Friday, January 7, 2011

Reference Point: Gold - Update #1


The system we have today is actually broken, only we haven't quite recognized it yet. And so we need a new one, and this is the time to do it, while the markets haven't quite figured it out yet.

The preceding were the words of a billionaire more than a year ago. The following are the words of a Federal Reserve Bank president from just a couple days ago (emphasis mine)… Should the debate that is happening privately remain hidden from the public eye…? Is the nation somehow better served by giving the public the impression that the entire [Fed] is in agreement…? A gold standard that forces countries to back their currency reserves with bullion is a legitimate monetary system.

This being the "year of the RPG" here at FOFOA, I thought it would be a good idea to keep an eye on how gold is acting as "a key reference point to allow people to assess the relations between different currencies" (to quote the head of the World Bank) throughout the coming year.

In order for the limited and stable quantity of above-ground physical gold to perform this important international function effectively, it will ultimately trade independent from the current network of bookkeeping derivatives that assume gold ownership through a counterparty's gold liability (receivables, futures, options, forwards, ETF shares, etc.). Such contractual obligations do not represent a stable and credible quantity like the physical gold itself does, and therefore they make a poor and distorted pricing benchmark.
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Sidebar:

More than 10 years ago FOA blew the whistle on the inevitable failure and subsequent dénouement of this distorted benchmark. From my post 100:1:

FOA (05/06/00; 16:45:21MT - usagold.com msg#20)
For Your Eyes Only!

By holding physical gold you are owning a super leveraged "derivative" that will be exchangeable against the value of real things at a par level lost to the minds of most investors. Today, physical gold purchased in dollar values is discounting its worth by perhaps 100 times. For us PGAs (physical gold advocates), that is a leverage worth "playing the physical game for"! (smile)

… Throw in the fact that the earth will not give up all its gold any time soon, present world gold holdings in reserve currency today must rise in value at least 100 times to match what assets now exist. On top of that add in the fact that dollar gold will go sky high just to equal past dollar creation (as the dollar fails) and one can see where physical gold is "the play" in modern times. Forget stocks, business valuations, land or currencies: physical gold is the wealth for the next generation.

FOA (10/9/01; 10:05:48MT - usagold.com msg#117)

Lost in all the confusion is the distinction between investing in the price of gold and investing in gold itself. Perhaps 90% of all the investing in today's worldwide, dollar settled, gold market is done in this first way mentioned. Yes, the market is structured, contractually, to settle in gold. However, in practice, in norm, and in past legal precedent, it is accepted that paper gold trading is meant to only capture the price movements in gold while ceding, what could be, controlling physical trades and their price setting function to other market areas.

Obviously, this is the way it all started, years ago, with the physical trading and its fundamentals dominating the lesser paper trading. But the market evolved with the paper contractual trading becoming 100 or more times the size of the physical side. But everyone already knows all this, right?

From a Friend

Ref: "In other words, the current price of gold means that you are buying a slice of the world’s gold supply with a proportionately smaller slice of the world’s money. You can currently buy x% of the world’s gold with y% of the world’s money, where x is much bigger than y. When gold will become the unit of account of the world’s wealth, you will find yourself able to claim a much bigger slice of that wealth than you would have been able to do with fiat money before the collapse."

This means that CBs and gold-clearinghouse BIS must attach a much higher VALUE to the gold they exchange (redistribute) than the public (visible) goldprice(s).

Note the difference between Value and price. The price is for bookkeeping purposes. The Value is for wealth reserve purposes.

That's why a private person cannot buy goldmetal directly from any CB (or BIS/IMF) ! We are not allowed to know how CB gold " flows " (and is valued in the inner circle). We have no idea how bullion banks intermediaries let goldmetal circulate from goldmine to state and private entities.

We are not allowed to know how the CB/IMF gold auctions really happen. How can we possibly verify the goldprices that are publicised ? Who are the receivers of the WAG gold redistribution ?

So much CB gold-Action and so little transparency. WHY !?
Because of Big difference between price and Value !?

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Of course today this is not yet the case. When we say "the gold market" today we mean all of the above paper contracts plus the gold itself. But that doesn't mean that everyone in the world views gold in this same way. They don't. It is really only us in the West, encouraged by the cheerleaders on CNBC, that carry this laughably optimistic view of counterparty trustworthiness when it comes to gold. Other more "giant" and less "Western thinking" entities around the world have quietly taken steps to prepare for the future.

Certain "giant entities" are, and have been for more than a decade, marking their physical-only gold assets to the market price of "paper gold" the whole time it has been rising from its low of around $250 per ounce. This doesn't seem like a very big deal to the Western mindset that can't see the difference between "counterparty gold" and "counterparty-free gold," but it is actually quite significant given the history of metal used as currency.

In the past, whenever any metal has been used in a monetary function during the presence of a government or monetary authority, the metal itself has endured a trade-value distortion that is always in conflict with the market forces present at that time. This market distortion is what has melded metal into money during these past systems. Not its free market floating value, but just the opposite; the suppression of free market forces on that specific monetary metal.

For example, you can stamp a metal into coins and declare that your coin form of the metal is of higher value than uncoined metal in payments you make and those made back to you. This is a way to overvalue a portion of a commodity metal's above-ground supply to your advantage. You are marking your specially stamped metal above the rest of the market metal, or "marking it to your model."

But over time, this method of monetizing a metal has always run into the same problem. The market for uncoined commodity metal always seems to catch up and overtake the face value of your coined metal and you are forced to dilute your currency into ultimate collapse, occasionally on a civilizational scale.

So then you might declare that all of a certain metal, coined or uncoined, is the monetary base or standardized unit of another money that you can print very easily. This method becomes more of a confidence trick because you are attempting to undervalue that metal (the entire quantity of it) out in the free market, relative to the easy money that you can print.

In order to support this confidence trick you must become both the buyer and seller of last resort of both your metal and your easy money. You must buy your easy money back with your metal and vice versa. This trick can last until you run out of one or the other. Of course, you need never run out of the easy money you can print, so that's not the real danger in this con.

In a sense, or perhaps in essence, today's paper gold market is not very different from this second monetary scheme. The banks that create paper contracts for "counterparty gold" by simply writing them become the buyer and seller of last resort for both their own paper promises and real physical gold. This can continue until one or the other runs out. But again, you are marking a metal to your model of a marketplace that includes both the metal and your paper creation, be it dollars or "counterparty gold."

There are many variations of these schemes in which the value of various metals had to be distorted by authorities in order for them to fulfill any useful monetary function. And there are also many examples where monetary authorities were forced to adjust or abandon their preferred money to avoid drowning in the unstoppable tide that is the market force. Like France in the 1870s abandoning its planned return to bimetallism in order to avoid having to spend its gold buying up all the excess silver in the world. [1] Or Sweden's successful move in 1916, closing its mint to the previously free coinage of all gold in order to levitate the value of Sweden's coined gold back above the market price of uncoined gold. [2]

All of these market/monetary shenanigans of the past stand in stark contrast to what is being performed today in broad daylight, once every three months, on the Consolidated Financial Statement of the youngest major monetary authority in the world. Once per quarter, the ECB openly marks the Eurosystem's monetary reserve assets, including the physical gold asset, to the last market price of the previous quarter. This is marked to market (MTM) monetary authority gold in the specific role of reserve asset, aka store of value. And while the implications of this 180 degree shift in any major monetary authority's regard for gold is not widely discussed, it is immensely significant. (See: FOFOA)

So without further ado, let's get to the latest Eurosystem reserve revaluation, just released Wednesday, and see how our RPG (Reference Point Gold) is holding up. First, I will show you how you can follow this on your own, or even go back and check past statements for analysis, or just for fun.

If you click on the following link to the ECB website you will see a description of the "Weekly financial statements" they publish every week:

http://www.ecb.int/press/pr/wfs/2011/html/index.en.html


It reads: "As a general rule, the consolidated weekly financial statements of the Eurosystem are published on a Tuesday, and they relate to the preceding Friday. There are two exceptions to this general rule.

"Firstly, the publication day for the first financial statement of each quarter will normally be a Wednesday (instead of Tuesday) in order to allow more time to complete the quarterly revaluation of assets and liabilities, which is reflected in these statements."


Note the use of the word "consolidated." This means that every line on the statement relates to the entire Eurosystem, not just the ECB. So the gold listed on this form is the consolidated total of the official gold reserves of all its member states. Same for other itemized assets and liabilities. Also note that they only perform the market-based revaluation of assets on every 13th statement (once a quarter). And for these, they allow an extra day, publishing on Wednesday instead of Tuesday. And this being the first week in January, we got the new numbers on Wednesday.

Below the description you'll see a list of the actual publication dates for the quarterly revaluations this year:


To the left you can click on any year going back to the launch of the ECB on Jan. 1, 1999 and review the weekly and quarterly reports from each year:


And down at the bottom, you can click on the language of your choice for today's quarterly statement, "en" for English:


So let's click "en" for English and check out the latest ECB press release, the "Consolidated financial statement of the Eurosystem as at 31 December 2010" or ConFinStat for short. If we scroll down a little we'll come to the actual balance sheet. This lists out all of the Eurosystem's official assets and liabilities, listed in their euro value, the official unit of account in Euroland.

Quantitative changes to this sheet are published every week, but qualitative changes, the line items signifying foreign currency assets and gold, are only revalued into the euro unit of account once per quarter. Just above the balance sheet you'll see the only section that differentiates this quarterly statement from any other weekly statement, the "Quarter-end revaluation of the Eurosystem’s assets and liabilities."


Notice the black arrow pointing to the following:

Gold: EUR 1055.418 per fine oz.

USD: 1.3362 per EUR

JPY: 108.65 per EUR

Special drawing rights: EUR 1.1572 per SDR


These four lines are the "market snapshot" that is taken once every three months, mentioned in my last post. It is a snapshot of the euro's market price as it floats against four different benchmarks or reference points. It is used to calculate the weight of those most valuable line items to any Central Banker, the reserves that cannot be printed and are therefore used to defend and evaluate that which can be printed. This snapshot will be used for the next 90 days.

For comparison, here's the last "snapshot" taken on Oct. 1, 2010:

Gold: EUR 960.580 per fine oz.

USD: 1.3648 per EUR

JPY: 113.68 per EUR

Special drawing rights: EUR 1.1399 per SDR


Right off the bat you should notice an interesting thing. Look at the percentage of the euro's change against the other fiat currencies. 2.1% change against the dollar. 4.6% against the yen. And only 1.5% against the SDR. They are all falling in tandem! Yet there's a 9.9% change against gold over the same time period. What you are witnessing here is the emergence of a true leader, the benchmark or Reference Point par excellence, from the rest of the pack of potential "reference point contenders."

Now let's take a look at the actual balance sheet to see how this Reference Point snapshot is applied. In the image below I have placed the asset side of the previous statement released on Dec. 28 side by side with Wednesday's release.


One distinction I want you to notice is the two columns on the quarterly statement, which I circled. Column "i" is for transactions or quantitative changes from the week before (this is the column that is reported every week), and column "ii" is for the "snapshot-based" adjustments or qualitative changes from the previous week/quarter.

You'll see from the previous statement that there was a net increase of approximately €1 million worth of gold (only around 1,000 ounces) to the Eurosystem stockpile during the week ending on Christmas Eve (possibly delivered by Santa). And in column "i" you'll also see that there was no change to quantity of gold during the week between Christmas and New Year. There was only a "qualitative" change (revaluation) which was reported in column "ii." And that change was +€33 billion for the Eurosystem's 348.1 million ounces (10,827 tonnes) of gold.

The other important thing to note on these ConFinStats is the gradually changing relationship between gold reserves and foreign currency reserves. These are both "hard money" reserves to the ECB because they must be acquired "the old fashioned way," or the "hard" way; they cannot be printed. This is what makes them valuable to any Central Bank. They are what is sometimes used to defend the value of the "easy money" that can be printed. And the qualitative relationship between these two fundamentally different kinds of reserves has been changing for the past 12 years!

As Randy Strauss of USAGold fame so eloquently points out here, "gold’s role has gained musculature from a mere 30.5% proportion to its current dominance now at 67.1%." That means that at the beginning, in 1999, Eurosystem reserves were made up of 69.5% foreign fiat paper and 30.5% gold. Today that has shifted qualitatively to a net foreign paper position of only 32.9% to gold's 67.1%, a virtual flip flop!

And what makes this so significant (and unique) for the euro is the way the ECB measures itself nakedly, transparently, against all competing benchmarks. The ECB valiantly reports ALL foreign holdings in its own unit of account, displaying itself confidently against any and all reference points. Second only to the ECB MTM concept, this is the revolutionary CB practice that other major CBs have yet to adopt. Most CBs still report their dollar holdings in Ben Bernanke's favorite benchmark, the dollar itself, master at the confidence art of self-reference.

Speaking of the dollar, it is difficult to maintain yourself as the global reference point if you are seen to be losing your youthful posture. So let's take a quick look at how an aged major monetary authority (preparing for its 100th birthday party in 2013) deals with this conundrum. It's not as pretty as the spry ECB statement, but here is the Fed's asset report from its latest release, "Factors Affecting Reserve Balances" (just released yesterday):


The salient point here (circled) is what Randy Strauss expounded on in his previously linked piece:

"Meanwhile, due to the woefully outdated paradigm established by the U.S. Congress for gold held by the Treasury Department, the gold reserves of the United States are effectively anemic and bedridden upon the books of The Federal Reserve System, where they exist only in certificate form — valued at a static $42.22/oz., forming a paltry $11 billion stake."

That's right! The Fed doesn't even have actual gold on its balance sheet that can be used as a reference point. It has "gold certificates" issued to it by the U.S. Treasury from the past monetization of U.S. Treasury gold at $42.22/oz. I suppose, technically, if the U.S. Treasury wanted to revalue its gold to the market price today, the proper yet antiquated process would be for the Fed to credit the Treasury's spending account with new dollars representing the difference in price. Today that would be about $355 billion fresh dollars for Congress to spend. Yet there would still be no existing mechanism to automatically account for the new and emerging Reference Point: Gold. Something technical is going to have to change!

But that's not really my concern. That is something for Congress, the Treasury and the Fed to collectively figure out. My concern is simply how this shifting, changing and adjusting international monetary system will affect my balance sheet. And that's why I have put myself on my own personal RPG. I have consolidated my assets. And in doing so, I have favored the genuine article over its lesser reproductions.

What makes me sad, though, is that some of the most studious and longstanding gold bugs, some of the most ardent "honest money" advocates, will apparently be slower to grasp this unfolding system of "RPG/Freegold" than the flocks of Sheeple, or even the Chartalists. Sometimes you've just got to "unlearn" a little past dogma in order to comprehend present reality.

The "silver lining" for them is that, at least, hopefully, they will have some physical gold in their immediate possession so as to participate in the RPG party train. If not, well, hopefully the commodities they invested in will at least rise with inflation and not succumb to the global economy resetting as it adjusts to its newfound lack of a 300 million-strong group of net consumers.

FOA (8/22/01; 05:18:54MT - usagold.com msg#98)

The war between gold and the dollar has been over for a while now. The action, today, is between the dollar and the euro arena and this is what will break the price lock on gold.

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FOA (07/27/01; 15:20:44MT - usagold.com msg#85)
"The Wind Will Blow"

Circulating cash dollars, official metal coinage and other previous fiats, themselves thought of as a final hard payment, were never any more than a known tradable value. A trade credit owed to you as long as one held the money unit. Even with gold backing the dollar unit, money's value was always in its exchange for something else we wanted. Gold values behind these fiats was used to represent some fixed tradable value the money unit stood for; not to be the money unit itself.

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The immovable past structure the dollar is built upon demands its values be defended with complete hyperinflation if necessary. Prior to EMU, there was no other reserve currency that the world could run to. Now, the dollar cannot deflate and take the rest of the world into deflation with it. The tables are turned; deflationary policy will not defend the dollar. Only inflationary policy will. Make no mistake, we are not calling for price inflation to end the dollar's reserve rein! We are calling for "inflationary policy" to dethrone it while said hyperinflation follows.

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The next step will be an orderly exit from dollar use; a somewhat destruction of all dollar gold pricing; and a super price inflation for US dollar assets. We are not at the end my friends, we have just come to the beginning. For physical gold advocates that understand the difference between real wealth and leveraged real wealth, the time arrives when values are reflected with the speed of the wind. Truly, in our time, "The Wind Will Blow".

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Having evolved a dollar reserve money system into a straight debt fiat currency, without gold involvement, the entire dollar function became locked into one basic premise: for the system to survive, its core reserves of debt values had to remain somewhat price stable as the currency inflated relative to GDP. Over the next 30+ years their dollar controllers, the fed and treasury, thought they had a fairly good handle on the system as they managed banking reserve requirements. To their amazement, it turns out today, that digital use demand was the best function that supported their efforts all the while; by increasing the world's use and need for currency. Had they understood this modern economic function early on, they could have somewhat printed the currency outright with almost the same result while arriving at today's destination. They could have let gold float, not to mention they could have skipped a large portion of the debt build up that will now end the dollars timeline.

Most, if not all, of this perspective is only now coming to light as the Euro builds pressure on the dollar. The better architecture of the Euro system is leaving little room to adjust as the US fed must singularly act to inflate their local currency in a historically new and unprecedented fashion. The actual debt machine that built much of America's lifestyle is now going into reverse as it destroys its own currency; one built upon a stable debt system with locked down gold prices.

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Without an international floating gold reserve pricing, to balance against their devaluing debt reserve, the entire dollar banking system can only rely upon extreme dollar inflation to float its accounts. Price inflation will have to be ignored. To this end the group of dollar supporting countries, we refer to as the dollar faction, has locked itself into a box. It must find a way to float gold prices with a gold reserve that only drains away if world gold price rise.

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How far will gold rise? At first blush, foreign dollar assets will not, in any way, return home! They will circulate offshore; either from lack of understanding of the issues, a thought that things will be worked out or from foreign exchange controls aimed at protecting the failing US economy!...

Mini-Sidebar

Exogenous (or exogeneous) (from the Greek words "exo" and "genis", meaning "outside" and "generated") refers to an action or object coming from outside a system. It is the opposite of endogenous, something generated from within the system.

In an economic model, an exogenous change is one that comes from outside the model and is unexplained by the model. For example, in the simple supply and demand model, a change in consumer tastes or preferences is unexplained by the model and also leads to endogenous changes in demand that lead to changes in the equilibrium price. Similarly, a change in the consumer's income is given outside the model. Put another way, an exogenous change involves an alteration of a variable that is autonomous, i.e., unaffected by the workings of the model.

...These reserves will circulate until their gross exchange value simulates a figure that can be reasonably expected to "buy something" within the US; ten cents on the dollar could be a guess? However, keep in mind that the fed will be printing like mad, local prices will be soaring and no one will be chasing dollars like they do today. I expect that physical gold trading, within the US, will follow far behind foreign trading for a time. Perhaps a $5,000 to $15,000 ratio will be a thought as dollars within the US will be worth more than outside. Still, the relative value of physical gold will eventually converge as a trading standard is reached.

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Sincerely,
FOFOA

[1] Mundell - The International Monetary System in the 21st Century: Could Gold Make a Comeback?
[2] Hayek - A Free-Market Monetary System



227 comments:

1 – 200 of 227   Newer›   Newest»
Texan said...

Thanks as always for your posts, FOFOA.

I have to confess though that I am still completely lost as to how marking individual sovereign states gold positions to a dollar price does anything at all for the currency itself.

If one presupposes as I do that countries will leave the euro because they are straightjacketed by a currency they don't control and as a result are horrifically uncompetitive, then the " euro project" will ultimately fall back into a central Europe core and they might as well call it the " deutschefranc" . DF.

That possible inevitability makes the euro a very dangerous
"store of value" right now, because at what rate does anyone get converted into either the defector currencies, or the core DF?

Really, Greece is trading like it will default. Portugal and Ireland are trading very poorly. Spain is in trpuble, and now even Italian spreads are widening. What are they going to do to hold this together? Are they going to print and absorb/ monetize the peripheral deficits from here to eternity, or are they going to tell them to leave the euro? Because a "restructuring/haircut" of the bonds means it's over for that country. They would not finance in the private markets again, denominated in euros.

This is the critical issue for the euro - it is the schism between the easy money countries, and the hard money countries.

GOLD FREAK said...

Texan - Read Greece is the Word from Feb 2010 on this blog and I believe you'll find all of your answers in there. It's been a while since I've read it myself but I'm going yo go ahead and re-read it now

Wendy said...

FOFOA,

I regret having to be the squeeky wheel here again, I think perhaps you meant to post some type that you did not paste into this post?

Forgive my assumption above, perhaps I'm just not getting it!!

I draw your attention to the mini side bar where you define endogo/exdogoneous, but there terms and not used anywhere else in your post.

answer2me said...

Most Delicious! One Must play the first you-tube song while reading.

Wendy said...

"there terms and not used anywhere else in your post."

I meant to type "These terms are not used anywhere else in your post."

I hate the tiny typing pad on these stupid netbooks!!

costata said...

Wendy,

"At first blush, foreign dollar assets will not, in any way, return home! They will circulate offshore...."
(FOA from this post)

This would be exogenous to the internal economic model that the Fed is trying to control.

US$ hyper-inflation can happen in the external float of US dollars and securities denominated in US dollars. It doesn't require policy missteps by the Fed and the USG internally to trigger it.

The international FX market and globalisation of commodity pricing in (US dollars) are the transmission mechanism and price driver respectively.

Capital controls wont save the USA from an externally triggered hyper-inflation of the US$. It will come home by proxy if the rest of the world loses confidence in the US$.

"The next step will be an orderly exit from dollar use..."
(FOA 10 years ago, quoted in this post)

Have you noticed that a number of countries are doing currency swaps so they can avoid using the US$ in trade?

This could get "disorderly" real fast in an FX market that has an average trade duration of around 30 seconds and turns over $4 trillion per day.

Wendy said...

Costata,

I do understand all the points you made, but that was not my point in terms of FOFOA's most recent post.

I was suggesting that perhap he had posted a draft and not the final copy.

We all make mistakes from time to time.

The Dork of Cork said...

A very bullish signal has arrived in the FT lex column this morning.

In reference to GLD
"The trend at this leading vehicle for financial participtation in gold should be a good indicator.
THE MOST RECENT TREND IS NEGATIVE GLDs physical holdings (?) have dropped back to levels last seen in June.
Perhaps the market is saturated or there could be some profit taking by opportunistic holders.
If so, it is a problem for goldbugs , who rarely fail to trumpet bullish supply and demand trends"
This is a bed time scary story from the FT but if you discount the colour this is very bullish for physical - they are now in full scale emergency mode in London - the price suppression scheme is nearly over.
check out the full article - its quite funny how he uses Charlie Munger as a figure of some Gravitas.
"Precious metal bulls have to hope that dollars lose real value faster than gold investors run for the exits. Mr Munger probaly would not consider that to be rational thinking"
Ha

costata said...

FOFOA,

Metallica are not my taste, but they're seriously good musicians. Thanks.

Cheers

Texan said...

Gold Freak, thanks, I read the post. If I am understanding it correctly, the ECB/ BIS will "save" the PIIGS by revaluing gold reserves to $55,000/ ounce. Or whatever the number.

There is one very large problem with this. Greece doesn't owe dollars, and it doesn't owe gold. It owes euros. So if the ECB revalued gold by bidding it, either they are going to devalue the euro by 95%, or they are going to revalue the euro so much vs the dollar that, well, there won't be many American visitors next year. Or exports out of Europe of any kind.

Is Germany going to sacrifice it's export industry to save Greece? I think not. Is it going to devalue by 95%? Not a chance. They tried that once before.....

So the ECB/BIS can't revalue gold, in a vacuum. Only the US can revalue it, in a vacuum.

And even if it is revalued, so what? Does that make Irish bonds more palatable? No? What if they are backed by gold? Then the gold is gone, a form of swap. And then what? Ireland now has no gold....

Robert Leroy Parker said...

I'd like to preface this by reasserting that I am no expert on finance or economics. However, so far I am inclined to agree with Rui and Texan. I am not seeing how freegold will provide additional stability to the current macroeconomic system.

Say there will be a great revaluation to absolve debts; why won't new debts of the same nature be reborn later in the future? Especially considering the worldwide neoclassical approach where the printing press is the only solution to hard times.

There will always be countries that are not fiscally careful in boom times that will later be the bane of other countries during the bust. What is the goal of freegold that default or bankruptcy will not achieve?

whatever said...

I have a question. Can USA (if they have physical gold left ) MTM this gold thus saving their currency?

mortymer said...

31 December 2010
The Minister of Finance has on 6 March 2005, after consultation with the South African Reserve Bank "SARB", under section 25(1) of the South African Reserve Bank Act, 1989 (Act No. 90 of 1989), determined that, for statutory price purposes, all gold of SARB be valued at the market prices taken at 14:30 on each valuation date.

http://www.reservebank.co.za/internet/publication.nsf/0/589EEC165F93EDC64225780F0031E362?opendocument

Tom said...

Would it make more sense to look at FreeGold as the spark that ignites USD collaps? Rather than the outcome of the collaps? Was it meant simply as a means to up the collapse? Sometimes I think I get freegold and other times I think I don't. I can see how the gold gets re-valued to $55k or whatever the number so that its price is again reflective of its real value, but how will this save the Euro members? If they settle debts in gold, they won't have any gold left. USD debt will hyperinflate and most other currencies that use dollars as reserves would hyperinflate as well, but what about Euro debt? Will it be just Euro debt that gets settled in gold?

costata said...

Texan,

If you cannot default on your debts by debasing your currency then your only other option is to restructure the debt.

The numbers are too large. The "debts" cannot be serviced from cash flow (taxes etc). There are not enough unencumbered assets to sell in order to repay the principal.

The debts cannot be repaid in full and, one way or another, they wont be.

Mortymer,

Aside from the Eurosystem CBs and Russia, how many CBs are now marking to market?

mortymer said...

Addition to the previous comment:
"2011-01-07 : Statement on the Gold and Foreign Exchange Reserves of the Bank - As at 31 December 2010

The gross gold and foreign exchange reserves increased by USD483 million to USD43,8 billion at the end of December 2010. The change in gross reserves reflects the normal foreign exchange operation of the Bank, foreign currency deposits received from the Government and valuation adjustments. The international liquidity position increased by USD273 million to USD43,4 billion because the increase in foreign deposits was partially off-set by an increase of USD404 billion in the overbought forward position. The latter increase reflects foreign exchange swap transaction conducted by the Bank to drain liquidity from the domestic money market."

-> emphasis is on the "SWAP".
-> whatever: Please read Another´s archives first, already answered in detail there.
-> costata, for quite some time I have been researching that, quite few my friend, quite few... :o) Gave hint about it already some time ago: http://bis.org/cbanks.htm

mortymer said...

Costata, perhaps you will be interested in this one:
"Foreign reserve management" www.bis.org/review/r100412c.pdf

dojufitz said...

I don't know if this has been posted here before

Here is the world pm page from the US debt clock.
Silver and Gold going down fast in World Reserves.......interesting in real time!

Can someone with good math please be able to tell me at what date does the clock strike zero?

http://www.usdebtclock.org/gold-precious-metals.html

costata said...

mortymer,

The Governor of the Reserve Bank of Mauritious delivered a very similar speech some months ago.

I cannot recall if I posted a comment about it here. Mauritious holds substantial gold reserves now whereas it had only forex a few years back.

They have been appointed as the key banking centre for the southern African economic union. I think you can place most of the CBs in Africa on the MTM list in due course.

Thanks for the research and the many excellent links you provide.

mortymer said...

"Yes, lets not underestimate the value of Doing Nothing, of just going along, listening to all the things you can't hear, and not bothering." W-t-P / costata: Thank you for appreciation, I also feel my knowledge increased little bit by studying.

...continuing on previous post -> Mr Emmanuel Tumusiime-Mutebile -> seems also occupied with "East African Community Monetary Union"
http://www.bis.org/review/r080304d.pdf

For what I remember Mauritius & other nearby states implemented quite interesting pro-freegold rules concerning physical gold imports/exports. MTM is just a small but important bit.

mortymer said...

IMF, Resolution No. 54-10, September 24, 1999
E. Off-Market Transactions in Gold by the Fund

RESOLUTION

Whereas the Executive Board is considering off-market transactions in gold consisting of sales of up to 14 million ounces of fine gold on the basis of prices in the market to cooperating members with repurchase obligations to the Fund falling due, and acceptance of the same amount of gold from those members in payments of their repurchase obligations falling due to the Fund; and
Whereas those off-market transactions will enable the Fund to place an amount of the sales proceeds equivalent to SDR 35 per ounce of fine gold in the General Resources Account and the balance in the Special Disbursement Account for investments for the benefit of the ESAF-HIPC Trust; and
Whereas the Interim Committee has requested the endorsement by the Board of Governors of this approach as a one-time operation of a highly exceptional nature,
Now, therefore, the Board of Governors hereby resolves that:
The off-market transactions of up to 14 million ounces of fine gold by the Fund that are envisaged will be a one-time operation of a highly exceptional nature that is a part of a broader financing package to allow the Fund to contribute to the resolution of the debt problems of the HIPCs at the turn of the millennium and to the continuation of concessional operations to support countries’ efforts to achieve sustained growth and poverty reduction."

http://www.imf.org/external/pubs/ft/sd/index.asp?decision=54-10
(I have not seen this in archives so I post it in full because its importance, so please feel free to comment on this fish)

David said...

@whatever,

Two problems that I see with the US government marking their gold reserves to market:

1) especially with gold on the rise, doing so would undermine the widely held (but mistaken) impression that US bonds are the world's safest, most-reliable and most-liquid store of value. The US needs this view intact to keep borrowing from the world at low interest rates. 

2) I don't know, but I think marking to market would require reliable audits. Is it presently in the government's interest to divulge the size of its gold holdings and the institutions with whom it has swap or lease arrangements? And how can we determine if the US really owns the gold that it subjects to audit?

How much of this gold do the big banks or other governments own? And in the process of letting in all this sunshine, wouldn't they have to admit that paper gold and derivatives are a huge scam, with government's intentions aided and abetted by Wall Street?

Things such as these can be more freely admitted after the present structure collapses. 

DS

Wendy said...

Thanks for the links mortymer, sounds like Uganda is very much enjoying the capital appreciation of their gold over the last few years.

Especially thanks for the first BIS link, poking through the research section is like being a fly on the wall in all the central banks.

All:

I quickly scanned a paper that talked about the joint international reserve function of both the british pound and USD during the transition to USD dominance, which states - bottom line - that there can be more than one reserve currency at any time and it's not a winner take all game.

I think we'll see this idea continue to evolve much like what's happening today with China trading with Russia, Brazil, Venezula etc in their respective local currencies. It not only allows bypassing the USD, but also the dumping of USD.

This makes sense as there is no way in hell the G20 are going to agree to get anything done.

Eventually the function of the petro dollar will simply disintegrate from lack of useage demand.

Texan said...

Costata,

Exactly. Devalue or restructure.

IMO, the Germans will not permit a massive devaluation of the euro against gold just to bail out the peripherals. The hard money faction in Germany would go absolutely ballistic. And ironically, such a deval wouldn't solve the problem unless the plan was for the peripherals to immediately sell their gold to pay off the debt. I don't think those countries would do that. They have way more benefits by defaulting and keeping their gold.

But how do they restructure peripheral debt while allowing those countries to remain in the euro zone? Their debt afterwards will be untouchable, they won't be able to issue new debt.

Mike said...

looking at the Canadian International Reserves, Canada has 153 million in gold using MTM
of course this is only 0.2% of total reserves.

http://www.fin.gc.ca/n11/11-001-eng.asp

the below statement from the site says the following about the gold reserves. Canada has also been a net seller of gold since the low of $250 which at the time gold was 1% of total reserves.

There were no sales of gold settled in December. On December 31, gold holdings stood at 0.1 million ounces. The valuation is based on the December 31, 2010, London a.m. fix of US$1,406 per ounce.

costata said...

Texan,

Here is the key flaw in your argument IMVHO:

"Their debt afterwards will be untouchable, they won't be able to issue new debt."

This touches on a couple of issues. Trichet is calling for hard debt limits and sanctions for any EMU member that exceeds those limits. The EU may want to see constraints on the borrowing capacity of the EMU member states.

http://www.washingtonpost.com/wp-dyn/content/article/2011/01/07/AR2011010706480.html

Other countries who have defaulted throughout history have been able to borrow again after a period of time. The default repairs the debtor's balance sheet.

If they default on someone else does that automatically mean that ALL lenders will reject them. I think it will depend on the terms on offer to new lenders.

I'm not expecting total repudiation of debt. I'm anticipating a combination of adjustments to the interest rate, term and principal.

Like any "business" costs must be cut before creditors will discuss debt relief for an otherwise "viable" business. I think that this is what the austerity programs are all about.

On another front I have had a big shift in perspective about how the Eurosystem gold reserves will be employed. Back when we were discussing FOFOA's post "Greece Is The Word" I thought that the gold might come into play in order to underwrite the sovereign debts. I no longer subscribe to this viewpoint.

I think the EU will clean this mess up using a combination of austerity measures, higher (but not hyper) inflation and debt restructuring. I now think the gold will remain in reserve to guarrantee that the oil flows and in case that war breaks out.

This change of thinking doesn't impact on my views about the Freegold revaluation. A huge increase in the value of gold will still be needed in order to recapitalise the system but I don't think any of the holders of EMU member bonds will see a gram of it.

Wendy said...

I wonder if anyone as given Thought to the possibility that the "all paper will burn" fire might start with the mortgage backed securities?

This robo signing mortgage fraud thing is a huge ugly monster.

Wendy said...

Mike,

I had a look at that, and our gold position is pretty pathetic. The US doesn't sell it's gold but we and the UK do. Frankly I don't get it beyound ass kissing.

Fortunately we are well stocked with resources in the ground. However I don't know how this plays out. Canada nationalizing resource companies???? I can't imagine!

I can dream when I say I wait for the day that we demand payment in Canadian dollars for the commodities we export to the US. It's scarry that 2/3 of our trade is done with the US.

Mike said...

Wendy,

it is my understanding in freegold that ALL the gold in the nation whether via citizens or gold in the ground, physical ETF's, etc, is what counts. So all that Gold in the ground i am sure already is accounted for if a revaluation were to occur.

And if that does happen then based on my understanding of Another/FOA that the mining companies will not be able to print money (gold), so they would become nationalized for the best interest of all Canadian citizens and would only make money on the say the last thousand of a 50k gold price.
similar to how Canadian companies that sell tobacco make only 10 cents per carton while the government and tobacco companies reap the rest of the profits ie $70 per carton.

i would think that somewhere around 1% of Canadians have at least 5% of physical gold as part of there assets. it would be fair to say that most Canadians that do have gold, have it via the mining shares or gold ETFs and not physically and i would think that it may be closer to 5% of Canadians that have that kind of portfolio. so a revaluation still wouldn't affect most people here i don't think.

i still look around and dont really know anyone who buys gold, they might have a few wafers or coins but not enough to really protect them. RE is still king here as you might already know.

correct me if i am wrong on any of this and my assumptions.

costata said...

Mike, Wendy,

They don't need to nationalise the gold miners. They can cut a deal whereby the miners make a guarranteed margin over cost of production and ongoing capex plus a return on capital.

The miners would probably be encouraged to maximise the mine life by stopping practices such as high grading. Post Freegold-RPG they could turn out to be superb investments. Albeit more like utilities than other miners. A steady, high yield investment.

IMO anyone who thinks the gold miners would be allowed to pocket, say, $50,000 an ounce profit is delusional.

If Australia moves in this direction I doubt that Canada will be far behind. Politicians don't need much prompting to grab a source of revenue that doesn't risk a voter backlash.

Mike said...

Costata,

thanks for your explanation.

so until the transition of freegold holding a miner in that scenario might be an awful investment as the paper price of gold eventually falls or when there is no market price for a certain amount of time.
it might help explain why banks are short the miners. i think i remember FOA mentioning something like this.

Wendy said...

Costata,
thanks so much for your input.

It's really difficult to source information about the US contagon on Canada. I know far more about the US economy, than the canadian economy.

Mike said...

Wendy,

lol the school system and media are designed to be that way.

Rui said...

RLP

As you've noticed freegold does not solve the debt crisis which is the root cause of this ongoing depreflation.

If we think of the pool of capitals as a fuel tank then rampant debt is like a hole in the bottom of the tank draining capitals away til they run out and then a crisis.

Recapitalizing the system with higher gold price is the right thing to do but we'd better fix that hole as well or it'd cause the same crisis later on, and that's where freegold fails as it, in FOA's proposal, suggests we don't settle debt in good money.

Nah, no can't do. Thou shall not legalize a hole in the bottom of tank. Debt better be settled in good money, AND GOOD MONEY ONLY.

FOA probably based his proposal on the belief that in the modern world we all need to borrow, which is not quite.

A healthy economy does not run on consuming / borrowing / spending. That kinda economy is what we have now in US - a drowning in debt, cart before horse economy. It instead should run on producing / saving / investing.

If we wanna consume we have to produce first. If we wanna borrow we need someone be willing to save and we promise to pay back first. If we wanna spend, we'd better spend it productively enough so that there's a positive return to keep the spending sustainable.

That's the real economy - a horse before cart, making ends meet economy, the very kind US truly lacks of. To have such economy you need a hard money disciplines, and settling debt in good money is part of the disciplines.

Look at PIIGS. Why are they in such mess? B/c they don't borrow money for productive purposes. They borrow to finance a living standard they don't deserve. Now the payment is due and they are done.

The right solution is for them to default, their collateral to be taken and the banks foolishly loaning money to them to write the loss down. If the loss is too huge and banks have to be nationalized then so be it.

But no. ECB, the role model of freegold, isn't exactly up to it so they decided to settle the debt with freshly printed Euros (bad money) to socialize the loss onto every other Euro holder.

So debtors outta jail free. Savings be diluted and capitals be ruined. Grade-F cart before horse management. If they implement freegold this way they'd be back to this point again and again.

Wendy said...

Mike,

I certainly agree, and will reference my comment at the very end of the "freegold" post in Sept 08/arhives.

Wendy said...

It's 10:45 pm PST, goodnight to all!

costata said...

Wendy,

Thanks for the kind words. I have had the same problem in trying to translate analysis of the USA into credible scenarios for Australia.

Goodnight

Mike,

A/FOA did discuss the gold miners. That's what I based my scenario on. If the scenario is correct the gold mining stocks could be high risk after a big gold revaluation and the transition to the RPG regime.

FWIW I think the mining stocks will run hard and I'm tempted to speculate on that. The trick would be to get out in time. We cannot be confident that we will be able to obtain physical gold with any future profits. So if we do it, it would be a play to increase our currency buffer.

Cheers

mortymer said...

European Union Accession:
The Challenges for Public Liability
Management in Central Europe
Cosponsored by the European Commission
and the World Bank
(A European Borrowers Network Initiative)
http://tinyurl.com/3xt2o5w
(I have not researched it yet but looks as quite promising paper)

"Page 48:
Table 2. Government Opportunistic Behaviors to Meet the Maastricht Defic
Behaviors On the revenue side
With the effect of increasing future To meet the deficit rule:
payables and liabilities of government . Introduce an ad hoc tax to be reimbursed in the future
* Accept cash with the promise of future benefits
* Record revenues gross rather than net of the reimbursements, which are due later
* Exchange some existing public debt instruments for indexed bonds sold at a premium
To meet the debt rule:
* Transform indebted government agencies into autonomous legal entities outside the general government while granting them a state guarantee
* Enter repo contracts with public debt
To meet the deficit rule:
Reducing future receivables
* Withhold revenues due in the following fiscal year
- Accept cash in exchange for future tax exemptions
Diluting the value of state assets
To meet the deficit rule:
a Record capital gains from a sale of property-
possibly with a subsequent renting or lease back arrangement
* Charge a dividend from revaluation of the gold reserves of the central bank
* Charge a higher dividend from public holding-
To meet the debt rule:
* Sell gold of the central bank
* Sell state assets"
[Mrt: Seems a bit messy format but readable, also perhaps from 1999]

Pat said...

As to Sinclair's Tanzanian company, there is word as yet officially unsubstantiated, that they will have a dividend program that pays stockholders in gold. Say 40% of production kept by company for on-going re-investment, and 60% payout to stockholders. The gold can be warehoused for stockholders for convenience, or taken in delivery.
Sinclair is the master, and the arrangement to share much with Tanzania for the betterment of the country ( infrastructure; money to develop farm land, etc ) is very forward-thinking.
Could be the model for any sophisticated miner in the future.

Pat said...

I should have mentioned the idea of thinking of miners like utilities in the future was the AHA moment, and maybe some insight into Sinclair's structure.

oldinvestor said...

In my part of the country there are a lot of weekend hobbyist type gold panners. Going to be kind of hard to control or tax them.

Texan said...

Costata,

Interesting that you think that ECB will require restructuring of the PIGS debt. The primary holders of the PIGS debt are "core" banks and insurance companies, as well as state- run pension funds. So the core would be restructuring their own assets, at no cost to the peripheral borrowers!

That is the messier equivalent of a back-door subsidy via the now proposed "unlimited" stabilization fund. Ie, just have this fund buy these bonds and very quietly eat the losses over time, or rather "snowball" the losses such that are never recognized but just grow and grow and grow. Aka - money printing! I think the politicians choose this....

Of course, "austerity on paper" ( if not in reality), will be required under either scenario.

So IMO, the euro will act going forward like the USD, as the ECB either prints like mad to absorb the peripheral debt and effect a European TARP, and/or they sterilize some of these purchases by issuing ECB bonds to the banks that hold the peripherals in one giant asset swap. It solves nothing, but in a world of Chartalist fiat, who cares (except for people who use food, energy, clothing, housing, etc.).

One thing that seems very apparent to me is that, while the Euro project may originally have been designed to act as a gold-linked reserve currency due to the perceived benefits of such reserve status, the architects did not anticipate the massive deflationary impacts of the internet and China, which have rendered wide swaths of the western world utterly uncompetitive.

Now, like the US, this "reserve currency" status acts like a massive anchor on exports by keeping the value artificially high. Revaluing it against gold would be tantamount to trade suicide. Look at how badly the Swiss are getting hit with a 10% reval in their currency.

Ask yourself why the Chinese are "supporting" the euro by buying it's bonds. Just like they support US bonds. Maybe they don't want competition?

ad said...

Mortymer,

Not only MTM for the SARB but a new precious metals act which came into effect in 2009. For the first time since about 1911 all South Africans can hold unwrought gold and silver, not just Krugerrands.

Yes you pay VAT on unwrought gold and silver but it is reimbursed at 14% of the present spot price.

Some say this was done for black jewellers to avoid the costly and lengthy process of obtaining a licence which is believable, but who knows?

Wendy said...

Mike,

here's a paper that discusses some of the effects the US economy has in Canada. I was surprised to learn the degree of integration of our banking/finance systems.

Although it's a BOC publication, it's better than nothing.

http://www.bankofcanada.ca/en/res/wp/2010/wp10-40.pdf

mortymer said...

Lets re:

1/ Few weeks ago - Zoellick meets Sarkozy:

PARIS, Dec 22, 2010

"World Bank President Robert Zoellick reaffirmed his proposal to use gold as a "reference point" to reform the current international monetary system on Wednesday in Paris.
"What I suggested is that gold serves as a key reference point to allow people to assess the relations between different currencies," Zoellick told the press here at the end of his meeting with French President Nicolas Sarkozy in the Elysee Palace.
"It's an approach that we can take, others also estimate that we can establish a benchmark against prices of principal commodities," the World Bank president said in response to a journalist's question.

2/
Today news - Sarkozy to meet Obama:

French president Nicolas Sarkozy meets on Monday in Washington his counter-party Barack Obama. Based on press speculation he comes there with provocative suggestion. Dollar, which is now used in world as a reserve currency, should based on his opinion have in world less important role.

=> Now I have the Déjà vu!

"...He oversaw tough economic measures to revitalise the country, including the issuing of a new franc (worth 100 old francs).[51] Internationally, he rebuffed both the United States and the Soviet Union, pushing for an independent France with its own nuclear weapons, and strongly encouraged a "Free Europe", believing that a confederation of all European nations would restore the past glories of the great European empires.[52] He set about building Franco-German cooperation as the cornerstone of the European Economic Community (EEC), paying the first state visit to Germany by a French head of state since Napoleon.[53] In January 1963, Germany and France signed a treaty of friendship, the Élysée Treaty.[54] France also reduced its dollar reserves, trading them for gold from the U.S. government, thereby reducing the US' economic influence abroad.[55]

On 23 November 1959, in a speech in Strasbourg, de Gaulle announced his vision for Europe:

Oui, c’est l’Europe, depuis l’Atlantique jusqu’à l’Oural, c’est toute l’Europe, qui décidera du destin du monde.

("Yes, it is Europe, from the Atlantic to the Urals, it is the whole of Europe, that will decide the destiny of the world.")..."

costata said...

Texan,

"Now, like the US, this "reserve currency" status acts like a massive anchor on exports by keeping the value artificially high."

With all due respect, No. It allows you to print currency in greater volume without concerns of triggering high inflation.

You can "recapitalise" a bank, under the existing regime, with as much fiat as you like provided the fiat does not circulate.

I don't think A/FOA, or the architects of the Euro Freegold project, anticipated currency swaps. IMO they reduce the need for FX reserves in International trade. This is a "game changer" insofar as it makes the demand for a replacement for the US$ in trade less of an issue.

Having said that, there may not be enough time to adopt, expand and perfect this evolutionary development in the IMFS before a "trade" currency is needed to replace the US$.

Wendy said...

Interesting mortymer! In sharp contrast to Zoellick, Mark Carney, Governor of the Bank of Canada, and ex Goldman Sachs executive, bends over for the US .....

"I will argue today that there is no miracle cure. Faith is required, but not in a barbarous relic
or a utopian global central bank. Rather, countries must restore their faith in the adjustment
process under the current system"

http://www.bis.org/review/r100916a.pdf

What a patent moron.

The Dork of Cork said...

W. buiter comments on FT Alphaville where he talks about the possibility of increasing the ECB liabilities in areas such as short term deposits etc.
What will this do for assets if the ECB increases their liabilities by 1 to 2 trillion ?

http://ftalphaville.ft.com/blog/2011/01/07/452096/buiters-e2000bn-solution-for-the-eurozone/

mortymer said...

Costata: Exactly right. After 2010/08/credibility-inflation post was published I wrote to FOFOA this:

**I briefly went through eyes flying over and I got stuck on this:

"A ‘fairy’ tale ...Those who would call scrip money "credit created out of nothing" were utterly blind to the true nature of the transaction. Fairgoers did not need a loan. What they needed, and got, was an instrument of clearing: the scrip, representing self-liquidating credit..."

Mrt: Cold you please explain me if "currency swap operations" could be used for this?
I remember that China when starting new deals with new countries enables/enlarges first this swap operations (1 year ago news).
If this is so then we do not need dollars as world reserve currency anymore, now another substitute world currency Euro nor anything like SDRs nor anything else. Simply dollar as a reserve currency redundant.**

F: "Yes, currency swaps do the job. They will work nicely with Freegold. Maybe more later."

So, see my above post about SA solved its liquidity issue by a swap. Pre-freegold in working? |January 8, 2011 2:14 PM|

Fofoa perhaps there is something to add?
(My conclusions are not so good so I rather let others to judge and post links and let time form my opinions)

Mike said...

Wendy,

i haven't read that other article you posted yet, its pretty long.

i read that statement by Mark Carney a few months ago also.
i think its just a sideshow, doesn't Ben say the same thing?
What do you expect them (IMF) countries to say? there system is designed to compete against gold not embrace it, so you can't say anything good about your competition but instead talk it down.
It was also mentioned on KWN.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/11/11_Bank_of_Canada_Governor_Rejects_Gold_as_Money.html



i honestly dont know for sure what Canada thinks about its citizens holding gold but i can tell you a couple of things i have witnessed.

1. BOC uses MTM.
2. Since the introduction of HST, all pure gold 999+ bullion ie Maples or wafers by the RCM are tax free where as before they weren't (subject to 13%). that sounds like a positive step towards freegold.

this is now driving 22k coins ie Eagles and Krug's to much lower buy back prices in Canada (way below spot $70+) compared to pure bullion buyback prices which are around spot.
it is my understanding from scotiabank dealers to not except eagles or krugs and if they do they will melt them down along with paying you for only 22k as if they were jewelery and charging you for the process (this is why its buyback price way below spot). only dealers that deal with US clients like Kitco accept eagles and krugs at the same buyback price as 1oz pure gold would go for.

this sounds like a push by scotia and rcm towards citizens owning their own gold.
scotia floods local dealers with their 1oz wafers and RCM coins i notice, very difficult if not impossible to find anything else without there name on it unless it came from clients, but will not be distributed to them from scotia.

also just so you know, scotia stopped distributing random year maples from the market on dec 31st, they are now only distributing 2011 maples and have added a 7% price increase to the already premium on the price. if you go to scotia macotta website where they sell bullion you will notice they sell a 1oz maple for over $1550 (about $200 above spot). you will see these type of prices for maples at dealers soon as when they begin to buy maples to sell from the bank, they will be charged this extra premium as a standard.

3.based on that above example of rising premiums, in our steps towards freegold aren't we suppose to see physical gold spread higher then the paper market price?

i know there is more then 1 distributor that dealers use but scotia is the big one here in size so they will eventually win control of the market prices.

finally,Nick Barisheff once said in a interview (Jim Puplava) about Canadians when it came to gold were probably the least educated in the world and when i talk to anyone about gold it is like you are coming from mars still, they can't get RE out of there head.

Mike said...

Wendy,

i haven't read that other article you posted yet, its pretty long.

i read that statement by Mark Carney a few months ago also.
i think its just a sideshow, doesn't Ben say the same thing?
What do you expect them (IMF) countries to say? there system is designed to compete against gold not embrace it, so you can't say anything good about your competition but instead talk it down.
It was also mentioned on KWN.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/11/11_Bank_of_Canada_Governor_Rejects_Gold_as_Money.html



i honestly dont know for sure what Canada thinks about its citizens holding gold but i can tell you a couple of things i have witnessed.

1. BOC uses MTM.
2. Since the introduction of HST, all pure gold 999+ bullion ie Maples or wafers by the RCM are tax free where as before they weren't (subject to 13%). that sounds like a positive step towards freegold.

this is now driving 22k coins ie Eagles and Krug's to much lower buy back prices in Canada (way below spot $70+) compared to pure bullion buyback prices which are around spot.
it is my understanding from scotiabank dealers to not except eagles or krugs and if they do they will melt them down along with paying you for only 22k as if they were jewelery and charging you for the process (this is why its buyback price way below spot). only dealers that deal with US clients like Kitco accept eagles and krugs at the same buyback price as 1oz pure gold would go for.

this sounds like a push by scotia and rcm towards citizens owning their own gold.
scotia floods local dealers with their 1oz wafers and RCM coins i notice, very difficult if not impossible to find anything else without there name on it unless it came from clients, but will not be distributed to them from scotia.

Mike said...

cont....

also just so you know, scotia stopped distributing random year maples from the market on dec 31st, they are now only distributing 2011 maples and have added a 7% price increase to the already premium on the price. if you go to scotia macotta website where they sell bullion you will notice they sell a 1oz maple for over $1550 (about $200 above spot). you will see these type of prices for maples at dealers soon as when they begin to buy maples to sell from the bank, they will be charged this extra premium as a standard.

3.based on that above example of rising premiums, in our steps towards freegold aren't we suppose to see physical gold spread higher then the paper market price?

i know there is more then 1 distributor that dealers use but scotia is the big one here in size so they will eventually win control of the market prices.

finally,Nick Barisheff once said in a interview (Jim Puplava) about Canadians when it came to gold were probably the least educated in the world and when i talk to anyone about gold it is like you are coming from mars still, they can't get RE out of there head.

Wendy said...

Mike,

I wouldn't bother to ever bring up the issue of gold here. For over 50 years (1957) we have been "encouraged" to purchase and rewarded for purchasing, registered, tax deductible, investment vehicles. I think it's fair to say that almost every living canadian adult has been effectivly brainwashed!

FYI, you can purchase RCM one ounce bars from J&M in Vancouver for spot + about $25.

Wendy said...

Anyone notice the map at the bottom of the page? Click on it. It's kinda cool, in a creepy sort of way ;)

Mike said...

Wendy,

ya i notice in BC the dealers seem to sell more of a variety, i think its because they get it from the US but i am confident that will change to scotia being the primary dealer.

if i get 1oz wafers (scotia or rcm) i do for the same price here and maples for 40 over. JM isn't really found here because of Scotia.

as for convincing Canadians about gold, i dont really bring it up to people anymore, i use to years back but if i do mention it they still think i am from mars lol.
i observe more then anything these days.

i think they introduced the TFSA to remove the tax deductible RRSP in the near future.
Based on how Carney talks about interest rates and that he might raise them as he is definitely sending a signal to the market that Canada's debt loads aren't sustainable and calling out real estate speculators. i beg to differ though, i think he talks too much and wont raise rates at all as that would impact trade to the US and really screw over our exports and raise unemployment. then how would Canadians deal with there huge debt loads.

Texan said...

That's interesting because I think in the US 22kt is widely preferred since it isn't as malleable as 24kt. They are both 1 troy oz of gold, so who would sell below spot?

Yes, the map creeps me out. Jesse's cafe has the same map and I always look at it with a kind of horrified fascination.

radix46 said...

Costata,

Re: playing the miners in the period before Freegold to increase cash buffer.

I think that this is a plausible strategy. After all, we need cash in this world. Gold may not trade for a significant time and so capital will be locked up.

With regard to timing, Freegold will be organic, so it should be possible to watch the moves the world's big money makes toward physical gold. Perhaps watching the physical premium over paper gold price might give an idea.

Can you be more precise about your mining stock strategy in terms of duration of holding, exit strategy etc?

Wendy said...

Texan, it's just that there is little demand here for anything other that 99.99%.

We are not taxed on pure bullion, but we are taxed, about 14% on lesser content.

Texan said...

You have a 14% tax premium on the entire coin? Plus dealer markup? That's incredible.

Aleksandar said...

@mortymer

Swaps strenghten the "medium of exchange" role of (fiat) money. They also open a way to conduct international trade without the $IMFS intermediary collecting its share of the added value (since it provided the original $ financing directly or indirectly). Any surpluses or outstanding balances will, at the end of each swap period, in one or another way be balanced by....

Yes, you guessed it.

costata said...

mortymer,

While I was typing I see that Aleksander has nailed it. I'll post my comment rather than waste the keystrokes.

FWIW I think that the net balances from trade between countries who have swapped currencies will be settled in either gold or through an adjustment in the amount of currency using RPG as the valuation mechanism.

I still see a need for a strong currency to be used in international trade settlement for the foreseeable future. In this role I expect the Euro to take "market share" from the US$. IMO China will chart her own course.

costata said...

radix46,

We are still discussing the mining share play. If we decide to push the button I will outline the strategy we adopt.

Cheers

Aleksandar said...

Re the creepy map

FOFOA should work on his Chineese. Map kinda empty there. :D

Wendy said...

Hey costata, I can see your flashlight blinking down there, and yours too Alek, way to the east =8o}

Biting Silverbug said...

FOFOA,

I wanted to thank you first for posting - I feel you do the web a great service in posting and have provided many ideas for me to think about. That said, I am indeed a silverbug with a single bone of contention to bite into :)

I can accept that gold will be part of the monetary transition, but that silver will NOT. If there is in fact less than 1 bn oz of silver, or 500 mn oz or less, there isn't enough silver to be used as money, and the unstable silver flow means an unstable money supply that cannot be tolerated. Granted. Furthermore, the fact that governments don't own silver means they don't want to use it for trade. Logical.

So, silver loses its "remonetization" premium because of its unstability and scarcity.

At the same time - so what? How much is that revaluation worth? Could the "scarcity" argument you mentioned matter more to the value of silver than the remonetization premium ever could? If there is 10x less silver than gold, and new mined silver is irretrievably consumed...should not the price of silver be greater than that of gold? The way I see it, any higher production of silver would be absorbed by industry, leaving the actual inventory of above-ground silver to be at best flat or slightly increasing, even if the amount of silver mined is 15x that of gold. Why doesn't scarcity equal value?

Why must silver BE money for it to be more valuable, ounce for ounce, than gold? For example, is there not more value in a house than an ounce of gold? Would you not rather have the house and trade it for many ounces of gold instead of having just one? If silver's future value could equal that of gold, but silver is priced far cheaper, why not buy only silver?

I hope I have not missed your thoughts and am not totally posting off the mark here. Thank you!

Aleksandar said...

@Wendy

Hopefully the "TPTB" do not take interest in us shrimps, they can find us in the blink of an eye.

And greetings to the readres in HK. And the lucky bastards living in Nice :D.

Wendy said...

LMAO alek .....

I can see how I'm going to entertain myself this evening .... gawd I wish I hadn't discovered the creepy map ;)

Although I must say I'm very surprised at the number of Canadians that come read this blog. Very Cool!

Syafrin Djohan said...

@Rui: Thanks
@Alexandar: real sterilization later ~= export the Euro abroad, buy assets abroad (no domestic inflation).

***
@any reader:
Despite not being a professional of consequence in this field, I have long ago not submit myself to any fear in intimidating terminologies. The one to bear consequences of the new monetary-hegemon-on-the-block is myself, so I find I have to understand the flaws.

This de Gaulle cited to say restoring the old "European Empires" and "deciding for the rest of the world" really makes me want to puke. In Europe, they don't talk about Liberty as much as in USA, they talk about Crowns, princes, princesses, and their cultured manners. These nations are still imperial states in hybernation.

Let the colonial masters decide for the world, the world will fall into their colonies. Nothing changes, they have been given centuries of chance to change the world to a better, and end up losing their status. Freemarket corrected their utopic and myopic ideas of imperialism, but they might want to try another round.

And if they decide to import the model of Dollar into Euro, with a tweak in gold valuating standard, then I guarantee these will happen:
a. the loss of all productive industries such as chemicals, automobiles, even aeroplane manufacturing, even things as basic as agriculture to the rest of the world
b. the overgrowth of parasitic free-riding industries
c. the unending problems of employment in the whole Europe
d. and finally the D-day, the tearing down of United Federation of Europe, as class wars erupt, as they are not as coherent as the US of A.

***
RPG actually does not benefit future savers in the aftermath of impact. Savers will be damned for the next 40-60 years until the system collapse again.

The debt dinosaurs survive the catastrophe, shift their foraging operation to Europia and now evolve into the more terrible T-Rex species that will eventually feast on Freefood (factory-farming the goldmines for imperial treasuries), sterilizing their zone's debt as export of inflation, plunging the whole world into serfdom of bad promises.

In that case, 21st century will be a return to neocolonialism, a century marked by uprisings, bloodsheds and fierce guerilla fights.

As for the rest of the world, my humble suggestion is: Be Savers, and fight these dinosaurs. Strike them at their Achilles Heels, get your way out of bankers' way.

Texan said...

Check out comment on oil price tonight by al-Atiki. Wow.

Mike said...

anyone mind telling me what RPG stands for?

costata said...

Mike,

RPG Reference Price Gold

Rui said...

Biting Silverbug

There's no such thing as "unstable or scarce silver" actually. There's only price-suppression induced shortage. If we artificially suppress gold price to 50 dollar/Oz then everyone is buying cheap gold jewelries and gold would be sold flying off the market and we'd be talking about unstable and scarce gold in no time.

Silver mining output is actually 9 times that of gold so there's no real severe scarcity as long as it's priced to the true equilibrium level, maybe 150 dollar/Oz, who knows.

150 is only a price w/o the currency crisis factor. Once fiat currency crisis worsens in the coming years, silver will be money that people switch to regardless what gimmicks these bankers throw out there.

Biting Silverbug said...

Rui

I define "scarce" in terms of above-ground inventories. Fully agree that it's price suppressed and that production is far above that of gold. However, I don't feel that price-suppression is the only factor and that scarcity will continue for the following:

On the supply side, silver mining is 60% mostly byproduct of other mining. So if zinc, copper mines don't start, silver production won't either. Even if mining is started, it will take a couple years to get the mines actually producing. Add in "peak silver" and I don't see how supply can increase rapidly. So if all of a sudden, silver jumps so high people start turning on mines...you still have at least a couple years before new supplies come on line, meaning scarcity for those years.

I'm also not sure I see demand for silver dropping off a cliff if it goes high - at least that what I'm assuming you're saying. The rationale is that so little silver is used in any particular one product that its per-product cost is minimal. Let's say there's 5 cents worth of silver in every new Underarmor T-shirt - even if the price of silver goes up 100 times, that's only $5 more for the T-shirt. Apply this logic across most of silver's uses, such as med tech, cleaning sprays, etc, and you have a price-inelastic demand for silver.

Thanks for the post! Glad to bounce ideas around - let me know what you think.

costata said...

Mike,

Sorry, RPG Reference Point Gold (as in a currency pricing benchmark).

Wendy said...

Wow FOFOA over 1100 visitors to the blog today. Very impressive, although it's really too bad that most don't stop in and say hello and offer where they come from.

They come from all over the world, it would be nice to put a place to the nics.

I have watched in surprise as many from canada and the NW US have visited tonight, and some live so very close to me...... kelowna, vancouver, delta, enderby, spokane, idaho.....edmonton, calgary etc etc. in addition to many canadians living east of me.

It would be awesome if those that drop by would post where they are from.

insteadofablog said...

New reader here. I found your blog from reading Fekete and I look forward to reading all of the archives to learn more about your views on gold. However, I typically read blogs using RSS feeds in Google Reader. Your feed, unfortunately, only gives partial previews of the posts. Is that something you would be willing to change?

Wendy said...

welcome insteadofablog, I certainly can't answer for FOFOA, and perhaps it might be past his bedtime, so stay tuned!

thedeadfauvi said...

I welcome the new host:
Wendy!
Maybe we could post our postal address as well, Wendy, shouldn't we???
Cheers!

Wendy said...

Cute fauvi!

DP said...

@thedeadfauvi: :->

Martijn said...

@Radix46

In the "happy new year"post you ask: "How can we know if the A/FOA story is true?", and then FOFOA replies, referring to me.

I did indeed find quite a lot of evidence indicating that A/FOA were not making stuff up. I have found articles on how Aramco (the Arabian-Amarican oil company) had been flying various 8,000 pound gold cargo's to Saudi-Arabia in the 1960, how the French (under de Gaulle) were 'raiding' the US gold reserves and at the same time were doing the Mururoa atom-test to show some muscle, how the first Saudi-king wanted only gold for his oil because he 'did not trust paper' (literal quote) and much more.

However, this 'evidence' is and shout not be our key focal point these days. It has been 10 years since A/FOA were posting, and we should focus our efforts on interpreting events in our days as A/FOA did in theirs.

As Michael Kosares said: "I find this sentence particularly interesting as it shows Another's basic methodology: "Not wanting to prove anything, asking us to prove everything for ourselves; as these long term events unfolded." Those who have studied Western philosophy are very familiar with the Socratic method of leading the student to an understanding through a series of questions and challenges. The word "education" derives from the Latin "educare" -- "to lead out of" -- as in to lead out of ignorance. To lecture is one method of "leading out of" but for long lasting results educators have long known that the Socratic method -- if it can be employed -- is the most effective."

However, since you asked, here is one of the small pieces of evidence I found.

Notice what the Shah says: 'by altering the rate of exchange of oil for gold in official transactions between the oil producers and gold-holding consumers'.

Everything A/FOA said has appeared in the papers. Only it was shattered across time and different papers, and as concise and centralised a view as A/FOA presented was not to be found. That we should formulate ourselves, and more so of our days than of those past, as we do live now.

Best regards,

M

Casper said...

When Germany lost the WW1 there were war reparations to be paid. Wikipedia states that the reparations were denominated in 269 bilion GOLDmarks! If WIkipedia is to be trusted that was roughly 1 trilion USD in todays currency. The payments were lowered in time but there still were and they were paid in hard/good money (gold or products). Maybe someone else can verify but I bet that when shortcomings in both hard currencies apeared the Bundesbank was printing marks and buying gold directly in the market. That effectively prevented the populus to secure their savings because there was no/very little physical gold to buy and all that remained were consumables. If you search for old articles about central bank of Zimbabwe you'll find that they too were buying gold, directly from the miners. Again preventing the populus to convert their savings to hard/good money.

When faced with rising prices I don't want to buy food, I want to secure my savings. But if government/central bank makes this impossible I look for other places (other commodities, food, stocks,...) to secure them.

I can also offer an example when (hyper)inflation stopped almost instantly.

Just before former Yugoslavia fell apart (1989) there was also rampant inflation/price increases (more than 1.000% per year) due to printing. There was a black market where people were buying DeutschMarks for local currency (Dinar) to secure their savings. The minute the politicians made Dinar convertible to DM the (hyper)inflation stopped because the flood of money was able to find hard money that protected their savings. For a moment there was »golden« opportunity to make reforms in the economy but was missed and total collapse followed in the next few months/years.

If the ECB and EU governments can withstand the urge to buy gold from the market 8it seems so) and assure the flow of oil there won't be a hyperinflation in eurozone even if they print euros to finance their operations/deficits. There will be inflation yes but no hyperinflation.


Casper

mortymer said...

"Sit down before fact as a little child, be prepared to give up every conceived notion, follow humbly wherever and whatever abysses nature leads, or you will learn nothing." ~Thomas Huxley:

http://www.ted.com/talks/lang/eng/sugata_mitra_the_child_driven_education.html

radix46 said...

Martijn,

Thank you for that link. Having lived all my life under a fiat standard, it is interesting to get these windows into the past.

Are you preparing more to reveal to us all? That would be fascinating!

samix said...

FOFOA will be posting the A/FOA presentation that you said is being worked upon by one gentleman here ?

I am sure people like me who wont be able to attend will be obliged!

Sorry if you have already answered this...

Martijn said...

More is to follow later, but that will probably take a few months as I have other obligations as well.

thedeadfauvi said...

I’ve found an interesting piece researching the fierce war against silver and even if it’s quite mixed I think it offers a long time view concerning the means and capacities employed by TPTB when they plan our life for generations ahead. Those who think that TPTB are stupid they are themselves naïve. That is no conspiracy, this is the history you will never be taught and all you can hope is that they have somewhat lost control, but that I don’t buy in.

http://www.silver-investor.com/charlessavoie/essayofthemonth.pdf

Silver will never play a monetary role, it’s demise was a successful war against humanity and I can only hope that FG/RPG is not an even shorter play to achieve the total accumulation of gold – maybe fifty years needed? – as in the end TPTB could control it completely.

Jeff said...

India to settle iranian oil with gold?

http://tinyurl.com/6bhp3dl

DP said...

@Jeff -- interesting link, thanks for sharing ;-)

I am puzzled as to exactly why India aren't just prepared to settle the trade in rupees. The article clearly states the Iranians are happy with getting Rupees. Does anyone have any further insights as to why the trade cannot be done in the most obvious way??

DP said...

... is it possible the US has told the Indians they may not settle the oil trade in a currency other than $...?

DP said...

ZeroHedge are not backwards in coming forwards with their opinion on this Indo-Iranian conundrum...

http://www.zerohedge.com/article/india-offers-pay-iran-oil-gold

h/t Patrick

DP said...

Another significant event on the timeline comes to pass.

It's interesting that the gold is not, apparently, bid for by oil though -- it is being offered FOR oil, by a consumer. Not exactly what any of us were looking for!

"Accept gold, bitchez"?

burningfiat said...

DP,

Perhaps not what we were looking for but it depends on the barrels / oz in this deal, no?

On the other hand, this appears to be "in the short term". So maybe this is just until these transaction/clearing issues are solved. Or maybe just "in the short term" while we wait for freegold?

Funny to note how these transaction issues are related to US sanctions. Are US politicians actively pushing dollar decline in international transactions or are they just stupid?

DP said...

Maybe this gold idea in the short term really is just a way to say "if you don't let us settle in the currency of our mutual agreement, US, we will agree to settle in and deliver gold, to bypass the banking system and the sanctions"(?). A threat, or bargaining position if you prefer?

I am expecting there to be an advance of some kind in short order... if anyone comes across that, please be sure to share!

Museice said...

Wendy:
Where is the 'creepy' map you are talking about?

radix46 said...

Museice,

Scroll down to the bottom of the page.

Ooooooooo, creeeeeepy!
I don't like it either. The internet is a double edged sword!

Martijn said...

It's interesting that the gold is not, apparently, bid for by oil though -- it is being offered FOR oil, by a consumer. Not exactly what any of us were looking for!

Be careful here. The media might provide the general state of affairs, but we cannot be sure about the details, especially when gold is concerned.

Perhaps oil did bid for gold here. We should also not forget that indirectly IMF-gold is being offered as India bought some recently.

DP said...

@Martijn: indeed!

We watch for the next gripping installment of this story together, yes? (smile)

Wendy said...

Museice,

Scroll down to the very bottom of the page and click on the map.

mortymer said...

Martijn, where in this India & Iran issue do you see BIS? Isn't it them doing those contracts? Is it Iran figured it out? Is it leak? Protest? Warning? This could signal major disagreement among OPEC members.

mortymer said...

Russia-India-Iran triangle STRATEGICALLY POSSIBLE
http://www.southasiaanalysis.org/%5Cpapers34%5Cpaper3363.html
Hmmm and what about Russia will say about this Iran India issue?

DP said...

@mortymer: "Hell yeah, pay us in gold too"? :)

Interesting paper; thanks for sharing.

thedeadfauvi said...

Fall 2009 Robert Fisk (Independent) wrote an article about the demise of the dollar.
I think this is a natural evolution, the geo-strategic relations R-I-I are plausible so it has to start from somewhere, why not India? There have been talks days ago to pay in dirham, why did they switch to gold? It’s a step toward RPG. The situation in the US and Europe is accelerating the process of transition. The gov’t need some scapegoat (OIL) and pretty soon.
Haircut for creditors, some sterilised bonds bought by ECB, a monetary reform in the US combined with a higher inflation some austerity for the future and RPG. Rather sooner than later.
Actually I believe the Bernank is also pushing toward the dollar demise. He is BIS insider, this RPG was a long term plan, they ALL work together! Look at Zoellick, his career.
You won’t believe he’s acting by himself or that he wants to make you rich, will you?

Mike said...

anyone think GATA will get what they want?

http://www.zerohedge.com/article/judge-sides-gata-orders-fed-present-her-its-classified-gold-records-private-review

costata said...

mortymer,

It has also been pointed out by many analysts that Germany and Russia's economic interests are closely aligned.

It would not surprise me at all if it emerges that there is some consensus on major issues behind the public posturing.

mortymer said...

costata: As when the volumes of LBMAwere exposed and fuly understood, ss when gold was cornered and when it was recognized, as when ECB was designed and when its purpose was understood together with the features of Euro reserves, I believe that the Zoellig, Hoenig, etc. are just for public view. No I do not believe that ECB and FED are acting against each other, there is "rather" a coordinated action; the question is IMHO "how" and "when". Now by including Sarkozy it is in a political domain.

Rui said...

Biting Silverbug,

Once silver price goes high enough, certain industrial usage (especially the wasteful ones) will be choked off or it'd just keep rising till the point balance between supply and demand can be achieved, which is how price discovery works.

I'm more interested in the monetary usage side of silver as I believe the coming hyperinflation is inevitable w/ government and central bankers at helm.

The root cause of our crisis is this fractional reserve lending based insane credit expansion that neither government nor bankers wanna give up. As long as FRL is in place they'd keep printing to fill all their budget holes and fiat will be worth less and less and eventually worthless.

When that happens all hell would break loose and silver's monetary status would be quickly restored and shoot sky high in addition to its industrial popularity. The difficulty then would be how to get out once it's overvalued. We'll figure that out later on. :-)

Syafrin Djohan said...

The main disease of the world financial system is Fractional Reserve Banking (FRS) System, this will silently and slowly absorb all the wealth of the world into private CB's hands.

Curing the symptom with RPG achieve nothing. Zoellick is NOT talking about discarding FRS.

Those who think that their government's gold is their gold live in dreams. Those are private hoard, owned by Rothschilds, Rockefellers, and the rest of Bilderbergers. This private hoard does not care about the citizens of any country. So don't be too happy if you find your government's gold is huge.

The only way out is to kill the CB. Gold has been in a cornered situation for decades. The only physical gold left in the world is what private citizens should utilize to fight the CB. If they also secede this gold to them by stop-short on welcoming the RPG instead of focusing long-term sharply on the flaw that is FRACTIONAL LENDING, it marks the end of freedom, anyway.

Euro, the imperial currency, will perfect the flawed fiat Dollar FRS bot with RPG module and confiscate all world's gold into CB private hoard with FRACTIONAL RADIATION.

William Borah, 1932, Senator-Idaho (thanks thedeadfauvi):
“IN ALL CALMNESS AND DELIBERATION I CONSIDER THAT THE ACTION OF THE INTERNATIONAL BANKERS IN DEMONETIZING SILVER AND VIRTUALLY DESTROYING THE PURCHASING POWER OF OVER 800,000,000 PEOPLE WAS ONE OF THE MOST BRUTAL ACTS EVER COMMITTED IN HISTORY.”

Ever since 1932, all the world has been destroyed by the Dollar FRS lending cartel, even my yet unborn grand grand children will shoulder the debt inflicted upon us by our Keynesian government with huge unpayable debt in Dollar.

Fri Dec 12 1997 21:06
ANOTHER (THOUGHTS!) ID#60253:
There are only two threats to the world fiat currency system at present. The oil states could stop buying US$ for oil and drop all paper gold for real bullion. Or, the masses could buy up all the physical supplies thereby breaking the OIL/GOLD/US$ bond.

Rui said...

Excellent, Djohan

Freegold not only does little to curb fractional reserve lending but also encourages such practice as settling public/private debt in bad fiat rather than gold. W/ that loophole in the system it's not much different from what is currently plaguing the financial world.

Freegold will not lead to free trade of gold as debt will continuously be issued with the help of easy settlement while prudent savers will have to shun such bad money for gold. Like I said many times freegold, akin to a failed government program, would achieve the exact opposite what it is advertised: Free debt + hoarded gold.

To fix the system we'd have to get to the root cause of rampant debt, and that is fractional reserve lending - the bread and butter of international bankers.

FOFOA said...

Re: Silver

Hello Rui,

You wrote, "the monetary usage side of silver as I believe the coming hyperinflation... When that happens all hell would break loose and silver's monetary status would be quickly restored and shoot sky high in addition to its industrial popularity."

For your information, gold is apparently the only store of value that actually increases its relative value during extreme times like hyperinflation. This is due to gold's unique qualities, unique even compared to silver. Gold's superior portability by weight during extreme times is one example of why it becomes the go-to focal point.

Everything else, including silver, crashes in real value because of the devastating economic consequences of currency collapse and the rush into the "focal point: gold." Sure, everything else rises nominally which disguises the plunge, but to see the real crash you need to compare them to gold. Look at this chart of gold and silver prices during the Weimar hyperinflation:

Weimar Gold & Silver Prices 1919-1923

A little math quickly reveals that the GSR plunged from 14:1 in Jan. 1919 to 160:1 in Nov. 1923. A virtual collapse in silver during the peak of one of the most well-studied hyperinflations in history. Add that 11x crash (a 91% devaluation of silver's purchasing power versus gold) to the Freegold revaluation (a separate event from hyperinflation, only relevant to gold) and you will find some of the more astonishing GSR projections put forth by FOA. The math would be something like 40 (Freegold) x 11 (hyperinflation) x 47 (today's GSR) in case you were wondering.

That's where FOA came off saying this about gold: "at the very least, the first $10,000 of that figure would represent the current purchasing power of the dollar today."
FOA (4/19/01; 17:50:29MT)

...while at the same time saying this about silver:

"When the coming paper illusion price of gold is destroyed, sending its trading price way up and way down, several times, before shutdown,,,,,,,,,,,,,, the thinner paper markets of lesser metals will be absolutely devastated. Yes we will see $50.00 silver in our time,,,,,, $50.00 for a hundred ounce bar,,,,, that is! No less a relative price decline for the other metals is in store. Even if these actual dollar numbers prove incorrect,,,,,, relative inflation adjusted prices will show the exact same ratios to gold. The gain will truly be in gold!
FOA (08/09/01; 10:27:19MT)

All of you that thought the above statement was mere hyperbole, do the math. It's all here in this one comment. Accept it, reject it, mull it over a while, your choice. I don't care. But bet on silver to outperform gold through either Freegold or hyperinflation at your own peril, and certainly not because of anything you read here.

Sincerely,
FOFOA

Rui said...

FOFOA,

Gold vs silver ratio during Weimar Republic has been a well studied subject. The ratio stayed around 1:16 all those years until the last a few weeks when rumors about a coming bloody Soviet Unions invasion were in the air. That's what spooked the rich to grab gold over silver as gold would be more mobile in case they needed to run.

The rumors were cleared later on and the GSR was down after that. Those who exchanged gold for silver during the last panic probably scroed big. Not sure who did it tho.

I don't know how FOA came up w/ that ratio but that's not how price discovery works. You'd get around 1 : 20000 from the "40 (Freegold) x 11 (hyperinflation) x 47 (today's GSR)" formula, meaning you could use simply 1 ton of gold to corner the annual silver mining output.

Say you are a rich man and notice the chance to corner an important market like silver to profit so you throw 1 ton at it. The problem is everyone else also notices it and does the same. That 1:20000 ratio would quickly disappear as the result of price discovery. FOA's lesser ratio would not hold either once the bidding starts.

An artificial lift of 40X or sth doesn't guarantee the ratio would stick. Even when silver was universally dropped as monetary metal during the gold standard days the ratio only swung between 1:40 and 1:100, and that's when there was 9X as much silver above ground as now.

I'm not saying OK let's dump gold to buy silver for bigger gain. Gold is certainly more established and mobile (and never erodes). I myself have both gold and silver. Just don't neglect silver that fast yet. :-)

SatyaPranava said...

FOFOA, while generally agreeing w/you on silver, though personally using a slightly higher solver to gold metric than you, i must point out a few thing about that Weimar data that seem very intriguing.

First, before Oct 16, 1923, there were only 2 times that the GSR veered from 16 by any more than roughly a few tenths. The first date used in the chart, and the number in Sep, 1921 (GSR: 27.). But in the span of one week, and who knows if this wasn't actually one day, the GSR shot up from the 16 level, to 160 and stayed there throughout the rest of this data set (roughly another 5 weeks).

so what's interesting to me, is that i'm willing to consider the starting GSR of 14 and change as an outlier, relative to all other values, as well as the 27. Obviously something dramatic happened within a single week that made that ratio increase by exactly 10.

a round number like that doesn't sound like freemarket valuation, though i'm unsure of all the details in how germany (attempted to) ran its economic/currency policy during the time. But sustaining a GSR of 16 for most of the 5 year period only to have the ratio decrease in a (day?) week seems odd.

Either way, it still seems a losing proposition for those expecting to benefit from hyperinflation under silver.

To you (FOFOA) or anyone else, why do you think that GSR moved (or didn't) in that way?

thanks,

Satya

SatyaPranava said...

edit.."But sustaining a GSR of 16 for most of the 5 year period only to have the ratio decrease"

should have read "increase" not decrease.

radix46 said...

Rui,

So, what you are saying is that during the period when the situation was 'more' orderly, silver held its own, but as soon as people got worried about anything, they immediately shot towards the focal point, gold.

Seems best to cut out the hassle in the middle and just go straight to the good stuff.

Biting Silverbug said...

So...let me understand this correctly. There is good A, gold, which is at 5 BILLION ounces. There is good B, silver, which stands at 500 MILLION ounces (10x less). We need silver as a society for just about everything, but we need gold just to "sit there and earn no interest" as all those people who hate all of us (the precious metals family) would say. And gold is supposed to be 20,000x more valuable than silver? So there's less of it, and it's worth less than a more abundant good? Let's say that there somehow is a ton of silver, everyone is totally wrong, and there is 20 billion ounces of silver above ground. I doubt there's even 1 ounce in my apartment of non-investment grade silver (how much investment grade I have, is only accessible by military-grade security clearances :) But with 5 billion ounces of gold, 20 billion ounces of silver, that's a silve ratio of 4 to 1. Fine, since more silver comes out of the ground, I can see a ratio of 10 to 1. But how do you get from 10 to 1 to 20,000 to 1?

FOFOA, my main head scratcher is why scarcity in this case does not translate into value. If you can explain this to me, I might well get back on the gold train - in fact, if you can show everyone how this one point alone works, probably you'd get rid of all your silverbug infestation! I can already accept that gold might get the first shot at the revaluation premium. But I don't see why silver wouldn't rise up as well, and faster. You make an excellent point about gold temporarily going to a level far above silver because of it's perceived portability - I may have to weight the portfolio more towards gold so that I can sell gold for silver, ride the silver train up, then buy the gold back.

As noted, if I were in that Weimar situation, I'd buy hand over fist silver at 160x to wait for the mean reversion to 16x and earn 10x my money relative to gold. The important issue here is that silver reverted, no? If it DIDN'T revert to 16x ever again, then there could be a case against it being overvalued and finding the "right price" at 160x. But it did return to 16x, so the 160x is the aberration, not the 16x, no?

Thank you,

Biting Silverbug

PS: Before I'm dismissed as a clueless silverbug, please note the following - I called oil's top (when it was $125) at $150, saying it would never hit it, and would go to about $30, based on the fallacy of most investment analysts thinking that "oil is inelastic! Demand can't go down!" -forgetting that people will change their behavior, carpool, what have you. As you know, oil went to $147 and then to $33. FOFOA, I feel you - you're on to a lot of things. You may be right. Until then, you're crazy - after you're right, then you're just lucky - to most people :) Seriously, I'd still like to know why scarcity isn't value.

Thank you,

Biting Silverbug

costata said...

Biting Silverbug,

You wrote:
"As noted, if I were in that Weimar situation, I'd buy hand over fist silver at 160x to wait for the mean reversion to 16x and earn 10x my money relative to gold.

If you weren't in gold at the time you could not make that (very astute) trade. Capice?

".... my main head scratcher is why scarcity in this case does not translate into value."

This is a much more complex issue than you may realise. More later.

Cheers

FOFOA said...

Hello BS (Biting Silverbug),

There are many commodities that are more scarce than gold on this planet. Scarcity is less than paramount in this particular (and vital) human role of store of value.

@ Rui,

Hyperinflation is always a parabolic progression. So the most extreme (and therefore the most relevant to us savers) changes happen in a short period of time at the very end... just like the GSR in Weimar. See this Zimbabwe graph for a parabolic time reference.

Silverbug graphs like this one from Roland Watson who made the (only?) argument which you are reciting are misleading, and more likely pure spin to suit the analyst's convictions.

Within a few months of the peak in GSR the hyperinflation was completely gone. The Weimar message for gold holders caught in a hyperinflation (not a Freegold revaluation) is to wait for the parabolic blow off top before you convert some of your gold into other hard assets.

You might want to give this article some consideration, Gold / Silver ratio reconsidered, if you are still wondering why (even sans Freegold) silver has still failed to surpass gold's performance in every crisis since the Weimar period.

Sincerely,
FOFOA

FOFOA said...

Rui,

Here's another riddle. Why has gold outrun silver 2.6:1 since 1970? -->Graph

Hint: It's not because of silver market manipulation. There is a good reason for this and it does not argue for the other metals to ever catch up. In fact, it argues for a repeat of this divergence in a magnitude that will take your breath away.

Sincerely,
FOFOA

Shawk Nixon said...

I'm new to comments but have read all the archives. One of the best reads of the year for me. So thanks to FOFOA and so many other great members of the is community.

I use to believe that scarcity was more important until reading this blog and the discussions about stock versus potential supply.

Gold or silver as a commodity would benefit with above ground scarcity. But if viewed as a wealth reserve actually needs a high level of above ground stock in the world and low level of new supply. This ensures liquidity for trade but also ensures that new supply can't be increased rapidly to devalue the wealth reserve (like paper money). This is one factor of safety/stability that will draw wealth towards gold over silver.

In the short term, we could see silver shortages, delivery issues and see short term spikes up in price. I own silver for that speculative reason but heavier weighted in gold.

The Dork of Cork said...

It struck me after reading the latest Jesse column on the CBs and their Gold records

Why should I accept the CBs latest meme.
How can I worship a balance sheet when it is filled with such mystery - it is a very Catholic doctrine this Free Gold belief system is it not.
The bread and wine is turned into the body and blood of Jesus - although we may not look inside the tabernacle , just admire the outward ornate design.
Although perhaps if we are loyal congregation we may benefit from the churches pleasure.
Do Goldbugs really want to kiss this ring ?

DP said...

@TDoC: That would be an ecumenical matter...

http://www.youtube.com/watch?v=IvvwNR3vF44

Rui said...

FOFOA,

As for why gold over silver by 2.6 in these 40 years, that's b/c it was not treated as money as it will be in the coming hyperinflation.

You can make a big deal on that 1 : 160 ratio last a few weeks of Weimar Hyperinflation and sniff at my argument it's abnormal, but it's that steady ratio lasting for most part of those years that's more reliable.

You need several things going in order to benefit from a blast off GSR that is not guaranteed: #1 That window of opportunity better be longer than just a few weeks. #2 You better be the very first few guys to react, or free market price discovery would quickly wipe any abnormal ratio out.

Both FOA and you took it for granted that you could just raise gold ratio to other assets to any level and it would stick. FOA even believed gold could stay 1:2000 for silver for no reason. That's not how market works. I already explained it in the previous post and I'll do it again here:

Giving annual silver mining output of 22,000 tons, you could just mine 11 tons of gold to corner an important market like silver on an 1:2000 ratio. Well there are a lot of nations or companies capable of mining that much gold. Once they all try to corner it that way, they'd quickly shoot the 1:2000 ratio down. That's before we even look at how much gold and silver are above ground.

Free market price discovery, pal. A flash in the pan abnormal ratio that doesn't stick is as good as if never existed.

One last thing about getting out of metals at the right time, better now wait after they blast off. By that time the price will be plunging and your coin dealer will not answer your phone. We don't need to worry about it now but keep it in mind.

Martijn said...

".... my main head scratcher is why scarcity in this case does not translate into value."

Well... scarcity is simply not the right word.

What matters is (exogeneous/naturally) limited supply (as in non-printable).

Once that condition (limited supply) is fulfilled, other factors come into play.

The combination of those favors gold over the other options.

Note for instance that the Mona Lisa (painting) is very limited in supply (there's only one), yet is not chosen as a worldwide monetary asset...

Martijn said...

How can I worship a balance sheet when it is filled with such mystery - it is a very Catholic doctrine this Free Gold belief system is it not.

I wonder who asked you to worship anything.

All I ever did was to buy gold after an analysis of the political forces that influence its price.

With or without worshiping anything those forces seem to have done their job lifting the gold price over the past decade, and from what I see in the media they are continuing to do so today.

If I were you I'd step out of the religious sphere and start buying some gold - smiley.

Martijn said...

Martijn, where in this India & Iran issue do you see BIS? Isn't it them doing those contracts? Is it Iran figured it out? Is it leak? Protest? Warning? This could signal major disagreement among OPEC members.

Interesting question, but difficult to answer.

Where the BIS is in this I don't know. It seems to be something between the two of us.

About the oil-for-gold-deal: Iran has known about it for decades (as per the article I linked above) and currently the other OPEC members most likely are 'in the know' as well, and I don't think it signals disagreement among OPEC. The are likely to agree that the dollar is toast in the first place, don't you think?

And yes, it could very well be some kind of warning or threat.. difficult to assess, we'll just have to wait and see what else comes up I guess.

Martijn said...

It seems to be something between the two of us.

... the two of them.

The Dork of Cork said...

@DP
Excellent - ttttt th th th th tha thattttttttttt is one of my favourite lines.

@ Martijn
You are a senstive soul , I am merely questioning the lodgic of this Idea.
For instance they may be far more unreported Gold then we have been led to believe - this unreported Gold may not be on the ECBs balance sheet , therefore the balancing of the balance sheet may be flawed in certain strong hands favour.
On the other side - the ECB and its sister banks may have little or no physical.
How do we know ? - this business is conducted by the central bank priesthood with little oversight from the princes.
One of the driving forces for the scientific revulution came from the ability to read and interpret the Bible as equals not as a flock to be lectured to by the high priests of finance.
We cannot touch and taste the body and blood so therefore how do you know its manifest ?
This is the central flaw of using Gold and gold alone as money - it is by nature monopolistic.

The Dork of Cork said...

Sorry logic and not lodgic - Lodgic is clearly for luddites.

radix46 said...

Dork of Cork,

You seem to concerned about the system as it should be. I think that most people here are trying to ascertain what it will be, morality aside.

Que sera, sera, whether you like it not.

mortymer said...

Exactly Martijn, and that is strange to me, I thought that those contracts were supposed to be done, assisted by, by the market maker - BIS (considering there is this 2-tier market) or perhaps IMF. I assumed that CBs behavior on gold market(s) are up to certain level based on some agreement - are not allowed to go to private markets but could obtain from own sources, e.g. Russia, China, etc; while the other interCB market is cleared by BIS.
(I have not carefully read your linked article, still to be done)

The Dork of Cork said...

@Radix46
Perhaps - Europeans will accept any dictats from their betters , however Americans are different , at least the oringinal European Americans - that is the reason they left , acceptance of central authority was alien to them - is there enough of them remaining ? perhaps not - but I would not so easily discount a massive silver rebellion maybe led by elements of the officer class withen the US.

A America after a hyperinflationary event would be a very dangerous beast.

radix46 said...

The 'average man on the street' knows nothing about precious metals, silver or gold. I don't know why everyone talks about silver being the metal of the people, virtually no one owns any and wouldn't understand that they should buy some if there started to be price increases in the things they buy. They would be more likely to go on Oprah and whinge about it.

radix46 said...

These changes will be driven by the big players, would you rather front run the CBs with hundreds of tons of gold or the fringe survivalist with a few hundred ounces of silver?

Your last stand may be valiant, but it will be futile.

The Dork of Cork said...

@Radix46

In the long run it matters little wether you own silver or not - you can produce massive amounts of silver with respect to Gold distributing the money throughout the economy - however you cannot produce silver at near zero cost so therefore the FED under a silver standard could never exchange trillions of dollars for wothless securities.
Thats the beauty of the stuff ( its inflationary yet provides a check on central forces) and the reason why CBs hate silver.

Martijn said...

@the dork of cork

I don't really like the 'boasting' of superlative language in order to increase the validity or impact of ones arguments, hence my response. Please don't feel offended, it's only my personal (sensitive) feeling and basically irrelevant to the discussion.

As far as the possibility of falsified balance sheets and the like: off course it's possible. We are unable to audit them and hence they might indeed be upholding some kind of show.

Al we can do is look at the possibility of that being the case.

I think there is little reason to disagree about the upcoming demise of the dollar. That also means that some sort of 'new' financial paradigm must be devised to replace the dollarsystem by those 'in charge' if they want to remain their position.

They could do so be lying about gold in their balance sheets, but wouldn't that entail a big risk? The purely paper dollar has had its best days or so it seems, what would make them think a purely paper gold illusion would hold better.

It's possible, but I don't deem it very probable.

Apart from that I have seen plenty of evidence about the Arabs wanting gold for their oil, and it seems highly unlike that that part of the story would also be faked by all players included.

And as oil does remain the no. 1 necessity (and currency) world wide I think we should not overlook its arguments...

The Dork of Cork said...

@Martijn
No offence taken - I am Irish so therefore enjoy a colourful and robust argument - however the reference to the tabernacle was not flippant in this case , the similarity between this spirtual vehicle and the workings of CBs is no coincidence.

Jeff said...

http://www.theaustralian.com.au/news/nation/reserve-banks-gold-sale-cost-us-5bn/story-e6frg6nf-1225985231872

Texan said...

Any chance this thread can revert to gold?

Wendy said...

test

Wendy said...

test again ;)

Wendy said...

I am officially invisable, and no longer a blinking light on the creepy map =8o}

costata said...

All,

One of my New Year's resolutions is not to use the phrase "shit for brains" in any comment addressed to an individual on this blog in 2011. I'd appreciate it if some of you would correct me if I stray.

Hi Texan,

"Any chance this thread can revert to gold?"

Seconded, with a side order of hyper-inflation analysis BUT first there is an off-topic matter that requires attention.

Rui,

You wrote (and wrote and wrote and wrote more or less the same thing):

"The root cause of our crisis is this fractional reserve lending based insane credit expansion that neither government nor bankers wanna give up." (My emphasis)

We no longer have (in net terms) a fractionally reserved international banking system.

The systemic changes in the international banking system that gave us the current system started to gain traction in the 1980s, accelerated dramatically around 15 years ago and were more or less fully completed in the early part of the decade just passed.

Some individual banking groups, such as HSBC, are fractionally reserved (at least on a notional basis) but the vast majority of the big banks are "negatively reserved". They have a reserve deficit. This is profoundly true of the Wall Street banks. IMO Greg Pytel is right. This is a gigantic Ponzi scheme.

Rui, your childishly naive and shallow comments about a "system", that only exists today in your mind, are bad enough. The fact that you don't display any understanding of the "system" you want to abolish only makes your comments more tiresome.

Much as I loathe Karl Denninger he, and many others, are correct about the mathematics of fractional reserve banking. This system can function well provided you have competent bankers, a supplier of emergency liquidity, diligent (impartial and honest) regulators, law enforcement and a stable currency.

Personally, I do not support the fractional reserving of a banking system because we never seem to be able to achieve all of the conditions (cited above) that are required for it to be sustainable over time. IMO fractional reserve banking raises ethical, legal, political, social and economic issues that fully merit a debate about whether it should be abolished or modified. That debate inevitably leads to the question: What do you replace it with?

Also IMO no debate on this issue will provide any useful insights if it ignores interest rates, capital theory, money and other related matters. Discussing any of these issues in isolation only leads to a dead-end like the one we are in now. Attempting to address these problems under a $IMFS is doomed for reasons that I don't think you are capable of grasping at present.

This blog discusses a solution for at least two of the root problems in the present system - monetary stability and recapitalisation of the IMFS. The Euro Freegold architecture may also open the way to resolving more problems of the IMFS in the future. This blog also discusses the transition to the new IMFS, so hyper-inflation of the US$ is part of the dialogue.

With an eye on the post crisis review of the system, I also think this debate should be vigorous and as broadly based as possible but, for the time being, you should exclude yourself from the debate until you research this area more extensively and develop a better understanding of the subject.

Phew! New Year's resolution intact.

radix46 said...

Costata,

Well thanks a bunch! Now I have to clean the coffee out of the keys of my computer after having spat it out whilst attempting to control my laughter.

Martijn said...

@Mortymer

Re: BIS involvement

As the Dork from Cork also notices, it is nearly impossible for us non-insides to see gold movements between central banks.

We also do not know where the - supposed - gold is stored. Some banks hold claims on gold through the BIS while not having that gold in physical possession.

As for India I expect them to have quite some gold in their own possession. If so they could trade with Iran. If it involves claims (held through the BIS) the BIS would have to be in as well.

Difficult for us to tell...

Rui said...

So costata

Perhaps you should inform Mervyn King (Governor of Bank of England) that we are not longer on Fractional Reserve anymore. Seems that he has not got your memo as he was proposing about "eliminating fractional reserve banking explicitly" just two months ago.

But then again who knows? Maybe
Governor of BOE is a little too childishly naive, shallow and short on extensive research to be worthy of your profound understanding of the modern monetary system.

hohoho....

Whatever. Take it easy and have a nice day.

DP said...

@costata:

http://www.youtube.com/watch?v=G_CG0frQAKc&feature=player_detailpage#t=59s

mortymer said...

Martijn, DfC: EEA - Education, Empathy, Analyze... as written by one good researcher I respect. Make some phone calls, go to archives, I mean the real ones, in Your country, on your ministries, get permissions and check on your own. It is silly to play with freegold theory, invest money, time, effort while having the main fact unchecked, smile.
Look even FOFOA has same opinion about US gold. I was also dealing with the same doubts. So, if it bothers someone, there is a way...
People lately too much tend to use just internet sources and forget the printed literature and people on certain public positions whose job is to know. You yourself found the nice article on scanned page or verified data. :o)
Other issue: concerning "hornet nest kicking"; to have opposition, to step on someone´s toes is a hint that the job is done well and a good way to deal with it is to take it as constructive criticism. Lets talk factual. And ask questions.

Martijn said...

@Mortymer

Coincidentally I have read quite some old documents recently, and as indicated above they seem to fit the A/FOA story remarkebly well.

Did you read the article I linked? There is much more than that in the archives.

I'm not going to sum it all up now, but for instance Duisenberg (who led ECB during the introduction of the euro) had been vocal about using gold between central banks back in de 70s multiple times; discussed it with the US and the like, headed the BIS later on.

Until proven wrong I'll follow the overwealming amount of circumstantial evidence I found.

However, I'm always ready to change my opion upon finding new facts.

Did you make the phone-calls or checked some archives? I'd be happy to hear about it if so!

Martijn said...

Other issue: concerning "hornet nest kicking"; to have opposition, to step on someone´s toes is a hint that the job is done well and a good way to deal with it is to take it as constructive criticism.

Well, there's form and content.

As I said before I do not regard the superlatives some people tend use in their arguments a positive (strengthening) contribution to the content of their argument, it often makes me wonder what it is they're trying to cover with their 'screaming'.

As for the Dork of Cork I'm glad I learned about his Irish background which indeed explains a lot.

Apart from that I should off course also focus on content over form, as you rightly noticed. So, for my next reply I'd be happy to discuss some facts.

mortymer said...

Doing a bit research of history of Czech gold (or what was left of it) as a pilot; unfortunately not in English. There is e.g. one researcher who put a good work behind it: ISBN 80-86182-69-X; I verified some of it. A lot of authentic research and for those who dare a way where/what to check and how.
But also a lot new new confusing questions. E.g. how http://en.wikipedia.org/wiki/Josef_To%C5%A1ovsk%C3%BD who sold the Czech gold treasure is now sitting in high position in BIS. All in all some things cleared, some confusing, great in-view in workings, but a lot of general assumptions solved.
Yes, now I read the article and it needs even more attention; form and content, indeed.

DP said...

Mervyn King didn't propose eliminating fractional reserve banking.

He advocates splitting banks into boring deposit-taking utility banks on the high street, and seperate investment banks that trade assets to generate profits. Putting a firewall between these two types of banking activity.

Reinstatement of a form of the Glass-Steagall Act, which was put in place after the last time we had a speculative bust of this magnitude and for similar reasons. It was torn down at the end of the last century at banker request, and look what happened soon after.

Elimination of FRB, as costata says, is an unrealisable dream. We just need to lock it down and keep it in its box again, so that it can't blow up the entire global economy when the bankers go wild and inevitably get it wrong. Again.

Syafrin Djohan said...

What happens when US$ takes the hyperinflation hit? All dollars go to bid Euro? ECB standby with fingers on the keyboard to manufacture all the Euro for international use, say in 1 month?

World Reserve Currency system has proven to be oppressive, can't anyone outside the Eurozone or US come out with a better and more just IMFS instead of resorting to Euro, with all the old players intact?

***
Weimar hyperinflation happened when the rest of the world were still more or less intact, meaning GSR remains intact outside of the impact zone.

Revaluation in 1933 happened when dollar was not too far from diversion path from gold.

This time hyperinflation will happen while the rest of the world has their currencies floated and somewhat pegged to dollar in one way or another, the undo of the peg is unprecedented.

DP said...

@Syafrin Djohan:

What happens when US$ takes the hyperinflation hit? All dollars go to bid Euro?

Well, they might. It's the buyer's choice to make. They could always all rush to buy gold too; that might have an interesting effect on various currencies around the world.

ECB standby with fingers on the keyboard to manufacture all the Euro for international use, say in 1 month?

ECB are always standing by with their finger hovered over the "create" and "destroy" buttons of the Euro machine. If consumer prices in their zone, priced in their Euro, should significantly deviate from +2% inflation rate over the medium term outlook, they will print/destroy Euros in order to keep the consumer prices on track for that target. That is their single mandate.

If other Central Banks/investors choose to buy up the supply of Euros in large quantities, locking them up in their virtual vaults for extended periods of time, then this will have a deflationary effect within the Eurozone because there is less circulating currency with which to buy goods. They will therefore press "create" to ensure there are sufficient Euros in circulation to satisfy the demand. Conversely, if the other CBs/investors start to dishoard them they will press "destroy" to keep the number circulating within the zone at the desired level.

So yes. Depending on the demand, it seems to me they might issue a massive number in even a single day, let alone a month. Or they might retire them instead, if that is applicable. The joy of digital currency means they can now issue an unlimited number in a matter of seconds, so there is no concern they won't have enough printing presses to meet demand in time.

The world is a very different place, monetarily, than it was last time a situation similar to this came along, as you rightly say. The whole world will be able to do what it sees fit. It will be interesting to see what all the actors on the stage decide to do, as things unfold.

DP said...
This comment has been removed by the author.
mortymer said...

To discussion related BIS reports:
http://www.bis.org/list/cgfs/index.htm

radix46 said...

So, would anyone like to paint a picture of what event/s are most likely cause this transition to Freegold?

Iran-India oil for gold deal looks ominous, especially for Iran. Bad things happen to countries that stop using the dollar for oil deals.

DP said...

The $55,000 question!

Or perhaps the $155,940 question...(?)

The Dork of Cork said...

@Martijin
You have the air of a extremely confident climate scientist who beleives his model has already been confirmed by the nexus of observations and complex modelling , it just needs a few tweeks - what if the data feed into a complex computer is corrupted by observational error and therefore giving false predictions ?
This fate in data presented by bankers with skin in the game of continued corruption is troubling to me.
Without a inherent redundancey in systems such as independent anylasis and data collection from scientific peers or a silver standard to brake the centralisation of all economic activities - this will collapse like all systems built on such narrow foundations.
Science is more then collecting data - all the data in the world is useless unless you view these facts through a appropiate prism.
The same goes for economic debate.

mortymer said...

The sad story of Czechoslovakia's gold:

http://www.pecina.cz/files/www.ce-review.org/00/11/brown11.html

Wendy said...

Yes Radix,

Iraq comes to mind as it wasn't "weapons of mass distruction", but the intent to demand Euros for Iraq's oil that led the US to invade.

ad said...

There Is No Getting Around Gold

The only real debate is between paper money and gold-backed money, and it is already getting under way at the highest levels.

http://www.forbes.com/2011/01/10/gold-dollar-world-bank-opinions-contributors-jeffrey-bell-rich-danker_2.html

mortymer said...

To anyone interested in German WWII loot & other archive materials I also recommend this great site:
http://www.archives.gov/index.html

Dimmed aurum said...

Here is the some info on the history of the bulgarian gold reserves
http://www.google.com/search?q=bulgarian+gold+reserves+history&hl=en&prmd=ivns&tbs=tl:1&tbo=u&ei=hwcuTeajBJHpObvjhPcJ&sa=X&oi=timeline_result&ct=title&resnum=11&ved=0CFcQ5wIwCg#q=bulgarian+gold+reserves+history&hl=en&tbs=tl:1,tl_num:20&prmd=ivns&sa=X&ei=KxAuTfXYDc-SOpygmM4K&sqi=2&ved=0CFsQywEoAg&fp=7b989c6c17f79c85

Martijn said...

@the dork of cork

You have the air of a extremely confident climate scientist who beleives his model has already been confirmed by the nexus of observations and complex modelling , it just needs a few tweeks - what if the data feed into a complex computer is corrupted by observational error and therefore giving false predictions ?
This fate in data presented by bankers with skin in the game of continued corruption is troubling to me.


That is your observation, which off course you are free to make. Did you also read me saying:

Until proven wrong I'll follow the overwhelming amount of circumstantial evidence I found.

For as far as I can see, I have a fairly acceptable story (that of A/FOA) that - as I found - seems to be supported rather well by historical facts and - not to forget - a rising gold price for the past decade and other current developments.

That doesn't guarantee anything as nothing is certain and I definitely lack an absolute oversight, but for me it suffices for the moment.

What would you recommend? Take the hard line that 'all bankers are thieves' (how would you prove that btw?), buy some guns and go off to live on a farm somewhere?

I see a better risk-reward in buying physical and remaining where I am, but I'm certainly open to another perspective if you have one.

Martijn said...

Bad things happen to countries that stop using the dollar for oil deals.

Iraq comes to mind as it wasn't "weapons of mass distruction", but the intent to demand Euros for Iraq's oil that led the US to invade.

Before the Iraq-invasion Russia and Venezuela were also mentioning the possibility of a petro-euro.

After 2003 (the invasion) they quickly shot their mouth, but in 2005 the Russian central bank started marking it's gold to market.

Perhaps they thought - and yes, they're probably corrupt and I can not audit or guarantee anything - "if we cannot use the euro we can at least create our own".

Recently Putin deemed it possible for Russia to join the euro, and besides Russia and China are using their own currencies for bilateral trade and recently opened an oil pipeline.

Wendy said...

Yes Martijn,

bit by bit the function of the USD is eroding as useage demand decreases one deal at a time.

Dimmed aurum said...

Capital controls soon to be introduced in Bulgaria:
1. Payment in cash for anything more expensive than 5000 levs (≈2500EUR, 3333USD) PROHIBITED!
2. Bank fees for cash transactions (primarily withdrawals) – RAISED!
3. Payment of government fees, taxes, fines and duties using credit/debit cards* – ENCOURAGED! (read NWO “cashfree” = no cash allowed = debt and fiat plastic currency bondage = toil for your governors you dirty bitches you kind of society/animal farm)
*Sorry FOFOA since I have a strong “allergic” reaction to plastic you are getting no financial support from me unless you publish an ordinary bank account (IBAN,BIC code etc.) or maybe there is some way to mail gold risk free (tried and suppressed by the government if my memory serves me correct)?

Rui said...

OK, quotes from Mervyn King here as reference:
"Eliminating fractional reserve banking explicitly recognises that the pretence that risk-free deposits can be supported by risky assets is alchemy. If there is a need for genuinely safe deposits the only way they can be provided, while ensuring costs and benefits are fully aligned, is to insist such deposits do not co-exist with risky assets."

Eliminating FR system (at least severely restricting it) is to prevent the reckless credit expansion generated bubbles from happening. Bubbles are destructive as they not only squander valuable capitals but also mis-allocate work force to fields having no real growth. A nation's economy suffers as the result.

A currency is only as strong as the industrial strength behind it. If there are constant bubbles weakening a nation's industrial output then its currency takes a hit and thus monetary instability. That's why we need to turn attention to the FR system, the engine of these credit bubbles.

Ignoring such cause and effect while focusing only on certain gold ratio tweaking is like trying to build 2nd floor while ignoring a fundamental weakness in the 1st. But looks like asking for a solid 1st floor before constructing any one above is naive and shallow in someone's mind.

insteadofablog said...

@FOFOA (or anyone that feels strongly enough):

First, let me apologize for asking an off-topic question in the comment section but I'm not sure where general Freegold questions are typically posed. If it is inappropriate, please point me to a more general forum and I'll gladly take my question there.

I am trying to determine if I should hold physical gold bullion, use BullionVault and/or GoldMoney, or some combination of both. I still have a lot of reading to do in the archives so I'm not clear if physical possession is the important thing for Freegolders or if it's only really important that you not own paper gold, i.e. it's ok to store your bullion elsewhere in allocated storage as long as it really is physical gold that you own.

I understand that FOFOA does not expect gold confiscation. That takes worry off of physical possession in the USA. Does it also reduce worries about being unable to take delivery of vaulted gold in other parts of the world (if it's ever really important to take possession at all)? Also, if I understand correctly from sparse reading, gold to FOFOA is a store of wealth but not necessarily the future of mediums of exchange. Does that tip the scale to the cheaper and more convenient vaulting approach?

Physical possession is a hassle (security, insurance, higher premiums over spot to purchase etc.) and vaulting solves many of those issues while increasing the risk that you might be cut off from your ownership by all kinds of unforeseen political and legal circumstances.

So, if there was an "official" Freegold-oriented recommendation, what would it be and why?

Martijn said...

an ordinary bank account (IBAN,BIC code etc.)

Why would that be less plastic than paypal?

It's all digital I believe..?

For paypal you would need your plastic keyboard nonetheless, but it seems you're not having that much trouble using it judging by your above reply.

Martijn said...

So, if there was an "official" Freegold-oriented recommendation, what would it be and why?

Well, the closer you hold your physical, the more control, and the less risk.

Bullionvault etc. say that you can trust them, but so does Bernanke about his dollars. Although I have more faith in Bullionvault than in Bernanke's dollars, I still believe you're more certain of storing the metal yourself (e.g. in a safe deposit box if you do not want to keep it at home).

It will cost you some extra as you say, but I figure that might just be worth the risk reduction.

Why would storing your own gold be such a hassle anyway?

M

Dimmed aurum said...

I use cash only. And that is CASH ONLY! No paypal no nothing like that, thank you. I do however have a bank account which helped me exchange Euros into Levs with a friend of mine until he got frightened that he may be charged with paying VAT on the transactions based on the premises that we are having some kind of concealed (and therefore subject to taxation) activity.

The Dork of Cork said...

@Martijin

I do not question the ECBs goal to redirect dollar reserves into the euro system - it is wise to follow power when preserving wealth.

I question the stability of the system - I presume that you do accept that the freegold system is a faith based device as the monetary priesthood has gained near total control and will not allow any prince to gaze inside their tabernacle.
Such concentration of power without even the pretence of rationality is dangerous in the extreme.
Freegold itself does not have balance - its function depends on the ability to pay or not to pay debt - therefore it is not tied to the money supply , this can create vast distortions as credit can grow to a monstrous size before again meeting the money supply ,therefore the balance lies with the people through coercion and deception - this is a recipe for violence
As for the final question - well of course , fractional reserve lending is just that , what else could it be.

Dimmed aurum said...

Mmmm, bullionvolt...interesting...How does anyone pays for the bullionvolt_ed gold.
Who said plastic!

Wendy said...

That's weird, Greyfox's comment dissapeared into thin air??

mortymer said...

@DA - Another: *During the span of ones life we must consider weather we really do experience changes or are we just experiencing a rebirth of old values from the past, repackaged for this modern world. In times past, real money did not earn interest unless it was lent out. Yet, it retained value relative to all things. Today, paper currency, also does not earn interest unless it is lent out. However, it does lose value against real things, over time. In this light one must also grasp that a currency unit, in hand, is "lent out already"! It is a credit, to be paid in the future. Truly, cash, outside the banking system is a receipt for "lent out money" that just doesn't earn interest!*

littlepeople said...

Jason makes some very valid, market-driven and persuasive points. Plus, the old "buffering" factor . . .

http://silverstockreport.com/2011/500-by-2020.html

littlepeople said...

Insteadofablog:

I much prefer direct, in-my-hand ownership. In times of strife, can you trust Bullionvault implicitly? What if they get bought out by JPMorgue, or go bankrupt, or whatever? What if you are 1,000 miles away, and can't get there due to fuel shortages, or what-have-you?

Assuming the world will look like it does today is a fearless (stupid?) assumption. A freegold world may look unlike anything any of us has ever seen.

Syafrin Djohan said...

Re: India
India is the world's largest consumer of gold. According to GFMS, in 2001 it absorbed around 700 tonnes (22.5 million oz) from the world market, compared to just 320 tonnes (10.29 million oz) in 1994; that is without taking into account the recycling of scrap from the immense stock of close to 10,000 tonnes (321.5 million oz) built up on the sub-continent in the last few hundred years, or gold imported for jewellery manufacture and re-export.

India has always been 'a sink for precious metals'. Both metals are closely woven into the social fabric, especially in the rural areas where they are the basic form of saving.

The gold and silver from the Americas, after Columbus discoveries, mostly just passed through Spain on its way to the east. In the 17th century the Dutch and English East India companies sent gold and silver to India and Java to pay for goods. The English East India Company shipped 20 tonnes (643,000 ounces), almost three years' world output then, to India between 1660 and 1690.

During the American Civil War in the 1860s India imported almost 420 tonnes (13.4 million oz) in payment for cotton exports because of disrupted American cotton crops.

Only once has India been a significant dishoarder, when 1,244 tonnes (40 million oz) was shipped out in the 1930s due to distress selling from famine and the new high price for gold (up from $20.67 to $35).

In recent times India has remained faithful to gold.

http://info.goldavenue.com/Info_site/in_mark/in_ma_in_hi.htm

insteadofablog said...

I appreciate the replies but let me qualify the question somewhat. I understand that there are risks to using BV or GM in terms of solvency, travel, transparency etc. There are risks to personal possession too. But I'd like to drop that out of the equation for now. Let's assume I've factored in the basic risks/costs and determined that they are a wash in all of those tradeoffs.

What I'm left with then is asking if there is any disadvantage to the offshore storage that pertains to the Freegold theory itself and one's ability to take advantage of the windfall that owning physical hold should bring. In other words, does taking advantage of your foresight require you to be *liquid* and have gold for the purpose of transactions or to avoid expected sociopolitical change? Would gold owned by a US citizen in Zurich be less valuable than gold in hand for any foreseeable reason that Freegold has anything to say about? Is there any reason related to a transition to Freegold that advantages one method over the other, assuming again that I've already considered the more universally applicable risks.

Assuming the world will look like it does today is a fearless (stupid?) assumption. A freegold world may look unlike anything any of us has ever seen.
I agree but couldn't that just as easily mean that personal possession in the USA becomes less attractive and offshore more? The reason most people go offshore to begin with is because they want protection from domestic risks. So far, I've read that FOFOA doesn't expect confiscation in the US (quite the opposite and a plus for personal possession) but does FOFOA expect it to be more or less difficult to deal with a vault in Zurich?

I'm sorry if my questions miss the point or don't make sense given my ignorance of Freegold to this point.

Wendy said...

I borrowed this quote from Jim Sinclair's site. I thought it might make everyone happy here all at the same time! (is that even possible?)

"Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves."
–Norm Franz, Money and Wealth in the New Millenium

costata said...

insteadofablog,

You wrote:
"Is there any reason related to a transition to Freegold that advantages one method over the other, assuming again that I've already considered the more universally applicable risks."

No. Whether you hold the physical gold in your own safe or someone else's "safe" it is still physical gold. It is, as you point out, a risk assessment issue.

littlepeople said...

Maybe Germany's Merkel is even ready to consider the ultimate debt-killer--the one-time revaluation of gold . . .

“We support whatever is needed to support the euro, also with respect to the rescue fund,” Merkel told a joint press briefing in Berlin today with Italian Prime Minister Silvio Berlusconi. “We’re saying what we’ve always said since the Greek crisis: We will stand by the euro.”

From Sinclair website.

costata said...

h/t Ed Steer of Casey Research

Perth Mint reports 'unrelenting' demand for gold on dip below $1,400

http://www.gata.org/node/9504

Here it comes. FOFOA posted a link earlier to a paper by Tom Szabo. Well worth your time IMHO.

The gold market is now totally dependent on gold scrap to supply any increase in demand (by weight), with physical metal, on the scale of 2010 over 2009.

http://www.moneymorning.com.au/20101001/lbma-2010-back-to-the-future-part-ii.html

IMO if the PTB are intent on kicking the can down the road for a while longer they have two choices.

(1) Stretch the demand over a static (or slightly expanding) volume of metal by raising the price. It sounds odd but higher prices are functionally the same as expanding the supply of metal if the purchasing power of the buyers is static.

(2) Increase the actual supply of metal by bringing more gold scrap to market and persuading some of the existing hoards of gold to bid for cash.

Lots a luck with option 2. Once the supply of scrap peaks then price is the only weapon left in their arsenal unless they can divert demand from the physical market.

How could they pull that trick off?

ETFs? I doubt it. Too much competition from the likes of the physical only funds and ETFs who hold real metal. FWIW I can't see any way that the PTB can be sure that demand would only flow to the ETFs they control. It's a long time since GLD was the only game in town.

That leaves ....... gold mining stocks.

Someone earlier posted a question about signs that Freegold was coming. IMO that may be the wrong way to look at the situation. Euro Freegold-RPG has been "coming" for 40 years.

How about looking for signs that it will be delayed? If the mining stocks start to move much higher it could divert demand from the Western physical gold markets. (No signs of note that Westerners are abandoning their paper delusions en masse.) This could be an indicator worth watching.

Another nice pay day for the insiders if they had amassed big positions while gold mining stock prices were weaker. Perhaps to sell down for some big gains while freeing up a little physical gold supply.

Cheers

Rui said...

Dork,

I think there are two simple rules when it comes how money is decided:

He who saves and produces dictates what money is b/c he backs his money up with the fruit of his labor.

He who borrows and drowns in debt has to accept what is arranged for him b/c he lives on others' mercy.

When I look at the ECB/EUROPE situation I see a few northern nations saving and producing (mostly Germany) and then a batch of liability (most noticeably PIIGS) hanging around. Adding that signature unproductive European socialism to the mix I seriously doubt it capable of providing a sound monetary system under their current structure even if they try.

Fruit of labor comes first, then money. In that order. A monetary system not designed to follow this principle is a waste of time.

Wendy said...

costata,

I sold all my equities in May, the day before the 30 min/1000 point drop on the DOW. I thought I was pretty clever as stocks contined to go down through June and July.

I knew by Sept. that "bad timing" was my middle name AGAIN, and was sure all had recovered. (these were well researched junior miners) but I refused to look.

Anyways your post tonight prompted be to look, after sticking my head in the sand for 6 months ..... all those companies I used to own have for the most part at least tripled.

I knew it, but I couldn't look. I still have the brokerage account, and really it's teeny weeny, but I'm not sure what I'll do.

I really lack experience with investing, and it shows in my bank account.

I'm not expecting investment advise, I'm just thinking out loud.

costata said...

Wendy,

Sorry to hear that.

DP said...

@Rui:

Eliminating fractional reserve banking explicitly recognises that the pretence that risk-free deposits can be supported by risky assets is alchemy.

The above does not say "I am all for eliminating fractional reserve banking".

If there is a need for genuinely safe deposits the only way they can be provided, while ensuring costs and benefits are fully aligned, is to insist such deposits do not co-exist with risky assets

This is saying that high street banking should be seperated from investment banking.

DP said...

BTW Rui, he's been calling for that in public for over a year now. He's in a good company, with Volker, Obama, McCain, and a few others all lining up to publicly state this is what should be put in place.

Next time you happen to swing by my blog, put "steagall" in the search box and you should find a few posts on this topic.

DP said...

It has also been discussed in FOFOAland before now too (put "steagall" in the search box again).

For example, Martijn has mentioned it at least once. So you are not shouting into the void here when you bring up this subject. :-)

Martijn said...

@The Dork

Freegold itself does not have balance - its function depends on the ability to pay or not to pay debt - therefore it is not tied to the money supply , this can create vast distortions as credit can grow to a monstrous size before again meeting the money supply ,therefore the balance lies with the people through coercion and deception - this is a recipe for violence

First off all (as per the rest of your reply) I'm not aiming to change the world or make it better where my monetary actions are concerned. If I could, I might, but I'm just too small for that. Therefore my goal is to observe the forces as they unfold and try to position myself accordingly.

As for freegold not having balance I don't really know. It's a rather deep subject that has not been tried in practice, so I guess we'll have to wait and see (if we ever get there).

One could argue that it does at least impose some sort of a balancing force: as the public (all market participants) are able to chose between holding gold or other (paper) assets, mismanagement of paper would drive the market into gold, forcing the paper managers to change their game.

How it depends on the ability to pay or not pay debt I don't understand. Freegold would just 'be' in my opinion. And if debts would continue to go sour, or the money managers keep printing that would both drive up the price of gold as no-one would want to hold debts or money as an (wealth) asset.

So I guess freegold would force some austerity on debt and money creation because the gold price(!) and not gold itself is tied to the money supply (by means of the market).

From what you write you seem to hold a different view, or am I mistaken there?

DP said...

@Rui (and anyone else interested in the topic of extending credit via the FRB mechanism) you may enjoy one of FOFOA's posts from March 2009, All Paper is STILL a short position on gold.

This discusses: money/credit; monetary/asset deflation; Exter's pyramid, and the fact that the Dollar is still above gold in the end; hyperinflation; differentiation of gold from all other commodities; and more besides!

   Ye Olde Blogge: "A good read all round!"
         (5 Stars)

The Dork of Cork said...

@Martijn
One thing we can agree on is that in the immortal words of W - "this sucker($IMF) is going down"
The entire global supply chain is so over.

GOLD FREAK said...

"The European Central Bank’s gold holdings earned 100 billion euros ($130 billion) in 2010, adding to a “gold buffer” that may absorb losses in its program of sovereign debt purchases, UBS AG said."

So a rising gold price helps the EU??? A'HA!!

Some people should begin to catch on.

Notice how the price of Silver going up isn't helping solve the debt crisis. It adds stress, it does not relieve stress..unlike gold.

disclaimer - Goldfreak owns gold AND silver

MystryBox said...

As much as I enjoy FOFOA and think he's generally correct, unfortunately I think he's correct only with how things will turn out for countries and the ultra-rich.

For individuals I think it's more likely that we get a "confiscation" similar to the gold confiscation in the 30's... but this time the confiscation will be physical currency. We'll become a cashless society because it will be the ultimate in government control and they'll be plenty of people who will support it to supposedly stop terrorism, tax cheats, etc. We're nearly a cashless society now so it's not much of a step.

I've had this worry for a while but the below essay really explains in detail exactly what I think is going to happen. Freegold won't matter to us peons because it will be illegal to transact in physical cash or coin. You will have to sell your gold in order to transact with electronic chits, and at the time of sale the government will take all your gains in taxes.

Read about our future:
http://danielamerman.com/articles/Cash.htm

DP said...

Mystrybox, how will They know what your capital gain was, to tax it? If you keep your gold online, say at BullionVault/GoldMoney, then sure you can't argue about it. But if you store it yourself, when did you buy it and what did you pay?

Every sovereign (pre 1971 £1 coins) I have, were gifts from family when I was born. There are no records. Even the ones I buy next month... :-)

Blondie said...

MystryBox:

Why Tax Freegold?

You cannot understand a future paradigm from within the context of the current one.

Using the current monetary system, Amerman is correct. Freegold is not the current system though.

Wendy said...

Costata,

Are you safe where you are?

It's hearbreaking to see the devastation and loss of life in Austalia over the last few days.

Blondie said...

@ MystryBox,

re: Amerman

Worth considering too that now Amerman has introduced you to his concept of "stealth taxes on gold", he provides a link to sell you his solution.

DP said...

@Blondie: Nice post you linked to there - when it finally shows up on Blogger of course...

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