Saturday, February 5, 2011

The View: A Classic Bank Run


What I offer here on this blog is a view, backed up by premises and interpretations, sculpted into a framework of understanding, challenged and tested through repetitive application. After my last post I had a couple of brief conversations. One was public, with Bron Suchecki, Senior Analyst for the Perth Mint in Western Australia. The other was by email with a "gold bug" who is also a professional in the gold mining and exploration industry.

Out of these conversations emerged a dichotomy of views on which I think I can shed some light. Mine is not "expert knowledge" like these two gentlemen. Instead, it is a simple understanding that I have gained from ANOTHER. If this sounds trivial next to the opinion of two "experts," then I invite you to judge for yourself after I make my case. As I implied, these two experts do not agree.

The difference in viewpoints that I encountered is nothing new, and from my perspective it extends far and wide in gold market analyses. It is a fundamental difference of opinion born of misunderstandings (on both sides in my opinion) about what is really underlying the events we can all see. It is difficult to explain, especially since most of you are firmly embedded in one side or the other, so please bear with me here.

As I have written on many occasions, I do not consider myself a "gold bug." So where necessary, I am going to broadly refer to three fundamental views as "the gold bug view," "the mainstream view," and "the FOFOA view." But unfortunately I cannot just lay these views out as simply as you would like. I need to lead you to my understanding. So here we go.

During our conversation, Bron wrote that the Bullion Banks are not, as he called it, "naked short" gold. He further explained his meaning, calling it "financially short" versus "physically short." They are not "financially short," in that they are not exposed to exchange rate risk, aka, any movement in the price of gold. Here Bron explains:

To clarify the distinction for our readers, let us consider a bullion bank with a physical ounce asset backing an unallocated ounce liability to its clients. If that bullion bank then lends that physical to a jewellery company who use it in their operations, then the bullion bank now has an ounce claim asset backing its unallocated ounce liability. From your point they are short “physical” but I would also note that the bullion bank is not short “financially”, that is they are not exposed to any movement in the price of gold.

Yes they are exposed to the risk the jeweller does not return the physical at the end of the lease. Probably more importantly, they are exposed to liquidity risk. I think this is the sense that you use “short” and is reflecting the issue of “maturity transformation” (see
http://unqualified-reservations.blogspot.com/2008/09/maturity-transformation-considered.html for an excellent explanation of why this is a big problem).

My use of the word “short” is for situations where the bullion bank exchanges (or sells) the physical backing its unallocated ounce liabilities for cash. This creates a financial risk as there is a mismatch between the denominations of the liability (ounces) and the asset (dollars).


In other words, the bullion banks lend (rather than sell) "gold units" (be they real or paper) and as a result they now hold the claim or contract for repayment denominated in "gold units" (be they real or paper). I think Bron is trying to say two things at once here – that 1) "technically" they are not naked short, and 2) they have no "exchange rate risk," both satisfied by the stipulation that the gold units (real or paper credits) that they had lent are now being carried on the books as an asset (i.e., claim on repayment) for the same "gold units."

Bron rightly elaborates that this condition exposes the banks to the standard counterparty risk of default, as well as "liquidity risk" from the maturity issue with lending short-term demand deposits (such as checking accounts and unallocated gold accounts) in exchange for longer-term assets (repayment over time like mortgages and mining finance). However, what he fails to acknowledge is this – there is no clearly defined lender of last resort to cover the risks. So the banks are IN FACT exposed to "exchange rate risk" as their ultimate recourse for filling the resulting permanent (default) or temporary (liquidity) hole in their books is to go into the open market to buy the replacement gold with cash.

If you think hard about a bank that finds itself in this position, you'll eventually agree it's just a matter of degree whether one is completely naked or just "semi-nude" – depending on the extent to which the market price is running away from him. And in this case, because they are chasing gold with cash, they in fact have "exchange rate risk" too, even though the denomination of their books imply that they do not. More in a moment.

Bron again:

The second part of FOFOA’s comment is that any delivery to GLD by a bullion bank of physical gold that was supporting/backing the bullion bank’s fractional unallocated liabilities is a “synthetic supply” that effectively suppresses price by “divert[ing] growing investment demand away from the tightening physical market.”

I would note that for this statement to be true the bullion bank(s) in question must be naked short. Not all Authorised Participants for GLD would have access to the physical to do this, nor would they all be willing to take on such a financial exposure


What Bron is describing here is classic, straight forward short selling – borrowing an item and then selling it, knowing that you will have to buy it back in order to return it to the lender. And he concludes that the only way GLD should be considered a "synthetic supply" is to the extent that the Bullion Banks outright shorted gold, borrowed it from their unallocated creditors and sold it into the market via GLD shares.

Now we're getting close to the point where I think a slightly different view of the gold inside the bullion banking system will reveal a different reality. I will get to this view in a moment, but I want to throw out one situation where the Bullion Banks may be acting following Bron's rules and still creating a "synthetic supply."

Suppose the BB/APs created a few GLD baskets with some of their physical reserves but didn't sell those shares. Instead, they held the shares as part of their physical reserves. And because the carry trade and mine finance uses for their gold were trailing off, they found a new way to lend gold for an income. They simply lent out the GLD shares (rather than selling them) to hedge funds and anyone else that wanted to short GLD. The BB/APs now have no exchange rate risk, they still own the shares representing their gold, they are earning an interest rate on the lent shares, the short hedge funds are creating a "synthetic supply" that will not only divert demand, but also put downward pressure on price, and the BB/APs can call in their shares and physical gold if and when they have the need.

I think Bron's "mainstream view" suffers a little from the same thing that all mainstream views suffer from – the 40-year commoditization of gold. This view holds that gold is more or less just like any other commodity rather than the systemically vital FX (foreign exchange) wealth reserve asset that it actually is. Last year Bron quoted Jeffrey Christian in a post written in defense of Christian's "100:1" comment. I think this quote that Bron used from Christian's CPM website really reveals the prevalence of this view of gold as just another commodity:

"This article may help to clarify the complex world of commodity banking, in which gold, silver, and other commodities are treated as assets, collateralized and traded against. When we explain these processes to clients, we often refer to the same mechanics as they are applied to deposits, loans, and assets by commercial banks in U.S. dollars and other currencies. Banks treat their metal deposits in much the same way as they do deposits denominated in money, as the reserve asset against which they lend additional money to borrowers."

So no big deal, because we're just talking about commodities here, not money, right? And thanks to this view, gold still trades precariously (without a safety net) inside a banking system similar to other FX currencies – dollar, yen, euro – with one notable exception. It is the only one without a backstop, a lender of last resort, a Central Bank. This would not be a problem without the expansionary force of fractional reserve lending, even at a conservative ratio. More in a moment.

Okay, now on to my gold bug friend. He writes:

Hi FOFOA,

Imagine that you were a bullion bank (or group of bb’s) who had sold short 5,000 to 15,000 tonnes of gold.

Now you have been in trouble for the last 10 years as the tide has turned.

But what if you created a diversionary device such as an ETF that holds only a portion of the gold it says it does. You could use the ETF (GLD) to divert money from physical and then systematically skim off 10 to 50 tonnes at a time to refill your coffers as physical gold was picked-up. You would still be “making money” with leveraged tools on the paper market with the money you held from the prior sale of the gold so you would not be hurt as much as everyone thinks while you patiently picked away at the available physical gold.

This GLD tool would give you the ability to start to repay your gold while using that device also as a price-capping mechanism.

Perhaps that is what GLD is for.

Sincerely,
XXXX


I responded that I thought his view was a bit conspiratorial. In other words, too many (obviously) competing interests would have to be in on the conspiracy to make it work. I responded that the Trust is not in the business of "picking up" gold. And that I thought my view fit the evidence better. That all the gold bars claimed on the list are actually there. But that they were (mostly) never a market flow off-take, but rather a simple reduction in reserves. He came back with this:

Hi FOFOA,

So if I understand correctly, large clients of the APs would buy gold, give it to the ETF for shares and then sell the shares – is that where the retail investor share liquidity comes from? Or is it simply a shorting vehicle where people buy gold, sell it to the ETF for shares then sell the shares before every drop in the price of gold while retail investors buy?

Under my model, I propose that there are a handful of big bullion banks (BBs) who played the gold carry trade and they would indeed have had to have a “look everyone, behave or we’re screwed” agreement to play this game.

If the ETF was vacuuming up whatever physical gold was available for “retail ETF investors” from unknowing AP clients it would be a “visible” vehicle to hide in plain sight while it was ultimately the handful of the BB APs trying to acquire gold to cover their own gold shorts. The AP clients could short gold while the BB’s could skim it off to cover their own shorts.

This could allow the AP BBs to systematically take steady delivery of smaller amounts without raising eyebrows while also creating a GLD ETF “fractional reserve” vehicle which may only have 10% of the gold it advertises to divert cash from the physical market. Whatever gold it is able to secure from unknowing AP’s is skimmed away by the BB APs who are in the know. And the tonnage could grow to the sky while only 50 to 100 tonnes is ever really there – and even having multiple claims on the total amount as you point out!

When redemptions are made, the ETF / public would only see that one of the APs had taken delivery never really knowing where the gold is going after the AP has taken delivery (back to the Central Banks or held in an allocated account for the CB’s).

Does this make any sense?

It will be interesting to see where this goes – although it may just end in a big smoking hole and we never find out.

Sincerely,
XXXX


I think there is a tendency in the gold bug community to be overly focused on "bankers and central banks" as the main culprit against gold when in fact it was mostly the mining operations and private moneyed hedge funds that were doing the majority of the short selling (albeit through the services of the BBs) and engaging in the gold carry trade. My gold bug friend's view stems (I believe) from a misunderstanding of the processes that were exposed, among many other places, in Blanchard's 2002 suit against Barrick and JP Morgan and described in this Motion to Dismiss. I am referencing this document only as one example that also contains a good description of the gold lending and short selling process, filed by the defendant, Barrick Gold Corp., nonetheless.

Also, I am not passing moral judgment on past gold lending and short selling activities as I believe that in this case "morality" is not quite as obvious as most gold bugs think. I believe that it was "the system" that systematically held gold prisoner in the past. That gold would ultimately break free and cause massive systemic turmoil was never in question. Only the timing and the amount of turmoil was. As Another wrote in his first post, "Westerners should not be too upset with the CBs actions, they are buying you time!"

Anyway, the rough view is that physical gold was lent by the CBs to the BBs and sold short for the specific purpose of suppressing the price of gold on behalf of the CB's supposed genetic disposition against gold. This would have left the BBs short tonnes of physical gold owed back to the CBs in a rising price environment which can be deadly to the shorts. The more detailed view is that the gold lent by the CBs to the BBs was then lent to the miners like Barrick, who sold it (through the BBs) into the market for financing purposes. While the BBs borrowed gold from the CBs and affected the sale of the gold, the exchange rate (or price) exposure would have been on the miners, not the BBs in this case.

My view is that this was an all-paper deal, all around. That the BBs lent their own "gold liabilities on paper," claims against their fractional physical reserves, to the miners… on paper! In reality they gave the miners dollar cash from the sale of these "paper claims" to the Western gold bug marketplace, and booked as an asset the miners' obligation to repay the loan back in physical gold units.

So the BB was short paper gold to the market and long future physical gold payments from the miners. Of course this has the same effect on the market price of gold as the gold bug view above, but it does shift the causal relationships around slightly. Let me explain.

All that BB paper gold that was sold into the marketplace to fund mining operations (to hopefully spur growth in the physical stockpile) was redeemable on demand from the BB "gold window." And the most common way you take delivery at "the window" is you pay a little more to have your gold put in allocated storage.

Another wrote that the Western gold bugs were willing and excited to not only hold paper (unallocated) gold rather than the real thing, but to also trade in their physical, that had been sitting around collecting dust as a dead asset from 1981 through 2001, for this new paper gold. In other words, they gave up their physical to the BB pool of unallocated reserves in exchange for tradable paper BB liabilities. This was a kind of "reverse gold window" in the 1990s, taking in physical gold.

So, imagine two "gold windows" at the Bullion Bank. One is marked "incoming" and the other is marked "outgoing." At the "incoming window" you have "the West" lined up to turn in their physical gold for exchange-tradable paper liabilities. And right around the corner you have "oil" lined up taking delivery or allocation. It is this flow that allowed the oil for gold deal to go on as long as it did. But then something happened.

The thing was, the incoming flow from the mines was not exploding as hoped and expected. And the overall flow from the mines combined with the Western gold bugs puking up their private stashes was nothing compared to the sheer volume of the "oil" wealth in line around the corner. At the current price there was literally unlimited demand at the "outgoing" window and a limited supply coming in. This is what Another meant when he wrote that the oil states had already (almost inadvertently) cornered the gold market by 1997.

ANOTHER: "People wondered how the physical gold market could be "cornered" when its currency price wasn't rising and no shortages were showing up? The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold flowing during a time that trading would have locked up."

This is important! Important enough that it was in Another's very first post. And this blogger (at least) believes Another was most probably a European CB insider, so as to give his words significant weight.

What he's saying here is that when the CBs lent gold to the BBs, it was in a banking backstop or lender of last resort capacity, not unlike when the Fed created trillions to backstop the frozen interbank lending market in 2008 or when it swapped billions with the ECB in 2009 as a Eurodollar backstop. All the BBs ever got from the CBs was paper, "CB certificates." Think of it in commercial banking terms. These "CB certificates" would have been analogous to "reserves held at the Fed." Reserves held at the Fed fill a void of cash in the vault for the banks, just like these high powered certificates acted like physical reserves to the BBs.

ANOTHER: "This whole game was not lost on some very large buyers WHO WANTED GOLD BUT DIDN'T WANT ITS MOVEMENT TO BE SEEN! Why not move a little closer to the action by offering cash directly to the broker/bank ( to be lent out ) in return for a future gold note that was indirectly backed by the CBs. That "paper gold" was just like gold in the bank. The CBs liked it because no one had to move gold and it took BIG buying power off the market that would have gunned the price!"

But then, like I said, something happened:

ANOTHER: "The Asians are the problem, by buying up bullion worldwide and thru South Africa they created a default situation on all the paper, for the oil / gold trade! …Asia put an end to a sweet deal for the West! From the early 90s it was working very well. But now: The problem with gold physical supply is very real indeed! … The oil "understanding" was broken by the Asians. More gold has been sold than can ever be covered! This market is not the same as the past. … The great mistake by the BIS was in underestimating the Asians.

"Some big traders said they would buy it all below $365+/- and they did. That's what forced LBMA to go on a spree of paper selling! Now, it's a mess. … Instead, the BIS set up a plan where gold would be slowly brought down to production price. To do this required some oil states to take the long side of much leased/forward gold deals even as they "bid for physical under a falling market". Using a small amount of in ground oil as backing they could hold huge positions without being visible. For a long time they were the only ones holding much of this paper. Then, the Asians began to compete on the physical side."
(See this post for more detail on the oil for gold trade.)

Now the real picture is starting to emerge. "Oil," lined up at the "outgoing" gold window, had the physical flow already cornered because of oil's indispensable value to the West. Then the Asians showed up at the window. Well, not completely. They were also taking supply right out of South Africa so it never made it into the Western paper liability system, the BB reserves. This caused the BB reserves (think cash on hand in a bank) to shrink.

The CBs stepped in to backstop this run on the BB's reserves with their "CB certificates." (A backstop prevents price from running away, the same way Bernanke's 2009 currency swap calmed the rising dollar.) Additionally, they convinced "oil" to take "repayment contracts" removed from the asset side of the BBs' balance sheets in lieu of actual physical reserves. These contractual assets were (now) as good as gold in the hand because they were backed by the BB's reserves which were (now) backstopped by CB gold, still sitting in the CB vaults.

Are you starting to see the view yet? Okay, let me back up a little bit for the slow. We really need to start thinking of the Bullion Banks as the banks that they are! In fact, it is largely unnecessary for us to insist upon calling these "bullion banks" – along the same premise that we don't find it necessary to specify when commercial banks are acting as "dollar banks" or "euro banks" or "yen banks." A bullion bank is simply a bank that carries a set of books denominated in "gold units" as opposed to dollars, yen or euro.

But to be fair, the act of operating a banking book in units of gold is specialized enough that it does tend to warrant the extra adjective when referring specifically to those banks that run in bullion circles. So who are the Bullion Banks? They are the banks that engage in banking and clearing operations with units of gold ounces. They include, but are not limited to, all the big banks that have committed themselves to offering market-making quotes to the LBMA network. These LBMA Market Making Members are:

The Bank of Nova Scotia - ScotiaMocatta
Barclays Bank Plc
Credit Suisse
Deutsche Bank AG
Goldman Sachs International
HSBC Bank USA NA
JP Morgan Chase Bank
Merrill Lynch International Bank Limited
Mitsui & Co Precious Metals Inc
Société Générale
UBS AG

Other non-market making BBs can be found on the LBMA Full Members list, although not everyone on this list is a BB. For example, Brinks is not a bullion bank.

It is important to start thinking of these gold operators as the banks that they are, because then you can start to see the significance of the CBs publicly announcing, through the twice-renewed CBGA, that they are no longer going to be the lender of last resort to this system. Quote: "The signatories to this agreement have agreed not to expand their gold leasings…" You cannot be a backstop without expanding!

Furthermore, you will be able to see how the very act of commercial banking (which is lending) automatically creates a ginormous synthetic supply of whatever the system's reserves are. Think credit money versus cash, or even M3 versus M0 once you throw in a few derivatives. The LBMA today clears 18,000,000 ounces, or 560 tonnes of paper gold liabilities every single day. That's down from its peak of 1,359 tonnes in December, 1997 when Another started writing. That's each and every day! It's all right here.

And that's just the part the LBMA clears. A Friend writes:

A bank can be "populated" with unallocated gold accounts in two primary ways. It can either be done as a physical deposit by a silly person or by another corporate entity, or else it can occur completely in the non-physical realm as a cashflow event whereby a customer with a surplus account of forex calls up and requests to exchange some or all of it for gold units, whereupon the bank acts as a broker/dealer to cover the deal – occurring and residing on the books as an accounting event among counterparties rather than as any sort of physical purchase. No bread, no breadcrumbs, only a paper trail and metal of the mind. This is how the LBMA can report its mere subset of clearing volumes averaging in the neighborhood of 18 million ounces PER DAY. Just a whole lot of "unallocated gold" digital activity as an ongoing counterparty-squaring exercise.

Here is an analogy that my Friend wrote me in an email:

It is here that I offer the eurodollar market as a very good parallel to the bullion sector of banking. While not a perfect parallel (for all the most obvious reasons) it provides a remarkably good bridge to help anyone who has a good footing on modern commercial banking to successfully cross over to that seemingly unfamiliar territory of "bullion banking". In fact, they need do little more to successfully cross over than to simply think of bullion banking ops as though they were eurodollar banking ops – the difference being that whereas eurodollar banking makes extra-sovereign use of the U.S. dollar as its accounting basis in international banking activities (thus outflanking New York's purview and restrictions), bullion banking engages in similar "extra-sovereign" use of gold ounces within its operational/accounting basis (thus outflanking and overrunning Mother Earth's domain and tangible restrictions).

And just to be sure we're on the same page, the eurodollar is not to be in any way confused with the euro, but rather stands to mean the artificial supply of "U.S. dollars" that "exist" as accounting units in off-shore banks, having originally been authentic deposits of New York's finest export, but which were then subsequently lent on – fractionalized and derivatized into a vast amorphous mass as only a network of cooperating banks can do best.


Okay, now that you hopefully have a new view of the valley below, for now we can call it "the FOFOA view," let's take a look back at the two other views with which I started this post. The mainstream view is blind to how gold is different than all other commodities in that its lack of a real lender of last resort in a fractional reserve system, should the interbank lending market freeze up, could bring down the entire global monetary and financial system.

And then there is the gold bug view that suspects the Bullion Banks, at the behest and under the guidance of the CBs, must be gaming the system in order to skim physical gold that they eventually need to ship back to the CBs. But then the FOFOA view is that the system itself is, and always has been, the culprit. And that the bullion banking system must and will revert to a non-fractional, non-lending, 100% reserve banking system. Not the fiat banks. Just the Bullion Banks. The CBs demand this, as Another told us a long time ago, because physical gold is cornered by real wealth at these prices, and they (the CBs) will not give up any more of theirs.

I'm sure there are still "tonnes" of those "CB certificates" in the reserve accounts of the Bullion Banks, as all their paper gold liabilities must be backed by either assets or reserves on their balance sheets. But those certificates will never be cashed, except by a very few "important clients" of the type you do not default on because they have something you need.

ANOTHER: "Banks do lend gold with a reason to control price. If gold rises above its commodity price it loses value in discount trade. They admit now to lending much where they would admit nothing before! They do this now because of the trouble ahead. Does a CB [receive] collateral to lend its gold? Understand, they only lend their good name on paper, not the gold itself. The gold that is put on the market in these deals belongs to someone else! The question is not "Are the CBs worried for the return of gold?" but, "Has our paper been lent to the wrong people?" The BIS will not allow the distribution of all gold to settle claims."

Now let's see, how can I apply this view to my last post in order to address Bron's contention that GLD does not constitute a "synthetic supply" while also addressing my gold bug's allegation that the BBs are scamming the system rather than merely trying to manage a run on the banks that is already well underway? Well, a lot of you seem to have no problem imagining a cashless currency system, so let's try another analogy.

Imagine a banking system that is running out of cash (pretend the Ben Bernank doesn't exist and there is no printing press). Most of you are perfectly okay with this because you use your credit cards and your debit cards, your newfangled online and smart-phone banking and your old fashioned checking accounts. You rarely, if ever, touch that nasty cash with its blood and cocaine residue and horrible germs. In fact, you hardly even notice that the banks are running out of cash.

But where did all that cash go? Well it turns out that there are some people that still believe only in cash, and they have paid the banks to put their cash into little metal safety deposit boxes. We'll call this "allocation" of the cash. Silly, these people are, because your paper gold, umm, I mean electronic money is still worth as much as their nasty cash shoved in cubby holes, and yours is a lot more liquid to boot! On top of that, you don't even have to pay storage fees for your electronic money! In some cases the bank pays you!

But at one point, say between 1999 and 2004, these banks had actually increased their cash reserves as some of their lending operations wound down. Think: people (mines) paying off their loans and the gold carry trade unwinding. With the loss of this revenue and a brief spike in reserves, these banks piled a bunch of cash into a vault and created a hybrid currency for some that believed in cash but still preferred the liquidity of electronic money. These "special accounts" paid a reduced storage fee on their money, less than the deposit box customers, but more than the regular customers. But for this fee they were guaranteed that their electronic money was not fractionally reserved like everyone else's. In fact, they were told, it was fully reserved.

The only catch was that, unless these special customers had $13 million, they would never be able to touch their cash. In fact, it would never trade at a different value from plain old electronic money. And once they realized this, it would be too late to do anything about it. Their only option would be to exchange back into electronic money and try to find someone who would sell them actual cash, which of course would be impossible at that time.

So you see, these "special full reserve accounts" created a synthetic supply that diverted people from the action they knew they needed to take, delaying that final, inevitable outcome, a bank run. That cash was always going to go to a few "giant" clients in the end. A few that could afford it. The few that got lucky in the end. Because the banks knew all along that it will ultimately be a "giant" that sounds the alarm. The overriding goal has always been to delay the inevitable, not to avoid it, for the last decade at least in my opinion.

And that is how the banks are using this "vaulted cash" to delay the revelation that a bank run is already fully underway. They are slowly buying back those "special accounts" in order to move that cash, a little at a time, into safety deposit boxes for the big customers that are actually "running on the bank." As long as no one runs out of the bank's front door yelling "the bank is out of cash," then the run hasn't reached the panic stage yet. But that doesn't mean it isn't happening.


Here's an interesting item that I struggled to interpret until I really thought it through. Do you remember the stories about HSBC clearing out space in their vaults, or JP Morgan building new vaults? What could be the explanation for this if the aggregate gold stock is so stable? Then it occurred to me that unallocated storage is much more space-efficient because the gold sits stacked on pallets. Allocated gold often gets put into cubby holes to assist in recordkeeping. That takes up much more space. So the process of allocation after many decades of non-allocation requires an expansion of vault space. This is how I now interpret these stories.


We cannot know the actual state of the BBs' books from what is visible for analysis. So how fast could all of the physical gold reserves be spoken for? As frightening as it sounds, worst case, they may already be. When I think about Jim Rickards' second-hand account combined with the fact that someone is draining GLD, it seems like we could be in the final stage of "extend and pretend that there is not a run on the bullion bank reserves."

We shrimps should have gold available for purchase until some small or medium-sized Giant is denied allocated bullion. Several people asked after my last post, "What if all the APs won't play ball and redeem your basket?" My answer was, "Well, then it is game over for Bullion Banking!" Gold is going into hiding. When a small Giant runs out of one of the Bullion Bank's front door announcing "the bank is out of gold," as Fekete puts it, all offers to sell gold against irredeemable paper currency will be abruptly and simultaneously withdrawn.

So buyers large and small, get in line to get your gold. Because we have no way of knowing who will be the last in line to get cashed out. What we have here is an explosion in the bullion banks' physical leverage factor, not through an increase in lending this time (the lending is actually declining), but through customer withdrawal of reserves, with no physical backstop. Even a bank with a conservative leverage factor can experience a bank-busting, system-crashing run. Public confidence is the only thing that stands in the way. This is how a classic bank run runs.








Sincerely,
FOFOA

PS. For those of you that struggle with my crazy music selections, this one is a cute little conversation between the dollar and gold. See the lyrics below for details…



Dollar: Last night I had the strangest dream
I sailed away to China
In a little row boat to find ya
And you said you had to get your laundry cleaned
Didn't want no-one to hold you
What does that mean?
And you said…

Gold: Ain't nothin' gonna to break my stride
Nobody's gonna slow me down, oh-no
I got to keep on movin'
Ain't nothin' gonna break my stride
I'm running and I won't touch ground
Oh-no, I got to keep on movin'

Dollar: You're on a roll and now you pray it lasts
The road behind was rocky
But now you're feeling cocky
You look at me and you see your past
Is that the reason why you're runnin' so fast?
And she said…

Gold: Ain't nothin' gonna break my stride
Nobody's gonna slow me down, oh-no
I got to keep on moving
Ain't nothin' gonna break my stride
I'm running and I won't touch ground
Oh-no, I got to keep on moving

Dollar: Never let another girl like you, work me over
Never let another girl like you, drag me under
If I meet another girl like you, I will tell her
Never want another girl like you, have to say

Gold: Ain't nothin' gonna break my stride
Nobody's gonna slow me down
Oh-no, oh-no, I got to keep on moving
Ain't nothin' gonna break my stride
I'm running and I won't touch the ground
Oh-no, I got to keep on movin'

(Chorus repeats until you get it.)

126 comments:

Wendy said...

Haven't read it yet, but I wanted to beat Tyrone ...... Thanks FOFOA
;)

SatyaPranava said...

ha, i've beaten tyrone as well...

and FOFOA has revealed himself, thusly!

Blondie said...

Thank you FOFOA for the cutting of the Gordian Knot.

I kneel in the long shadow of your excellence.

To all those who have plans to buy some gold at some stage, before it all goes up in flames:

BUY. PHYSICAL. GOLD. NOW.

Free gold? Yes please! said...

FOFOA:

A masterpiece! Every time I read one of your posts I realize that when it comes to brains I am about 8 notches below you. You're words are written in plain English, but trying to figure out what the heck it all means is giving me college Physics flashbacks.

Anyhoo, this latest post successfully managed to freak me out again, so I'll be purchasing more gold ASAP.

Robert Leroy Parker said...

Fofoa,

You are awesome. My head nearly exploded after reading this post. More physical please.

Regards,
Butch

THEBIGE said...

FOFOA
saw your freegold advertisement on tv tonight regarding last post. They lowered the price to 9.99 is that a breakeven point of 16500 now?

Thank you for your postings once again

THEBIGE said...

Hey while I'm on here commenting which is rare can someone refer me to the posting about how FOFOA is getting ready for this as far as weapons food etc....I know it was over a year ago know when he went through how to prepare besides gold. I have been unable to find it even through key words in google......

drillfillbill said...

FOFOA you have been on the gold trail (by your own admission) since 2008. How long did it take you to figure out most of these concepts?

radix46 said...

So, how might this extend and pretend be extended further?

If there is no monetary/financial method of extending, then a political/military solution?

Perhaps if a 'Large Oil Government' were to be overthrown, then a replacement administration might be willing to extend and pretend for protection rights?

Paul said...

The mass accumulation of debt is a burden on future generations. Plain and simple. Only way to stop it is here and now. People should realise and then accept this simple fact. That this is what WE are responsible for. FOFOA is correct in calling the system for what it is.

More debt will starve children everywhere, stop, change, save money, buy gold, and give them a future. Even the unborns. I feel responsible for both the shit we are in, and for the young ones that are not. If not for me, I am buying for them ...

Bron said...

FOFOA,

There would be many within the Mint who would be amused at you categorising me as a “mainstream” view. I understand you are using my explanations as representative of the mainstream view but I would like readers to be clear that my personal view is different. To clarify this, some comments on your piece.

While I have no direct evidence of the bullion bank's (BB) activities, I am not as sure as others that the BBs are massively financially short gold (this is not to say they don't run short term speculative positions). My reasoning for this is that gains and losses on such positions impact their reported profit and loss. If they were as massive short for as long as some claim, their losses would have been visible.

I would also suggest readers ask why a BB would take on hundreds and hundreds of tonnes of short gold positions over time in some attempt to suppress the gold price. You only do this if you have a philosophical hatred of gold. I understand that gold ownership is a political action, a rejection of fiat currency and banking, but would (at this time) a bank with a BB division really be threatened by the pathetic fraction of a percent of those investors who hold gold? Threatened to the extent that they would of their own accord take on a massive short position?

Now the above does not mean I think everything is OK. On my fractional fubar post you mentioned, I commented “ It troubles me as well. The Mint has been under no illusions about London unallocated as the legals say we are an unsecured creditor and the bullion banks would never make any statement one way or another about what they did with it. We have operated accordingly.”

Bankers make money by intermediating – buying from one, selling to another, borrowing from one, lending to another – and taking their cut along the way. I would suggest readers consider the theory that BBs would be willing to intermediate for someone else with that philosophical hatred of gold and take their riskless cut along the way. Why risk your own money when someone else is willing to do so, with the bonus that their activity protects your banking “franchise”?

This then leads on to your statement that “there is no clearly defined lender of last resort to cover the risks”. Is this really the case? You mention two risks the BBs have.

1. Default – Borrowing gold doesn't solve this problem, as the act of borrowing gives you an gold asset but also a gold liability. The only way to solve this problem is to buy the gold, which results in a loss because you have to give up dollars to acquire the gold asset.

2. Liquidity – Buying gold doesn't solve this problem as while it gives you gold to give to your creditor but also gives you price exposure as you have technically bought your gold asset which is due in the future. The solution is to borrow gold directly, repaying it when your gold asset comes due. Alternative, you can borrow synthetically by buy spot gold and then selling forward (using the gold from your gold asset to deliver into this forward sale).

I would therefore agree that BBs have "exchange rate risk" for the default situation but not for the liquidity situation. This assumes that holders of gold (which in cases of large volume really just means central banks) are willing to sell (in case of default) or lend ( in case of liquidity) to BBs. I therefore suggest the question is not whether central banks are lenders of last resort, but whether they have the capacity, or willingness, to fulfil that role now or in the future.

comment to be continued...

costata said...

Bron,

You said:
"Bankers make money by intermediating – buying from one, selling to another, borrowing from one, lending to another – and taking their cut along the way."

No. They don't. You are describing a credit union not a modern bank.

radix46 said...

Bron,

I don't see anywhere that FOFOA has implied a BB hatred of gold. He seems to me to be saying the shorting is a function of attempting to keep the West's reliance on cheap oil sustained without massive dollar hyperinflation and system break down. Your theory seems to be based on the axiom that BBs have some kind of innate hatred of gold. This is obviously entirely subjective and unprovable. However, it is not a universally accepted axiom, so any further premises are highly questionable. In FOFOA’s view, there are at least events, empirically demonstrable, on which to base his theory.

Can you explain this hatred of gold a little further?
It seems far too simplistic and a bit of a Deus Ex Machina to say large short positions = hatred of the underlying asset. FOFOA has put forward an entirely different scenario. Are you saying here that his scenario can be explained away by your view: “I would also suggest readers ask why a BB would take on hundreds and hundreds of tonnes of short gold positions over time in some attempt to suppress the gold price. You only do this if you have a philosophical hatred of gold.”?

Bron said...

comment continued...

In my previous post I stated that central bankers are the gold market's lenders of last resort. The fact that central banks hold gold as a physical asset (and only gold) in addition to fiat currencies is clear indication to me that gold is not just another commodity. However, the other side of this is that central banks can be lenders of last resort of this “money”, just as they are of dollars.

Central banks have been more than willing to lend dollars to banks to help them out with their liquidity problems, eg taking on their crappy mortgages etc, rather then have them fail and to avoid a systematic collapse of the banking system.

Consider the situation where a bank comes to its central bank and say “Hey, I've got all these pesky unallocated gold holders wanting physical but all I have is these long term loans. Can you lend me some of your physical gold and I'll replace it later when those borrowers repay their leases? If you don't I'll have to declare bankruptcy, the gold price will rocket up, this will cascade through the gold market and we will have a systematic collapse of the banking system.”

Why would a central bank not be willing to support a bank's BB division in such a situation, especially when they would do the same for dollars? For me this is not the issue, I think they will do (are doing?) it.

You mention the CBGA as proof that (some) central banks are “are no longer going to be the lender of last resort to this system”. I think it is therefore very interesting that the 2009 statement (http://www.ecb.int/press/pr/date/2009/html/pr090807.en.html ) makes no reference to leasing as the previous two statements did. Why the change?

To me then the key issue is whether the central banks have the capacity”.The interesting thing about capacity in respect of gold of course is that you can't print it! Easy to do if your bank has a dollars problem, not so if they have a gold problem. Questions to consider:

a. How much gold would central banks be willing to lend to prop up banks? All of it? Or would they balk in the case of gold? Who cares about dollars, just print more – but risk the country's only real asset?

b. Out of the total they are willing to lend, how much has already been lent?

A speculation: maybe the reference to no more leasing in the 1999 and 2004 CBGA statements was a message to the BB to clean up their books. However, around 2008-09 the banks said they will fail without the backstop, need more time to unwind, have increasing physical redemptions, so CBGA drops the leasing reference to enable them to continue the "extend and pretend that there is not a run on the bullion bank reserves."

In conclusion, I would like to suggest the following in respect of the two risks

1. Default – This is most likely to happen if the BB lend to a short seller who is now bust. In this case we should see buying and thus an increase in the gold price.

2. Liquidity – As agreed, this will happen if unallocated holders are calling for physical. In this case we should see an increase in the lease rate.

Note that in the past the lease rate was around 1% to 2% with low gold prices, during gold's bear market. This was because of the large amount of miner forward selling that was going on. What we have seen in recent times with miners closing down their hedging is low lease rates and high gold prices (see http://goldchat.blogspot.com/2008/08/producer-dehedging.html for a chart). So there is a very general relationship between short selling and lease rates over the long term.

What would be interesting would be sustained increasing gold prices AND higher lease rates, as it may indicate buying to cover defaults and borrowing to cover liquidity.

Bron said...

costata,

I'm not saying they only make money intermediating, but it is one of their sources.

radix46,

I'm not implying that FOFOA or I say that BBs hate gold. Those comments are directed at the many I see on the internet that think that BBs do. A fair bit of the comments I make are directed at readers and not FOFOA specifically and also just to get readers to think/question.

Atticus said...

FOFOA:

This post is extremely interesting, but I'm not sure I understand it entirely. I'm going to have to re-read and re-think a few times.

In the meantime, I'd be interested in your take on a constitutional amendment I've drafted. It does two things: 1) cancels all existing debt public and private, except for demand deposits and Federal Reserve Notes; and 2) re-establishes a gold standard for the dollar.

How do you think this would affect things in view of your analysis?

The draft 28th amendment can be found here:

http://strikelawyer.wordpress.com

Reven said...

Please, someone answer this question for me that knows more about freegold than I do.

I understand that FOFOA is projecting gold to rise to approximately $55,000 an ounce within the price/probability distribution he calculated.

However, this begs the question, will I be able to buy a new car for a fraction of an ounce of gold as the price suggests? Or, is part of the path to freegold hyperinflationary?

I am trying to understand what the real purchasing power of gold will be under freegold. It's difficult to imagine buying a house with a few ounces of gold.

Thanks!

oldinvestor said...

Re’ FOFOA survivalist post.

Aug 27, 2009, No Free Lunch.

Near bottom of main post.

SS said...

You're an interesting chap,FOFOA.
A song I like is 'Clowns' by Goldfrapp.It's about breast implants but also suits bubbles (well at a stretch but it's such a beautiful song in this version,i'll post the link).
http://www.youtube.com/watch?v=lO8NSVu_Sh8

Reven said...

Oldinvestor:

That post doesn't tell me what the real value of gold will be in 2011 non-hyperinflated dollars. I want to know approximately how many ounces of gold to buy a car, a house, a stockpile of oil, etc. Just saying gold is going to $55,000 does nothing for me unless that prediction is in REAL terms.

Wendy said...

Reven,

FOFOA is talking in terms of today's purchasing power.

Reven said...

Thank you Wendy.

Free gold? Yes please! said...

Reven,
I was telling a friend about the concept of Freegold and he brought up the same question that you asked.

He was playing "Devil's advocate" and he said that if gold goes up to $50,000 that means that the dollar has probably collapsed and we will likely be living through a complete collapse of civilization as we know it. People will be searching for basic essential items like food and clean water so why would anyone want to barter and receive a piece of metal for basic essentials that they need for themselves. I had no answer for this so maybe someone here has thought about this scenario and can offer some thoughts on this.

This got me thinking: if gold does skyrocket to $50,000, people who own gold won't want cash it in for near worthless dollars, BUT they may NOT be able to trade it for goods because people who own food/water won't want to trade for metal that they can't eat.

My question: What good is gold at $50,000 if it becomes more or less untradable???

Wouldn't it be better to stock up on canned foods, extra jugs of water, guns, ammo, etc... like the "doomsday" predictors suggest?

Reven said...

I believe I may be able to address your question, because I have also given it significant thought.

During a collapse there is chaos, so the value of things like food temporarily become much higher than normal.

But once order and monetary stability is restored, that food will go back to being worth very little, but gold through freegold will remain $55,000 in real value because it is the anchor of monetary stability.

During the chaos, you would be most unwise to sell or trade your gold for anything. But I fully expect people with a surplus of supplies will want something of actual tangible value (like gold) for their goods.

Order will be restored eventually, and if it isn't, then it won't matter anyway what decisions you make financially.

Free gold? Yes please! said...

Reven, that makes a lot of sense. I guess the main issue is not about the benefit of owning gold, but about how long and painful a transition would take. It's probably wise to stock up on essentials AND gold so that no matter what happens you're covered.

BTW, if the dollar goes *poof* and disappears, what happens to things like mortgage debt and credit card debt? Do I get to own my house outright if there is no mortgage paper attached to it and get to clear out my credit card debt? PLEASE say yes!!

Reven said...

Here's a simple example during a collapse scenario where there's widespread chaos.

We know certain items will be in high demand, like food and ammunition.

Lets examine what a hypothetical company does that manufactures gasoline electric generators. They have a supply of generators to sell, but suddenly the collapse occurs. What do they do with this excess supply? Do they sit on it until the collapse has ended, eliminating a chance to make a major profit?

But what do they accept as payment for their surplus generators? Surely they cannot accept fiat currency, because it is currently hyperinflating in value. And what would they do with the money once they had it?

They could exchange generators for food and ammunition, but then they have an excess supply of food and ammo they don't need. The logical thing to do is to trade an excess supply of useful items for gold during the chaos, something of historic value that will still be worth something when the chaos is over.

If I had two electric generators during the chaos, I would certainly sell one of them to you for a certain amount of gold. The extra generator is of little use to me, you see?

Reven said...

Don't assume the dollar will go to zero value. It may be devalued 90%, 80%, we don't know. What we do know is the world needs a fiat currency to conduct commerce as a medium of exchange. Gold serves as the wealth preserver.

But keep in mind, the standard of living that you currently enjoy is as fake as the value of the money in your bank account. As the dollar loses value, so will the real GDP of the country and therefore the real income people rely on to settle debt. Food and energy inflation will be rampant, reducing people's disposable income for mortgages and credit cards. Unemployment will be quite high.

If you have gold, you can simply sell a small amount of it and pay off your house with ease. If you rely on a job, which can disappear any moment, it may be impossible to settle your debt even in hyperinflated dollars.

mortymer said...

Hi Bron,
I am just an amateur observer with no other interest but to educate myself in this interesting subject of gold and what is happening with it. Your words are important for readers here. Thank you.
My time, tools and sources are not on comparable level so also my thinking is nothing to compare to yours or other professionals. But enough!
Yours: "What would be interesting would be sustained increasing gold prices AND higher lease rates, as it may indicate buying to cover defaults and borrowing to cover liquidity."
You are certainly familiar with this paper:
(http://www.professorfekete.com/articles%5CAEFGoldBasisScrewedPP5.pdf)
GOFO = LIBOR – GLBR
COGOFO = LIBBR – GLOR.
...I am aiming to your statement about the lease rates being still "low" in a bull market. Is it really so?
Could you please elaborate?

My take on your Qs:
a/ CBs differ a lot, some have stronger more independent hands than others; some were stripped of their gold. How much? Who knows, depends on urgency/severity I suppose.
b/ Is it even possible to know in so much of secrecy? All CBs look at each other and if they realize there is a certain global risk then there is no lending?

Free gold? Yes please! said...

Thank you for your replies Reven! Everything you say makes a lot of sense and it gives me some "ammo" to use with my friend who doesn't think gold is important to own. Cheers!

enough said...

Hi FGYP,
there's a 2007 1/2oz. "Jefferson Liberty" for sale on ebay ending tomorrow. These are issue by West Point mint and .9999 fineness. It's part of the current "first spouce series" They have been going for as low as +20 which IMHO is good value and beautiful coin !! Only 24k 1/2 oz. currently issued US Mint. Got back from Tampa last night with a 2010 Coachmen concord. There is a video about this unit on youtube. Bad ass RV. If TSHTF I am ready. Gold hoarding, gun toting road warrior and if it doesn't just going to have some recreational fun :-)

Bron said...

mortymer,

Check out http://www.kitco.com/lease.chart.html

Unfortunately it only goes back to 2000, charts of lease rates further back show long periods in the 1-2% range.

Also keep in mind that at very low rates there is less accuracy, see http://goldchat.blogspot.com/2010/07/understanding-negative-lease-rates.html

Having said that, it is my understanding that there are holders of gold who are not interested in lending at such low rates - the risk/return payoff is not there.

FOFOA said...

Hello Bron,

You write: "I'm not implying that FOFOA or I say that BBs hate gold. Those comments are directed at the many I see on the internet that think that BBs do."

Those "many" also think the CBs hate gold. In fact, they lump all "banksters" in together, as if one bad apple spoils the whole bunch. I argue that the Central Bankers not only do not hate gold, but they are in fact working toward Freegold. This was Another's message. They long ago realized the need for a stable store of value in a fiat monetary system and that once the dollar's wonderfully stable debt is gone, this is next.

You write: "You mention the CBGA as proof that (some) central banks are “are no longer going to be the lender of last resort to this system”. I think it is therefore very interesting that the 2009 statement makes no reference to leasing as the previous two statements did. Why the change?"

This post is not a proof, but a view. And no, unfortunately I wasn't able to fit the entirety of the view into one post. To see this view, you have to look at larger trends in action. For example, the reduction in LBMA volume following the first CBGA. The steadily rising gold price since the CBGA. The dehedging that began after the CBGA. The CBs selling less and less until they finally became net buyers. Why the change? Perhaps they have ceased (unwound?) gold lending operations at this point and don't need to mention it anymore?

In any case, my position in this post is that the CBs only ever lent their good name (CB certificates) as Another wrote, not actual physical. And if I am right about a "bank run," then certificates will not help any more than reserves held at the Fed would help a run on cash.

"Why would a central bank not be willing to support a bank's BB division in such a situation, especially when they would do the same for dollars? For me this is not the issue, I think they will do (are doing?) it."

I don't think they are doing it anymore. I think the CBGA was a warning to the BBs that they had better wind down this monstrosity. I think the CBs realized the necessity of a stable store of value as the foundation under a fiat monetary and financial system, and that only (what I call) Freegold could accomplish this. I think that is, and has been, their goal all along. To force bullion banking to wind itself down. This is the view ANOTHER and FOA painted. And to me, it matches what can be seen since they stopped posting.

You write: "a. How much gold would central banks be willing to lend to prop up banks? All of it? Or would they balk in the case of gold? Who cares about dollars, just print more – but risk the country's only real asset?

"b. Out of the total they are willing to lend, how much has already been lent?"

This is what I find so revealing about the A/FOA archives. Once you really take the time and effort to understand them, you realize that these questions you are posing were already asked and answered by the CBs themselves prior to 1999, perhaps long prior. Since then, we have been watching the execution phase. Yet without the view presented by Another, it would seem to us outsiders that Central Bankers don't think very far ahead and that these are still questions that must be answered at some high level.

Cont...

FOFOA said...

p.2

You write: "A speculation: maybe the reference to no more leasing in the 1999 and 2004 CBGA statements was a message to the BB to clean up their books. However, around 2008-09 the banks said they will fail without the backstop, need more time to unwind, have increasing physical redemptions, so CBGA drops the leasing reference to enable them to continue the "extend and pretend that there is not a run on the bullion bank reserves."

Yes, this is possible. It would require a cost/benefit analysis at the highest level of international central banking as to how much physical gold to "spend" in order to buy a little more time. And we are talking about supplying physical during a run, not certificates, so this would be a new and different undertaking. And as I have speculated in previous posts, there comes a time when the cost of "more time" rises exponentially.

Also, does that fit within the framework and what is visible as laid out in my post? I don't know. That said, Randy Strauss has also proposed the existence of a plan to delay the inevitable a little bit longer:

"The central banks of the world, throughout their long history, have more or less developed the requisite infrastructure and ample experience in the fine art and science of gold storage and allocation transfer. Therefore, not only is an alternative to the dollar available for the store of value role, it is readily available with no significant timeline to accommodate the practice. To be sure, many central banks have already in place the mark-to-market accounting structure to accommodate (and benefit from) the significant upward revaluation of gold reserves as would be expected to occur through the dollar-to-gold transition.

Various policy signs over the past several years had indeed pointed toward 2010 to be the watershed point in the international monetary transition, but the depth of the current commercial banking crisis likely argued strongly for a delay under the thought that calmer waters would facilitate a better transition. As such, the existing infrastructure and policy is largely in place at the present time, so a timeline for this store of value transition can be every bit as short as that for invoicing — essentially, no time needed for flipping the switch.

But in light of the current crisis and some of the policy efforts underway to restore calm to the commercial markets, it looks to me that the new timeline for significant transitions is mid-2013 consistent with the current policy talks driving the permanent European Stability Mechanism to that timeframe, but with that said, it could be set into motion at any given moment between now and then, and between your breakfast one day and breakfast the next. Hence, it is best that you work to actively establish your desired gold position without undue delay, and then with peace of mind you can turn your full attention to the business of living your life as it was meant to be. Spending significantly further time obsessing over currencies and investments is a fool’s errand."


Bron, you write: "1. Default – This is most likely to happen if the BB lend to a short seller who is now bust. In this case we should see buying and thus an increase in the gold price.

"2. Liquidity – As agreed, this will happen if unallocated holders are calling for physical. In this case we should see an increase in the lease rate.

"… What would be interesting would be sustained increasing gold prices AND higher lease rates, as it may indicate buying to cover defaults and borrowing to cover liquidity."

Cont...

FOFOA said...

p.3

Regarding #1, "sustained increase" in the gold price, I offer exhibit A:

Friday, February 8, 2002 - *** GOLD ABOVE $300 ***
Monday, December 1, 2003 - *** GOLD ABOVE $400 ***
Thursday December 1, 2005 - *** GOLD ABOVE $500 ***
Monday, April 17, 2006 - *** GOLD ABOVE $600 ***
Tuesday, May 9, 2006 - *** GOLD ABOVE $700 ***
Friday, November 2, 2007 - *** GOLD ABOVE $800 ***
Monday, January 14, 2008 - *** GOLD ABOVE $900 ***
Monday, March 17, 2008 - *** GOLD ABOVE $1000 ***
Monday, November 9, 2009 - *** GOLD ABOVE $1100 ***
Tuesday, December 1, 2009 - *** GOLD ABOVE $1200 ***
Tuesday, September 28, 2010 - *** GOLD ABOVE $1300 ***
Thursday, October 14, 2010 - *** GOLD ABOVE $1375 ***

And regarding #2, an "increase" in the lease rates, I offer exhibit B:

Lease Rates

Not an increase, but an *unexpected explosion*, sometimes preceded by a period of low lease rates. See here. It exploded in about a week, around the same time I saw premiums start to run at my local dealer over a matter of 48 hours. You notice this has only happened three times in a decade. My thesis is that we'll be lucky to get a week's warning, or even 48 hours, next time. And that next time it won't just be a short spike.

I would like to know your thoughts, Bron, on my closing paragraph. Particularly where I write, "What we have here is an explosion in the bullion banks' physical leverage factor, not through an increase in lending this time (the lending is actually declining), but through customer withdrawal of reserves…"

If this is the case, and the CBs are lending physical to the BBs as you propose, then they are essentially converting paper into physical at paper's price. This is something that Another said the CBs would not do, because "the BIS and the major private gold holders know the total claims" which means they know the true value of their physical. Clearly they are not going to convert ALL paper gold into physical, so the game is to convert just enough to reestablish confidence in the system and stop, or at least slow down the "bank run." Confidence is a delicate game. In my post, Just Another Hyperinflation Post - Part 2, I envisioned a scenario in which physical dollars became more valuable than electronic credit dollars beginning with this paragraph in the post:

"Back in the 30's, gold was the reserve, but gold could not be created at will. If it could have been, then they would have just closed the banks long enough to truck enough gold out to the banks. And it's not just the customers lining up outside the banks that forces this action. It’s the interbank settlement process and the interbank confidence that lubricates this process. And eventually it will also include the larger retailers, who operate with a huge degree of confidence in the bank clearing system."

Cont...

FOFOA said...

p.4

In this scenario, the Fed is forced to convert electronic credits into physical cash while chasing the confidence gap in the interbank lending market and the falling value of electronic credits on the open market, which leads to hyperinflation Zimbabwe style. The point is that once you have to do this, confidence is already gone and you are chasing a runaway train that you can never catch. The faster you run, the faster it runs away from you. And the banks themselves fuel this chase as they are the ones that see your desperate actions first-hand.

So if the CBs are now backstopping the BBs with physical gold to maintain confidence, the BBs themselves would know this because it is a change from the "CB certificates" that Another spoke of. In other words, it is a self-defeating process for the CBs. And opening a public discussion like we are doing surely can't be of any assistance to such a confidence game (if one exists). Perhaps it could even raise the real cost of purchasing more time – decreasing the amount of time purchased per tonne, in other words. Would you agree? And if so, would you say we should keep our thoughts to ourselves under this scenario?

I suppose the alternative scenarios are that the CBs are not supplying physical because there is no actual shortage of physical in the BB reserve pool, or else that Another was a fraud and didn't know what he was talking about when he said, "they only lend their good name on paper, not the gold itself." Can you think of any others?

Sincerely,
FOFOA

Aleksandar said...

Bron,

To humbly add to FOFOA, consider that in the 70s, 80s and 90s, the CBs were the leneder of last resort. They had no choice then. But they have a choice today.

enough said...

Mr. FOFOA and mr. bron,
I do not wish to interupt such an important exchange of ideas and as I believe Mr, FOFOA's question about keeping his thoughts to himself is a rhetorical one but in the slightest chance FOFOA may be serious I would beg him not to. Another and FOA wanted to expose the citizens of the world to their ideas of what is to come so that the shrimps could prepare and participate as best they could. I am sure these exchanges hurt the cause of the BB's secrecy. But IMHO their secrets must be exposed. They have had long enough at their game and it is a shame that still so many will be caught flat footed. One again my aplolgoes for interupting what is a fascinating exchange !!!! bless you both !!!

Free gold? Yes please! said...

Enough, congrats on the RV! You're prepared for anything now :)

As for me, all I have is a 4 man tent and a couple of sleeping bags ready if TSHTF...see what happens when you find out about FOFOA too late!

Speaking of which, I discovered this blog less than a week ago and FOFOA is suddenly and MYSTERIOUSLY ready to stop discussing this important info in public....You see? I always knew there was a conspiracy against me making money...and all this time I thought I was broke because I'm married!!

enough said...

FGYP,
you are not "late". Just in time. As mkt timing seems important you, I remind you gold is nearly $100 from its intraday high. As Blondie said "buy physical gold now". before it's too late. Finding low premiums can offset higher "spot" prices. For example. Buying 1/20's at +5 when the normal premium is +20 is like buying at a the normal premium when spot was $300 less. Finding product at low premiums is more important than the current spot price. That's if you consider spot to be the true reflection of the value of physical gold, which I do not....best E.

enough said...

FGYP.....on apmex site, in search bar, type in "scruffy" or "abrasions" they often have small bars and fractional coins slightly damaged at very small premiums. Unless one types these words in, nowhere else on the site will these pieces be seen. In freefold sctached or perfect coins and bars will have no significance.

Free gold? Yes please! said...

Thank you for the tips Enough! I never would have thought of searching for "scruffy" coins...good find! If gold hits $50k I don't think people will be too worried about how "pretty" it looks...lol.

I forgot to mention, if the *bleep* really does hit the fan I would think that RVs would be a HOT commodity for people who want to get out of the country but still want to live "indoors." A few years ago my father-in-law bought a pre-owned RV and then resold it a couple of years later for a PROFIT. Seems like a very good investment in this environment for sure!

enough said...

FGYP...of course this is a forum about gold not RV's but part of my decision was fiat related. I could have paid cash but I decided to finance instead and will buy more gold. Minimum downpayment with a 4.75 rate, simple interest loan over 15 years that can be repaid at anytime with no penalty. Now I have a "real" useful asset and a 15year liability to be repaid in ever decreasing value fiat. This has got to be a losing proposition to BOFA as the $ depreciates more than this rate of interest in mere months. It was very interesting that the senior tech guy there (largest RV place in the SE, 140 acres of rv's) said demand is brisk bit financing is impossibe to get from the banks. As I said loans in the current environment of low rates and depreciating $ must be a losing proposition for the banks. I had to have an 800+ credit score, produce property titles and bank statements with large cash positions for this "moderate" loan amount to be approved. In case the banksters tried to pull a fast one I would never borrow against my home and properties as the banksters would love to get their hands on my land. I would always keep sufficient fiat to pay these liabilities just in case. It's possibile that all debt might burn and/or be bailed out by the fed with infinite QE..so maybe I get it for just the downpayment :-)

Free gold? Yes please! said...

E, we definitely live in a STRANGE time and I don't think anyone really knows how this is all going to end. Hopefully more good than bad comes out of this financial mess.

wheelchairs : Manish Steel Works said...

I really appreciate your post and you explain each and every point very well.Thanks for sharing this information.And I’ll love to read your next post too.

costata said...

When? (My emphasis) Why? (My thoughts below.)

Date: Mon Nov 03 1997 07:31
Reify ( @ANOTHER ) ID#413109:
Soooo, I'm wondering, over what period of time are your predictions?
Where do you get information on about, Big Trader?

Reify,
The actual buying of gold ( no other metals ) by huge players is not a prediction, it is ongoing. In 1997 it exploded! The price of the metal in currency terms will be made for all to see as it moves quickly upward for a very short period of time ( 30 days ) . After that only black market traders and third world noones will understand it's price! When is this going to happen? I have no idea. Is there anything to look for that will tell us when the problems have started? At first the US$ and gold will go up together against all other assets!

Big Trader is ( was ) from HK and is in the business.


Why would the US$ increase in price (for a time) against other currencies while gold is, by rising as well, signalling the collapse of the US$ reserve system? Perhaps because the US$ is the only legal tender in the USA and those who seek US$ assets need them in order to spend them in the USA.

costata said...

(My emphasis)

Date: Sun Nov 23 1997 10:51
ANOTHER (THOUGHTS!) ID#60253:

Auric,
In this age of "digital currencies" it is impossible to see how fast the thoughts of people are shown as actions! Many will wait for markets to do what they have done in the past, "looking backward to see forward". Be known that most of the actions by the ultra large players is complete. When the change in direction of gold starts, it will be hyper fast! A good many will run to the US$ first, making that currency rise with gold and misleading much people. Before Christmas? I do not know.

sean said...

FGYP and Reven,

spending some time reading FOFOA archives should help reassure you about events during the transition time. For example, in http://fofoa.blogspot.com/2010/07/debtors-and-savers.html FOFOA explains that "Hard money regimes almost always end in bloodshed, when the easy money camp slaughters the hard money camp to avoid hard repayment terms. And easy money regimes almost always end in financial suffering when the easy money collapses".
Also if you were reading the ongoing exchanges between FOFOA and Bron interspersed between your conversation, you'd see that the evidence suggests that central banks have been preparing for this event for over a decade. It's in their interest to engineer (or facilitate) as smooth a transition as possible. The Euro is one mechanism that was introduced to ease transition to an RPG standard. While it's probably advisable to have some spare cash and a few essentials stashed away, there's not likely to be a complete a breakdown in society. Just remember to have some gold reserves in place, despite the fact you can't eat it.

Bron said...

“In any case, my position in this post is that the CBs only ever lent their good name (CB certificates) as Another wrote, not actual physical.”

I don't have any insight into the CB-BB operations (this gives you an insight into how out of the loop the Perth Mint was with its CBs actions http://www.scribd.com/doc/47066031/Perth-Mint-Nugget-Journal-Aug-1997-Reserve-Bank-of-Australia-Gold-Sale), but “certificates” doesn't sound right, I'd suggest probably more like the CB offers to lend the BB unallocated gold that is held in an account with the CB. BB's auditors would treat such an asset held with a beyond reproach counterparty as good as gold. This I think would only happen with the big CB's.

Note that CBs with smaller amounts of gold or low country risk ratings would likely have to deliver their physical to the BB to be able to lend it. Role reversal here, with the CB holding an account with the BB.

“It would require a cost/benefit analysis at the highest level of international central banking as to how much physical gold to "spend" in order to buy a little more time. And we are talking about supplying physical during a run, not certificates, so this would be a new and different undertaking.”

Agreed, but consider that the state of the banking system and the wide open discussion of it on the internet is a completely different environment to that time in which Another's wrote and radically different circumstances during the first and second CBGA. This may have necessitated a change in policy by the CBs.

"What we have here is an explosion in the bullion banks' physical leverage factor, not through an increase in lending this time (the lending is actually declining), but through customer withdrawal of reserves, with no physical backstop. Even a bank with a conservative leverage factor can experience a bank-busting, system-crashing run. Public confidence is the only thing that stands in the way. This is how a classic bank run runs."

Agreed, customer withdrawal of physical “reserves” increases leverage. Note that this is an exponential function. If a bank starts with 10oz physical against 100oz of liabilities and loses 50% of physical, the leverage factor increases from 10:1 to 20:1 a 100% increase. A withdrawal of 70% changes leverage to 33:1, a 233% increase. The exponential nature of reserve withdrawal is I think what you refer to when you said “you are chasing a runaway train that you can never catch. The faster you run, the faster it runs away from you.”

“If this is the case, and the CBs are lending physical to the BBs as you propose, then they are essentially converting paper into physical at paper's price. This is something that Another said the CBs would not do, because 'the BIS and the major private gold holders know the total claims' which means they know the true value of their physical. Clearly they are not going to convert ALL paper gold into physical, so the game is to convert just enough to reestablish confidence in the system and stop, or at least slow down the 'bank run.'”

I don't know it for a fact, just suggest it may be a possibility as desperate times call for desperate measures. On the other hand, all the talk during the 1990s when CBs were selling gold was that the CB stocks were an overhang and that CBs wanted to get rid of their gold. I mean, this is a once in a lifetime opportunity for CBs to offload all that “sterile” gold and be rid of it once and for all. Well doesn't look like any takers - maybe those CBs are not that stupid after all (well except BoE).

Bron said...

“And opening a public discussion like we are doing surely can't be of any assistance to such a confidence game (if one exists). Perhaps it could even raise the real cost of purchasing more time – decreasing the amount of time purchased per tonne, in other words. Would you agree? And if so, would you say we should keep our thoughts to ourselves under this scenario?”

I don't think our little discussions are registering yet. Consider that the highest profile gold sypathetic blog's (eg ZeroHedge) most popular gold articles get hit rates of 100,000 compared to www.huffingtonpost.com with 25,000,000 readers.

“I suppose the alternative scenarios are that the CBs are not supplying physical because there is no actual shortage of physical in the BB reserve pool, or else that Another was a fraud and didn't know what he was talking about when he said, "they only lend their good name on paper, not the gold itself." Can you think of any others?”

I don't think Another was a fraud. As I suggested above, maybe circumstances have changed and now some CBs see the need (or threat) to support BB operations. It is also possible that the BB reserves are be drained but there is still plenty/some/little left.

Another possibility is that maybe BBs just think (delude themselves?) that any current withdrawals are just temporary and will revert, so they think they can ride it out and don't yet have to call on CBs. Consider that the gold market does move in cycles: we had retail shortages in 2008, but that abated. This may give false comfort to BBs and then when it is too late they realise the withdrawals will continue.

At this time I'm not seeing any desperation in the wholesale markets. As a refiner of 10% of the world's gold production (new supply), you'd think we would be courted by BBs to get hold of new physical flow if the existing above ground stock is increasingly in strong hands and not able to be coaxed out of hiding. Having said that it is a very strong market, but not “tight” in the sense that you mean.

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

Hmm, maybe I spoke too soon re desperation. Reported by GoldCore:

(Bloomberg) -- JPMorgan Will Accept Gold as Collateral for Securities Lending

JPMorgan Chase & Co. said it will accept physical gold as collateral “to satisfy securities lending and repo obligations with counterparties.”

The company expects to accept additional precious metals and commodities as collateral later this year, it said today in an e-mailed statement.

http://www.goldcore.com/goldcore_blog/jp-morgan-accepts-gold-bullion-collateral-silver-backwardation-lead-short-squeeze

costata said...

Bron,

"BB's auditors would treat such an asset held with a beyond reproach counterparty as good as gold. This I think would only happen with the big CB's.

Accounting standards, for banks, appear to be rather flexible "lately".

Bron said...

And for many CBs they have always been flexible, lumping all gold "assets" together with physical.

Reserve Bank of Australia is an exception, breaking down who they lent gold to by credit rating.

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

Seems like the small giants are taking your advice FOFOA.

“The Asians, particularly the Chinese, want physical gold and they want it tomorrow. So the Chinese have a new method. They are now planning to buy tremendous amounts of the ETF GLD. They will then tender the GLD shares for immediate delivery of the gold. This bypasses all of the rules of places such as the Comex limiting delivery. There is no limit as to how much you can buy from the ETF GLD.

King World News

ad said...

...that should read giants and small giants.

enough said...

Mr. Bron,
I personally want to thank you for your contribution to this blog. When/if things pan out as ANOTHER's "thoughts", FOA's "gold trail" and FOFOA blog of tribute and expansion fortell. Their writings will become the stuff of legend and history. The depth of your current discussions with Fofoa are in my mind one of the highpoints of this blog and will long be remembered by its readers. Thank you once again and please continue to share your expertise and ideas !!!

S said...

In this artuicle there is a tantalizing little detail that may or may not be interesting..

http://www.ft.com/cms/s/2/3a8cd690-1ebd-11e0-a1d1-00144feab49a.html#axzz1DIjPZcBZ

"
Please respect FT.com's ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email ftsales.support@ft.com to buy additional rights or use this link to reference the article - http://www.ft.com/cms/s/2/3a8cd690-1ebd-11e0-a1d1-00144feab49a.html#ixzz1DIjt9xH8


Peter Munk, the octogenarian chairman of Barrick Gold, the world’s biggest gold producer, first met Rothschild in his mid-twenties when the latter’s reputation was still more playboy than business patron. He did so because he was asked to by Lord Jacob, Nat’s father and a close friend who was concerned about his son’s “issues”. Munk ended up becoming a sort of surrogate father figure for Rothschild in the investment world and persuaded him to move to Klosters, the Alpine ski resort in Switzerland where Rothschild is now based."

Free gold? Yes please! said...

Bron or FOFOA:

"JPMorgan Will Accept Gold as Collateral for Securities Lending."

Isn't this MAJOR news and proof that Freegold is ready to break loose?

Why is this news story getting ZERO attention in the financial press? Am I missing something here?

Patrick said...

JPM won't take GLD as collateral

mortymer said...

Repost: #Aristotle (12/29/02; 14:07:25MT - usagold.com msg#: 92882) Leigh #92875
For all practical purposes, COMEX doesn't feed the marketplace with supply of Gold to the consumers, so there's no *physical* worries regarding a lockup on futures trade.
However, that's not to say there are no physical worries, it's just that physical flow and liquidity is more dependent on general confidence in commercial banking and bullion banking.
Simply said, "Nobody *shops* (for Metal) at COMEX."
But let's connect the dots. Any COMEX lockup in the trade of Gold futures would certainly undermine the current confidence in bullion banking in general, you'd find fewer private parties willing to sell their Gold at this present low price level. (The mines have no more to give.) If this is followed further by depositor demands for withdrawal from unallocated accounts, cascading default of the banking system could be threatened unless governments intervene as Gold lender of last resort (unlikely) or to force currency settlements for paper Gold (or simply to allow for their default if the counterparty is rendered bankrupt.)
Gold. Get you some. --- Aristotle"

raptor said...

http://mcalvanyweeklycommentary.com/ica2011-0126-mp3/

Very interesting observation about the support of the Euro from China.
I think this is the dynamic is the one that will help Euro stay even in the possible worse case scenario.
And as FOFOA alluded Euro is positioned well if it doesn't crack compared to the other major currencies.

ebikeguru said...

https://live.bullionvault.com/audit/withdrawal_note.html

I keep an eye on this as it is the physical window of Bullionvault. This "Doctor" character always seems to be the beneficiary. 63 kilos last week, out of his 4500 kilo stash. Nice.

Great debate too. Your insight is fascinating Bron and your jousts with FOFOA are just what he/she needs!

Cheers!

Bron said...

Patrick,

this http://www.jpmorgan.com/cm/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1158618906599&blobheader=application%2Fpdf&blobheadername1=Content-disposition&blobheadervalue1=attachment;filename=A4.PreciousMetalsAsCollateral.02.01.11.pdf doesn't explicitly exclude gold ETFs and in fact does include ETFs in general as acceptable.

I'll see if I can get it clarified.

Free gold? Yes please! said...

From what I can gather, the US owes $100 Trillion in various debts.

Here is a link to a VERY cool illustration of what 1 Trillion dollars looks like. Worth a look.

http://www.pagetutor.com/trillion/index.html

Diamond Jack said...

FGYP,

"Isn't this MAJOR news and proof that Freegold is ready to break loose?"

When JPM execs demand their bonus in gold, then will be the time to cue the shoe shine boy.

Patrick said...

Bron,

Off course they accept ETF as a collateral... but do they accept ETF related to gold as collateral.. you link doesn't state that explicit

Museice said...
This comment has been removed by the author.
enough said...

Now LCH.CLEARNET (large european clearing operation) is considering accepting physical gold bullion as collateral......we just went verticle !!

DP said...

http://www.cnbc.com/id/41461540

Panelproli said...

Baltic DRY is falling now again.
Do you think it will make gold cheaper in dollar terms or are they rather independent from each other?

Michael H said...

HuffPo article quoted by Denninger:

http://www.huffingtonpost.com/janet-tavakoli/gold-game-changer-jpmorga_b_820005.html

"Credit defaults swaps on the United States currently settle in euros, but there is talk of creating new contracts calling for settlement in gold."

I'm of the opinion that CDSs are ticking time bombs. If gold-denominated CDSs do appear, their detonation would bring freegold.

Admittedly this could be some years away. The creation of gold-denominated CDSs might restore confidence in financial markets and allow the 'extend and pretend' machine to continue grinding on, much like the housing bubble allowed the financial system to continue operating after the dot-com bust.

My point: the $IMFS seems to have nine lives; over the past 30 years it has simply refused to pass on, and continues to find ways to extend itself. However, I see no way that a detonation of gold-denominated CDSs would not destroy the $IMFS. Payment in fresh-printed USD would not restore confidence at that point, since USD-apprehension is precisely the reason behind the creation of these instruments.

raptor said...

http://jessescrossroadscafe.blogspot.com/2010/03/what-is-spot-price-of-gold-and-silver.html

how it is calculated..

Michael H said...

Here is Randy on JPM's gold collateral story:

RS View: Following yesterday’s post, I’ve received some of the previously absent yet vital details from J.P.Morgan’s gold-collateral scheme. The operational scheme employs UNallocated gold, decidedly a come-down from the most bullish-possible scenario which would have required rigorous maintenance and pass-through of earmarked accounts. As it is, J.P.Morgan’s move tends to expand the utility of UNallocated gold accounts, thus somewhat conflicting with and combating the ultimate safe-haven incentive of institutional holders to sequester their unallocated gold credits into physically allocated (earmarked) form. Consequently, rather than being inherently guaranteed as would have been accomplished by strictly earmarked collateral, the stability of this new scheme is very much contingent upon J.P.Morgan’s own institutional judgement and stewardship regarding how these potentially overleveraged and undeliverable unallocated gold-credit accounts are managed.

Boopstir said...

e, are you married? I've got a brand new pair of roller skates, seems you've got a brand new key...

p.s. I'm secertly hoping that A and/or FOA might speak to us again, prehaps while we are in transistion? Meanwhile this shrimp is very grateful for FOFOA's picking up of the torch.

mortymer said...

A.Fekete new article alert: http://www.professorfekete.com/articles.asp

Jeff said...

I want to believe. And yet...

There is one problem I can't get around; the Euro. FOA envisioned it as the dollar killer. Oil would be settled in euros. The UK would join the EMU. The euro would be unencumbered by debt, its trade surplus would make it strong, it would be the world reserve currency.

This is not the euro we have today. Several euro members are dead economies walking, and will probably default on their euro debts. Only the ECB will buy the debt of these weak states, the sort of monetization scheme that would horrify FOA. Many of the euro states are buried in debt, just like the USA! Oil is not settled in euros, the UK did not join the club. The euro is not strengthening against the dollar and is effectively held in a trading range through currency swaps and manipulation, apparently indefinitely.

FOA was right about gold being marked to market by the ECB, but that was going on when he was still posting. He was wrong about the rest, IMO.

So can there be freegold without the euro as world reserve currency? Or will oil bid for gold?

I want to believe. And yet...

Bron said...

Seems JPM will take GLD as collateral http://fridayinvegas.blogspot.com/2011/02/gold-collateral-and-42-wild-italians.html

Jesse piece on spot price is interesting but I don't agree with his statement "because the price is set in the paper markets". Just because the OTC market is "dark" doesn't mean COMEX dominates. I'd put a comment up but he doesn't allow them - why not?

gideonmandoma said...

jeff, I agree with you. To begin with, Freegold is a theory, so as with any theory, you have to take it with a grain of salt until there is at least a reasonable amount of proof. And second, we have seen that FOA/Another are fallible. They were WAY off on the euro thing, and that was a pretty big part of the equation. That being said, I still think holding gold for now is a win/win, until the dow gold ratio is near 1, if history is any guide. Also, it does seem that gold is the only reasonable answer in one way or another to all this debt. Maybe not freegold and maye not a true gold standard, but certainly a bigger role than it has played since 71. Therefore, for the foreseeable future, it makes sense to hold a good amount of gold regardless.

enough said...

Bron,
you can email Jesse if you wish to ask him a question. He is very good at responding and enjoys a good joust. It's not my place to provide it but it is available if you scroll down to the bottom left of the home page to "view my complete profile" and hit email...best E.

enough said...

Gid and Jeff,

What you say has merit but the fact remains that the best way to repair the horrobly damaged soverign balance sheet is a monumental revaluationn of the gold price. It is needed more than ever because of the problems with european debt. Also channeling inflation/debasement expectations "officially" thru gold is far superior to having commodities necessary to human survival (ag, energy etc) explode. Using gold as the store of wealth "par excellance" is need now to head of a debt, commodity, catastrophe...of course IMHO

Edwardo said...

This is not entirely OT: Are we to process this as it is intended, or are we being played? You decide.

http://www.guardian.co.uk/business/2011/feb/08/saudi-oil-reserves-overstated-wikileaks

Chico_hawk said...

interesting article from last March re: cornering the Gold Market

http://www.tavakolistructuredfinance.com/Gold.pdf

reading the above in light of her comments today about JPMorgan`s announcement & repeating her call to outlaw credit default swaps makes me wonder how far along we are to the point in time where physical gold will become unavailable...

would like to hear others`thoughts on this

Rui said...

@ Jeff

I think it's more than just the ECB part. I'm as hard-core a gold bug as the next guy and yet the more I read into FOA's proposal the more I doubt it.

For example FOA based his theory on the assumption (among others) that (in FOA's own words)"we all must borrow in this modern world". Well, irresponsible borrowing like the subprime mortgage or the PIIGS situation was exactly the root cause of the debt crisis. A sound monetary system should not make borrowing easy.

Those BRIC nations are not borrowing around and yet they are doing fine. It's these easy-credit western nations drowning in an ocean of debt.

A healthy economy starts from people willing to produce sth valuable rather than borrow from others, and hopefully produce more than they consume so they can trade the surplus. It is only at then that we need money to certify and measure our productivity. So production comes 1st. Money comes 2nd. Strictly in that order.

Borrowing is good only when it's intent to be used as investment for people to produce more. Borrowing to consume squanders the capitals and should not be encouraged, and yet that's what government is doing, e.g. home buying credit, cash for clunkers, etc.

When 70% of GDP comes from consumption US economy cannot make ends meet and is doomed to bust in a debt bomb. The fix is to dump the consumerism economy and start producing again. The future monetary system should be focused on promoting production & saving rather than consumption & borrowing.

Things such as "no form of debt can force its payment in gold" / "creating a demand (and added value) for them [fiat currencies] in addition to general use demand." proposed by FOA sound too much like bankers playing God with the system and gimmicky rather than solving the problem head-on. My 2Cs.

Wendy said...

My opinion is that the Euro will surprise us in it's strength. The PIIGS are heavily weighted with gold in their researves. (I'm not sure about Ireland).

I really don't think we will go with only one researve currency. I imagine the Euro will play a role, as well as a diminished USD. I expect mostly trade will be done between countries using their respective legal tenders. I don't think it matters much, as long as gold is used as a reference point in which all other currencies orbit.

We do live in interesting times :)

FOFOA said...

Hello Rui,

While I'm happy to see that you are reading FOA (the first page at least), I am sad to see that it is going right over your head. Let me help you out with a few "Cliff's notes", or "FOA for Dummies" (not you, Rui, it's just an expression ;)

There is a disease in our system today that has many visible symptoms. Most everyone (including you) is obsessively focused on eliminating the various symptoms. But as any good doctor knows, removing symptoms will not cure the disease.

The disease is gold used as a currency, one that can be lent (which always leads to fractional reserves and a synthetic, unstable supply), rather than merely being a tradable physical asset. All the problems (symptoms) that you are referring to flow from this disease.

The disease allows for the growth of debt beyond economically sustainable levels. It is the choice that savers make that enables the unhealthy growth of debt. They choose to save in debt because there is no floating monetary alternative.

If you use gold as a currency it will be lent, and through that process it will be automatically expanded in volume suppressing the value of physical gold held by the savers. You cannot get around this problem. Gold systems have been tried time and time again, and man always borrows money, which expands its supply.

You must have a savings medium in relatively fixed supply, separate from the currency, so that borrowing dilutes only the transactional currency and not also the savings medium. When savers lend to debtors through saving in debt they are diluting their own savings automatically. Remove this one disease and all the other symptoms will disappear.

Freegold does not make borrowing easy, nor does it make it hard. If it is easy in one country then the currency will self-dilute and fall in value relative to other currencies, and gold will rise priced in that currency. Simple as that. But if you have gold lending, you automatically eliminate this counterbalance and reintroduce the disease. The disease that removes stability from the gold market by creating a synthetic supply and sending savers back into debt financing.

So this one little tweak, removing the synthetic supply of gold so that gold becomes a stable alternative to bonds for the savers, will set us back on a course away from debt-driven consumerism and living beyond our means. Not by creating a change in the minds of the debtors -- they will always live beyond their means if you (the saver) make it cheap enough for them. But by creating a change in the minds of the savers, on all scales from the individual on up to Sovereign Wealth Funds and Central Banks.

It is this one little flaw, not having a monetary store of value in stable quantity, separate from the currency, that created all the problems since the conception of the dollar, from the Triffin paradox to the US exorbitant privilege to the Greek debt crisis. That's right, all those debt problems in Europe are 100% attributable to the $IMFS, not the eurosystem.

Sincerely,
FOFOA

Wendy said...

hmmm my comment dissapeared after I saw it posted? That's never happened before.

Ok , I' try again. (it wasn't really that important anyways):

My opinion is that the Euro will surprise us in it's strength. The PIIGS are heavily weighted with gold in their researves. (I'm not sure about Ireland).

I really don't think we will go with only one researve currency. I imagine the Euro will play a role, as well as a diminished USD. I expect mostly trade will be done between countries using their respective legal tenders. I don't think it matters much, as long as gold is used as a reference point in which all other currencies orbit.

We do live in interesting times :)

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

Greenie said...

Arrogant fellow, isn't he?

http://www.avaresearch.com/article_details-691.html

DP said...

In his articles Stathis, like so many others, will continue to revel in being a little bit right in his opinions. Right up until the day that he realises he has been clueless about what money really is, and finds he was suddenly and catastrophically wrong in his assumptions. He's at liberty to think whatever he likes. We'll have the gold he didn't want. Who knows when he'll be wrong - maybe he'll laugh all the way to his grave? Or maybe an epiphany comes tomorrow.

mortymer said...

Repost 1/4:

Belgian (07/20/03; 03:28:55MT - usagold.com msg#: 106105)
@ a nation of one # 106084
1/ Global "State"-debts rise permanently ! 40% > 60% >100% > 140% ...of GDP. Debt-Growth is increasingly bigger than the collateral-reserve-Growth . More Debt on less reserve and collateral.

2/ Private debts : Inflate the price of your collateral (house-stock-etc...) and take more debt...resulting in more price rises. Lower IRs and set the environment for more and "easier" debt creation.

When you are able to service debt...you are solvable enough to take more debt that is created at your convenience.
Fractional reserve banking !!! Each Interest-dollar is considered as reserve and makes new debt creation possible.

Total "NET" debts keep on rising and grows faster than the global economy as collateral. The total debtload can never, ever be repaid out of "profits". Repayments of state debts must be done with new debt...more printed confetti and/or higher (more) taxes that have limits.

The great confetti Ponzi system : Fill the holes with sand from the next hole. Dig deeper and deeper with more and more debt-holes. Once this debt-driven "thing", declines in expansion-speed...the economic water evaporates and the debtberg becomes more visible !

There never is (was) enough reserve or tax revenue to pay for any any war. Therefore confetti must be added to the existing pile. More confetti circulating in the same volume of economic activity...more empty debt-holes...more ice on the debtberg.

Bron said...

FOFOA,

I disagree with your statement "The disease is gold used as a currency, one that can be lent (which always leads to fractional reserves and a synthetic, unstable supply) ... If you use gold as a currency it will be lent, and through that process it will be automatically expanded in volume suppressing the value of physical gold held by the savers."

The phrase "always leads" I think is only true where fractional reserve banking is allowed.

If, as per http://mises.org/ the law only allowed 100% reserve banking and time deposits (what I refered to previously as NON-maturity transformation) then you do not have credit being created or volume expanded.

I don't think the problem is gold being used as a currency, rather the rules around banking.

As you said "this is what gold will be freed from: The fractional reserve banking practice, which is a carryover from the gold standard." that is, freed from fractional banking.

Can't such freed gold be free to be used as currency, which can just be conceived of as a barter transaction where one asset (gold) is exchanged for another? Or free to be "leased" to someone, during which time I cannot use, ie spend, it, so no "expansion"?

mortymer said...

Repost 2/4

"...Same goes for all State debts that cannot be recuperated-recycled one way or another. Total amount of confetti is quantitatively inflated in increasing DIS-proportion of any type of collateral (reserve).

Simply à la Kurt Richebacher : 5 $ of additional debt needed to create 1 $ of additional GDP ! THE GLOBAL DEBT PONZI SYSTEM ! A growing debtberg in a smaller ocean ! A debt-driven global economy ! A monopolizing, globalizing world, where the debt-creators gain TOTAL control.

Repeat : The debt-creators are the ones who master the debt-tool, debt-process as ultimate instrument for taking control ! Once you are endebted, you promoted yourself as a slave. A debt-addict. Free people are almost debtless. This counts for private debts and state debts as well.

In the present "political economy", enterprises are colluding with the state as debt-creator and vice versa.
Give your neighbour a friendly, accomodative loan, let his business detoriate and confiscate his properties. Buy your votes with helicopter money, stay in power and add to your productive wealth through debt-enslavement. Sell your action as Free Market and the show goes on. Power-Lust !

The sheeple...the sheep dogs and the sheperds.

Gold-People want independance and individual freedom ! Gold is the purest anti-thesis of debt. The more a society goes on debt-addiction, the more Gold must be banned ! Debts do melt away at the end of the system's lifetime. GOLD IS FOR EVER !..."

mortymer said...

Repost 3/4

Almost all sheeple do believe that this debt-system is going to (conveniently) last and therefore refuse to consider Gold. THE DEBT_PONZI WILL/SHAL/MUST GO ON FOR EVER ! What's in a Trillion more or less...is the general, complacent reasoning. The system "works" and stop your disturbing Gold-Advocay !

O'Neill got the bag for his $ 44 TRILLION debt-liability-figure !!! The new debt order. The new "yahoo" era ! Debt *IS* worth ! More debt is more "worth" !

Previous fiat-devaluations were admittance that one's debt grew out of control and became destructive. I wonder if today, we have the courage or the possibility (!!!) to devalue one's currency (dollar-reserve) as to re-adjust for past horrible (debt) management ??? Devaluation, meaning the melting of some ice of the gigantic debt-berg and turning this ice into water (more confetti) again...! But we have not enought life jackets (profits) or rafts (GDP) to float on !

Total global debt would become "manageable" again if it comes within workable proportion of a global hyper-price-inflated, economy (same debtberg in much more water).

What is the main reason that "general" price-inflation is not showing up !? Will it (price-inflation) be so destructive that it has become impossible or are there other reasons ? Is the survival of the dollar (dollar-reserve-system) in danger with a global outbreak of price-inflation ?

mortymer said...

Repost 4/4

We are all buying time as to desperately find a collateral for the growing debt-driven economic activity. Overvaluations and gigantic financial distortions (IRs) have bought us already some of that time. Will higher taxes and more "deficit" spending bring, sufficiant, economic relief (activity) ??? Don't think so. W're in a global "structural" debacle as MK points out in other words. A Debt-Debacle of a magnitude as never before !

The US economy (25% of total economy) is at the epicenter of this global structural debt debacle. If global cooperation, to alter this debacle, fails...it will be everybody on his own. I'm afraid that this is happening NOW ! We are all on the same Titanic. Organized evacuation (currency coordination) at the early stages of the sinking...chaos is coming.

Unredeemable, unserviceable, ice cold debts ! Jump with your golden parachute.

mortymer said...

Bron, I would recommend to you this post from archives:

Aristotle (7/22/03; 02:11:22MT - usagold.com msg#: 106178)
Money supply for Sir Spotlight

The end is important, that the gold must not be lent. Snipset of summary/conclusion:

"...Now don't get me wrong. That's just the thing to do with dollars. Just don't do it with an amount of dollars that represent a significant amount of your net worth. You may suffer losses through both currency depreciation and also loan default, both of which may conspire along with government action and taxation policy to leave you with less net purchasing power than you ever gained in interest.

So what's a boy to do? Convert a good portion of those dollars into Gold -- and don't lend the Gold or else you're right back in the same boat of artificially inflated supplies and risks of repayment default. Your *return* on your physical Gold will come as it simply appreciates in value in the face of a growing population, growing economy, growing standard of living, and growing understanding among the populace about this form of intelligent wealth management in the face of inflating/depreciating national money.

Gold for a personal standard of saving. Get you some. --- Ari"

costata said...

Greenie,

"Arrogant fellow, isn't he?"

Agreed

DP said...

@mortymer: is this a golden icebreaker I see before me?

allen said...

Lord they have eyes but they just don't see...


*Dow Theory Letters, by Richard Russell, February 7, 2011:


''Over the weekend I've been mulling over the US's problem of its falling dollar (of course the US may want a weaker dollar in order to pay off its debts). If I was Secretary of the Treasury, I would ask myself, 'What could I do to render the dollar more attractive?' Here's an idea that occurred to me, and this is what I might do.

The US owns the largest hoard of gold on the planet (in terms of sheer number of ounces). Suppose the US decided to back the 'dollar' with gold. That would immediately make the dollar more attractive to dollar-holders. But if the US decided to back the dollar with gold, skeptical investors, worldwide would be likely to turn in all their dollars to the US and soon clean out the US's hoard of gold.

But suppose the US unilaterally announced that the price of US gold from now on would be $5,000 per ounce. This would mean that an investor would have to turn in $5,000 in cash in order to receive just one ounce of US gold. My guess is that few investors would be willing to turn in $50,000 of their money to receive only 10 ounces of gold.

The dollar would be backed by gold, making it a one-of-a-kind currency, but few people would be willing to turn in their dollars for 'expensive' US gold.

Nevertheless, the dollar would be the only gold-backed currency on the planet. And that would render the dollar a wanted currency, perhaps the world's most wanted currency, because it would be the only currency backed by something tangible.

This might effectively end the insane era of fiat currencies. The US move might be copied by many other central banks. And politicians would once again be bound by the discipline of gold.

But wait, there's a problem. If it requires $5,000 dollars to buy a single ounce of gold, isn't the dollar being effectively devalued in that it would require an enormous amount of dollars to buy an ounce of gold?

So the key question -- If the US unilaterally raised the price of gold, would it be inflationary or deflationary? Do any of my subscribers have an answer?

Uh, FOFOA, u got an answer for this lost soul :)

zenscreamer said...

Yes Allen, he does. He already answered this one some time ago, but perhaps you knew that and were being clever? (Written communication can be difficult to interpret sometimes.)

If I recall correctly, the first government to supply a fixed purchase price for physical gold from their public coffers is the government that ends up with empty coffers even as the price of physical takes off for the sky.

Can't currently remember where the argument was made, or exactly how many times he has made it (!!) but I'm pretty darn sure it's in there somewhere.

DP said...

The floating aspect is the vital evolutionary improvement over all previous structural monetary failures which tried to use a gold standard at a fixed price (i.e., unit of account) perversely joined to the very elastic money supply of any given country’s banking system.

Part of 'RS Comment' within Freegold Foundations (emphasis mine)

Atticus said...

@FOFA:

It would seem that you could accomplish the prohibition on lending or borrowing gold by legally declaring any such contracts void and unenforceable.

Do you think this would work?

Jeff said...

atticus, foa said this:

FOA (06/19/01; 19:26:30MT - usagold.com msg#78

No one is going to tell anyone they cannot enter into gold contracts. Sure, we will be able to borrow, lend, option or sell gold all we want. But, unlike those overt alcohol laws during prohibition, today's gold party people be able to drink all they want. (smile) That is deal in all the gold collateral you want. But, if any of those deals go bad because the other side wants to walk, instead of deliver, you will have to settle in cash. In a Euro court of law, no one could bind you to physical settlement if the deal was in Euro Legal Tender. Even if it was in the contract. You would have to accept cash, if contested.

More at that post, atticus.

Atticus said...

Jeff, thanks.

I think I pretty much agree. I mean, people can lend and borrow all they want, but if they want their agreements enforced they'd be out of luck. That's what FOFOA seems to be proposing and what I would propose as well.

This sets up a very interesting state of affairs where physical possession of gold becomes a very serious affair, kind of like when the Feds distribute new currency or destroy old currency - an operation attended by a lot of armed guards.

I see what FOFOA means about the monetization of gold, such that it can be leased or borrowed, being a problem. I think it's part of the central problem - not the whole thing - the whole problem being government recognition of the rule of law.

You and FOFOA might find the jubilee amendment I have drafted and proposed interesting. It can be found here:

http://strikelawyer.wordpress.com

I think it might be worthwhile to declare the leasing and borrowing of gold unenforceable contracts in the constitution as part of that amendment. I'm mulling it over.

littlepeople said...

Sprott has some thoughts on silver. Maybe he is talking his new silver book (phys), but I wonder--will freegold pre-empt silver's dash to 16:1 or will silver prevail, allowing a huge arb for silver-bugs first?

"Such a game-changing scenario should recalibrate the gold to silver pricing ratio in silver's favor, thereby eventually restoring it to its traditional level of about 16 to 1, he says. "It's the easiest call of all time."

"Silver as a currency always traded in a ratio of around 16 to 1 compared to gold, when it was a currency in the U.S. and the U.K. The current ratio is 48 to 1. If we go back to a 16 to 1 ratio, the implied price for silver would be $85.62 (per ounce)." he adds.

"On that basis, if gold goes to $1,600, then that would value silver at $100. And we certainly think that gold is going to $1,600. In fact, I'm willing to bet that this ratio will overshoot on the downside. It might even get to 10 to one."

The only reason why silver is still trading at a 48 to 1 ratio to bullion's spot price is that its price is being "manipulated" by big banks, Sprott says. That's because they don't want precious metals to become a popular alternative currency to Fiat money (currencies that are not backed by hard assets)."

What do you think?

Pete said...

Please no more talk of silver...

We've been there already

Bron said...

mortymer,

The Aristotle quote just says not to lend Gold because it will result in "artificially inflated supplies". I think you're taking it out of context and the assumption behind that statement is don't lend in a world of fractional reserve banking. It does not deal with the situation under a Mises.org 100% reserve banking system.

Atticus,

I would strongly disagree with prohibiting gold leasing on a number of fronts:

1. I tend towards libertarian view so reject over regulation
2. It would severely hamper legitimate price hedging activities
3. Probably would completely stuff up arbitrage activities which keep prices in different locations and time in line
4. Probably ineffective because of the mathematical relationship between lease rates, cash rates, physical price, futures prices and forwards. Result is that you could easily synthetically create a gold loan using those other markets so you would therefore have to ban futures and all others.

The solution is not more rules with unindended consequences, but to leave privately entered into contracts to the parties and make them responsible for their own actions.

The key problem with fractional reserve banking (money or gold based system) is that the Government implicity guarantees your oncall deposit with banks (although under a gold system it is not possible for the Government to print gold to protect the bank against a run, so that would have to be a stronger system IMO).

If the bank stuffs up in not being prudent with their maturity liqudity, depositors and bank executives get a bail out, which ultimately comes out of my (and your) pocket either through higher taxes or inflationary money printing. That unfair and totally not free market. The current structures are skewed to favour borrowers at the expense of savers.

The solution is no so much banning and regulation, but I would suggest, that the Government should just go out and explicitly tell the public you are on your own, we will not bail you out or buy the bank's mortagages or print them dollars when you run to withdraw cash - you are responsible for your own actions (shock horror, take responsibility for the contractual arrangements you enter into).

In that situation interest rates would no doubt go up as we would have a fair number of people who would not want such risky oncall deposits and instead prefer the security of 100% reserve banking and/or short term fixed deposits (ie non fractional deposit lending).

Banks would have to convince depositors that their loan books are secure, that they only lend (non-fractionally) with 20% cash deposits or similar and so are not exposed to falling prices. The whole dynamic would change with a focus on security and prudence and banks would compete on that basis. I think this would be a far better situation and would give us a better chance of a more stable interest rate, asset price, and thus economic cycle.

Atticus said...

@Bron:

You're confusing regulation with law, and prohibition with enforceability.

I'm suggesting that lending and borrowing of physical gold be legally unenforceable, not that it be criminalized or regulated. Indeed, any gold lending or borrowing under those circumstances would be completely unregulated. It might still happen, but if something went wrong or some dispute developed neither party would have any legal remedy or recourse. So it would be fair to conclude that it wouldn't happen much.

The only enforcement would be at the point of a gun. This might be an unintended consequence, but it certainly wouldn't violate any libertarian principles. It is, however, something to take into account in thinking it through.

Interestingly, "gold clauses" in contracts were made unenforceable by federal statute in 1934. But this is an entirely different thing.

As I have said often on my blog, law trumps economics. Your analysis (1 through 4) doesn't seem to get that. Hedging activities could continue but any problems would not be remediable in court. Maybe that means that there's no such thing as "legitimate" hedging activities, since they would entirely lack legal sanction. There would be no need for arbitrage activities to keep gold prices in line, because the gold price would be fixed and legally defined in dollar terms. Lastly, the effectiveness of making gold leasing unenforceable could not really be in question. The only legal provision on the table is that courts will not enforce gold lease agreements. This would be self executing. Courts would simply not do it.

I was addressing the main post and what seems to me to be an important insight, that the lending and borrowing of gold would eventually cause the same kind of problems we are currently experiencing.

This is a very interesting topic. I invite you and other readers to peruse my 28th amendment proposal at a number of posts here:

http://strikelawyer.wordpress.com

HUYS FINANCE said...
This comment has been removed by the author.
HUYS FINANCE said...
This comment has been removed by the author.
Jenn said...

Alright. Who was it that left the front door unlocked again. C'mon. Fess Up!

HUYS FINANCE said...
This comment has been removed by the author.
HUYS FINANCE said...
This comment has been removed by the author.
Jenn said...

Hi Bron-

I wanted to mention that I found your idea about lending gold in a physical only market interesting. It seems to me if the lender is required (hmm -- that would imply regulation) -- rather -- if the market operates in such a way as borrowers refuse to accept paper gold loans instead demanding physical -- then perhaps Freegold and gold lending could coincide.

But this begs the question, what forces exist to encourage the bastardization of such a market? If I can get even one sucker to accept a paper promise on gold stored in my basement, can I not get two?

FOFOA, what do you think about this idea of physical only loans?

--Jenn

HUYS FINANCE said...
This comment has been removed by the author.
HUYS FINANCE said...
This comment has been removed by the author.
Jenn said...

I would also like to add that I appreciate Atticus's notion about responsibility. If Dick loans his physical gold to Jane and Jane is unable to pay Dick back the gold, that's Dick's problem -- not the courts.

littlepeople said...

Pete:
We've "already been there" regarding hyperinflation, freegold, gold lending, etc., etc., etc. Why are you and so many others afraid to discuss silver? Is it simply because thus far, Another, FOA and FOFOA's expectations have not come to be regarding silver?

Pete said...

@littlepeople

It's not a fear.

Can't we have the silver discussions in the silver threads?

I come here so looking forward to reading comments about FreeGold and related economics. Then there seems to always be someone derailing the conversation with talk of silver.

It's always back to the same old discussion that has been had time and time again. Can't it be continued in the threads that are relevant for it?

Jonathan said...

Bron,
"As you said "this is what gold will be freed from: The fractional reserve banking practice, which is a carryover from the gold standard." that is, freed from fractional banking.

Can't such freed gold be free to be used as currency, which can just be conceived of as a barter transaction where one asset (gold) is exchanged for another? Or free to be "leased" to someone, during which time I cannot use, ie spend, it, so no "expansion"?"

Regarding the idea of leasing gold under freegold, I thought FOFOA has answered this question in that savers real purchasing power is diluted through debt, without a savings asset outside the debt system. I thought FOFOA meant that in leasing of gold, gold is synthesised, hence an increase in money supply occurs that is detrimental to the saver. Therefore debt needs to be arranged in currency outside of gold to ensure a beggar-thy-neighbour FENCE is upheld. I can't understand how you can say leasing of gold does not increase "money supply" if I understand you correctly. Keeping it simple in a beggar-thy-neighbour illustration (of say four farmers) might help to illustrate the point.

Bron,
I have questions regarding the end of gold fractional banking reserve practice as well.

DP said...

@Atticus:

There would be no need for arbitrage activities to keep gold prices in line, because the gold price would be fixed and legally defined in dollar terms.

Where will it be fixed? Will you write a law that will be globally enforceable? Will you also make the price fixed in all other countries?

If you fix the price of gold in your jurisdiction, you will have arbitrage alright. Fix it too low, and you'll be drained of gold by foreigners (again). Fix it too high and you'll be swamped with it and face a deflationary drain of your currency.

@Pete:

+1 -- there are a couple of nice silver discussion posts for those that wish to participate. I think it was recently suggested by someone to direct people at Kicking the Hornet's Nest

mortymer said...

Bron,
I posted the link exactly to support and highlight the idea that gold in FRB should not be lent but saved not to oppose the other part of your comment. We live in FRB system so I look at it from this point of view.

Motley Fool said...

Well now.

That was a truly excellent post. It seems you have taken that “woolly” comment to heart FOFOA. Nice and clear, though you did get somewhat sidetracked about 2/3' s through, but that is inconsequential overall.

There is some truth in each view you presented. The problem with this of course is that people shape their views around their truths.

You already established some common truths between you and Bron, once the definitions were out of the way, so I'll leave this.

A interesting truth from “the gold bug view” that “the FOFOA view” shares, which you seek to deny is the “conspiracy view”. The “FOFOA view” contains within in the concept that CB's are aware of the problem and are managing the transition. This implies that they must be using some methods of manipulation, in order to gain time for their plans to be in readiness.

Who the responsible parties are, BB's, CB's or miners, is a interesting question, but it should be noted that the CB's would have a vested interest from the “FOFOA view”, irrespective of who actually did it. The most interesting view I came across in my time of researching gold is that CB's were doing so through miners, up until recently, primarily Barrick Gold.

Other than this observation I am in agreement with “the FOFOA view”.

I do feel you are brushing aside the question of morality as brought up by Bron aside a little too easily. How did he put it - “ You only do this if you have a philosophical hatred of gold.”

A interesting statement, but then the philosophy of gold is not too well known, unfortunately. That being said, your view does provide a perspective in which their recent(say 20-30 years) actions are not (too) immoral.

I would like to extend my thanks.

I had written a long reply in the same vein as Bron as to why you were wrong about your reply to Rui. Since I did not have Internet access to post my reply, I continued and read your Reply to Bron post.

(cont)

Motley Fool said...
This comment has been removed by the author.
Motley Fool said...

I thought long and hard about your position and contemplated ideology vs practicality. I must admit I have never considered the problem of political will in a gold currency system. The analysis presented is logical and consistent in the scenario you presented.

I would like to include my original reply to that part in order to set the basis for asking a few questions.

################################

I saw a interesting reply to Rui which I would also like to comment on. “If you use gold as a currency it will be lent, and through that process it will be automatically expanded in volume suppressing the value of physical gold held by the savers.You cannot get around this problem. Gold systems have been tried time and time again, and man always borrows money, which expands its supply.“

Actually you can get around this problem. Historically we have not yet, but it is possible. This is one point on which I disagree with you and why I see gold being used as currency in future.

I now see Bron also responded to this ( I am typing this as I go along) , but the 100% solution does not work, sorry Bron.

Your solution is feasible, but not the most elegant. Ultimately it would result in a slower rate of economic progress than is possible otherwise.

In my view the distinction on loans should not be between gold and fiat, but between self-liquidating and stagnant loans( eg. housing). From that perspective the problem is also solved, albeit also through legislation, though of a different nature.


################################

Your position in summation is that gold should be removed from contractual lending because at some point large scale default will occur and this will lead to a changed political will which will not allow those losses to be realized.

I agree that if such a large scale default occurs, you are correct.

In the ideal system I had envisioned there are a series of checks and balances which would limit reckless lending by banks. However that system is also prone to the risk you mention in the case of a large scale default.

My questions are this.

How large a default would have to happen in order to change the political will?

I would imagine it to be a significant percentage. Given that postulate, what events would have to occur to create such a significant percentage of default?

The above are not rhetorical. :P

I can only imagine that the events would have to be catastrophic in nature. I would think that this same political will you envision would allow for a breather in such a scenario. Furthermore I would like to think that it is possible to compensate for such a rare occurrence and then continue using a ideal system after that compensation has been wound down. Your Thoughts?

Peace

The Fool

Post a Comment