Thursday, April 7, 2011

Reference Point: Gold - Update #2


With gold near its all-time high, it's time for another Eurosystem MTM party. And just maybe, there is a timely message here for Congress and the U.S. Treasury.

Yesterday President Obama vowed to veto the Republican's short-term spending bill, and today Washington is facing a possible full-on government shutdown in less than 26 hours when the cash funding runs out. [1] Not only that, but while the cash will run out at midnight tomorrow, April 8, it appears the national credit card will be all used up a little more than a month later, on May 16. [2] Calling this a dire situation may be an understatement.

Meanwhile, over in Europe, they have just released the new market-based revaluation of their monetary reserve assets, including gold. They do this once every three months. It sort of lets the world know the true, market-based strength of their monetary foundation. It's not that the currency is redeemable in government gold like the old gold standard. They simply make sure physical gold is available, tax free, at the floating market price. You can even buy it at the bank. This acts as a nice counterbalance for those who worry about saving in a depreciating fiat currency. And by publicly reporting the gold revaluation every quarter, the European Central Bank leads this stabilizing practice by example.

By contrast, the U.S. Treasury gold has never been marked to market. It is still marked on the books at the price set, not by the free market, but by the edict of President Richard Nixon in 1973:

U.S. Treasury website:
"The book value of gold is currently $42.2222 per troy ounce."
Federal Reserve website:
"3. Gold stock is valued at $42.22 per fine troy ounce."
U.S. Mint website:
"The gold is held as an asset of the United States at book value of $42.22 per ounce."

Here's the latest from the U.S. Treasury:

Current Report: March 31, 2011

Click on images to enlarge

And here's the latest from the Eurosystem:

6 April 2011 - Consolidated financial statement of the Eurosystem as at 1 April 2011

Quarter-end revaluation of the Eurosystem’s assets and liabilities

In line with the Eurosystem’s harmonised accounting rules, gold, foreign exchange, securities holdings and financial instruments of the Eurosystem are revalued at market rates and prices as at the end of each quarter. The net impact of the revaluation on each balance sheet item as at 1 April 2011 is shown in the additional column “Difference compared with last week due to quarter-end adjustments”. The gold price and the principal exchange rates used for the revaluation of balances were as follows:

Gold: EUR 1,007.250 per fine oz.

USD: 1.4207 per EUR

JPY: 117.61 per EUR

Special drawing rights: EUR 1.1161 per SDR



Now this may not seem like a very big deal to the casual observer. But I'm about to tell you why it should at least be an option on the minds of everyone in Congress, the White House and the U.S. Treasury, especially today.

But first, you may want to review my last RPG update:

Reference Point: Gold - Update #1

After refreshing your memory of the last update, you may notice that the valuation of the Eurosystem's gold actually dropped by EUR 16.7 billion since last quarter. But that's okay. That's how it is supposed to work, as the reference point for currencies. Because you'll also notice that the U.S. stockpile of gold rose in market value $15 billion during that same timeframe. As I wrote in Update #1:

The Fed doesn't even have actual gold on its balance sheet... It has "gold certificates" issued to it by the U.S. Treasury from the past monetization of U.S. Treasury gold at $42.22/oz. I suppose, technically, if the U.S. Treasury wanted to revalue its gold to the market price today, the proper yet antiquated process would be for the Fed to credit the Treasury's spending account with new dollars representing the difference in price. Today that would be about $355 billion fresh dollars for Congress to spend.

And today, three months later, that amount of untapped U.S. hard asset equity is $370 billion! The reason U.S. gold went up and European gold went down is simply because the dollar went down and the euro went up. That's the point of Reference Point Gold! It's what Robert Zoellick, head of the World Bank, was talking about. It's really no big deal! But today it may be a big deal to Congress.

On Monday, Treasury Secretary Geithner sent a letter to Senate Majority Leader Harry Reid, John Boehner, the Speaker of the House, Nancy Pelosi, House Democratic Leader, and Mitch McConnell, Senate Republican Leader warning that the U.S. Credit Card will be maxed out by May 16. Geithner wrote:

I am writing to update you on the Treasury Department’s projections regarding when the statutory debt limit will be reached and to inform you about the limits of the available measures at our disposal to delay that date temporarily.

In our previous communications to Congress, we provided regular estimates of the likely time period in which the debt limit could be reached. We can now make that projection with more precision. The Treasury Department now projects that the debt limit will be reached no later than May 16, 2011.

[…]

If the debt limit is not increased by May 16, the Treasury Department has authority to take certain extraordinary measures, described in detail in the appendix, to temporarily postpone the date that the United States would otherwise default on its obligations. These actions, which have been employed during previous debt limit impasses, would be exhausted after approximately eight weeks, meaning no headroom to borrow within the limit would be available after about July 8, 2011. At that point the Treasury would have no remaining borrowing authority, and the available cash balances would be inadequate for us to operate with a sufficient margin to meet our commitments securely.

As Secretary of the Treasury, I would prefer to avoid resorting to these extraordinary measures. The longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations.

If Congress does not act by May 16, I will take all measures available to me to give Congress additional time to act and to protect the creditworthiness of the country. These measures, however, only provide a limited degree of flexibility—much less flexibility than when our deficits were smaller.

[…]

For these reasons, default by the United States is unthinkable. This is not a new or partisan judgment; it is a conclusion that has been shared by every Secretary of the Treasury, regardless of political party, in the modern era.

Treasury has been asked whether it would be possible for the Treasury to sell financial assets as a way to avoid or delay congressional action to raise the debt limit. This is not a viable option. To attempt a “fire sale” of financial assets in an effort to buy time for Congress to act would be damaging to financial markets and the economy and would undermine confidence in the United States.

Selling the Nation’s gold, for example, would undercut confidence in the United States both here and abroad. A rush to sell other financial assets, such as the remaining financial investments from the Emergency Economic Stabilization Act programs, would impose losses on American taxpayers and risk damaging the value of similar assets held by private investors without generating sufficient revenue to make an appreciable difference in when the debt limit must be raised. Likewise, for both legal and practical reasons, it is not feasible to sell the government’s portfolio of student loans.

Nor is it possible to avoid raising the debt limit by cutting spending or raising taxes. Because of the magnitude of past commitments by Congress, immediate cuts in spending or tax increases cannot make the necessary cash available. And, reductions in future spending commitments cannot supply the short-term cash needed. In order to avoid an increase in the debt limit, Congress would need to eliminate annual deficits immediately.

As the Congressional Research Service stated in its February 11, 2011 report:

“If the debt limit is reached and Treasury is no longer able to issue federal debt, federal spending would have to be decreased or federal revenues would have to be increased by a corresponding amount to cover the gap in what cannot be borrowed. To put this into context, the federal government would have to eliminate all spending on discretionary programs, cut nearly 70% of outlays for mandatory programs, increase revenue collection by nearly two-thirds, or take some combination of those actions in the second half of FY2011 (April through September 30, 2011) in order to avoid increasing the debt limit. Additional spending cuts and/or revenue increases would be required, under current policy, in FY2012 and beyond to avoid increasing the debt limit.”

None of those budget policy choices is feasible or responsible. As a consequence, given that Congress has imposed on itself the requirement for periodic increases, there is no alternative to enactment of an increase in the debt limit.

I am encouraged that the leaders of both parties in both houses of Congress have clearly stated in public over the last few weeks and months that we cannot default on our obligations as a nation and therefore have to increase the debt limit. Because the date by which we need to increase the limit is growing nearer, I hope that the leadership in both houses will help us impress upon all Members the gravity of this issue and the imperative of timely action.

President Obama is strongly committed to working with both parties to restore fiscal responsibility, and he looks forward to working with Congress to achieve that critically important objective. In the meantime, it is critical that Congress act to increase the debt limit so that the full faith and credit of the United States is protected.

I hope this information is helpful as you plan the legislative schedule for the coming weeks.

Sincerely,

Timothy F. Geithner


Rock, meet hard place. Indeed!

Now I certainly do not have the solution to America's debt or budget problems. But it does seem to lil' ol' me that Congress has right now run up against a hard wall. And I do know a way they could at least buy themselves a little more time to figure it out.

Okay, here goes. Now pardon my French, but Timothy Geithner is a moron. I realize it is too much to ask that anyone in Treasury understand currency theory, since no school has taught currency theory in generations, but why Tim even mentions "Selling the Nation’s gold" when it has so far only been monetized up to $42.22 per ounce is beyond ignorant. How about this? Rather than selling the gold, why don't you just value it like the rest of the world? Why not just mark it to the market price of gold on the Treasury books? If you, Congress, are going to insist on an honest accounting of America's liabilities, why not properly account for her ASSETS as well?

And then… the U.S. Treasury, under the daft guidance of the G-man, can issue new gold certificates to the Federal Reserve. As anyone with even a rudimentary understanding of double-entry bookkeeping knows, the balance sheet must balance. For every asset there is a liability, and vice versa. This is basic stuff. You don't need to be a banking "expert". And so far the Fed only carries $11 billion of the Treasury's gold on the asset side under the gold heading. Today we have room to add $370 billion more, and that means fresh Fed liabilities—also known as U.S. dollars—accruing as fully paid-up credits to the Treasury account for the government to use however it deems appropriate.

Again, I realize this doesn't solve any of the big problems, but it does buy some time. And furthermore, it is not a bad or reckless thing to do. It is the right thing to do! America has an untapped asset. You can use it without selling it for gosh sake! And just like the old gold certificates, the new ones will NOT be redeemable by the Fed or any other banks in physical gold. They will simply be an accounting entry on the Fed balance sheet. In the future, that gold can be mobilized, if necessary, in defense of the U.S. dollar. But only with the approval of Congress. The physical gold remains the property of the United States. It will simply be monetized by properly revaluing it as the monetary reserve asset that it is, and placing it—at its proper valuation, updated quarterly—on the asset side of the central bank's balance sheet, just like the ECB.

I want to be very clear here. This has absolutely nothing to do with Ron Paul's bill. Nothing against Ron Paul, but he may not like this because he has other plans. And this has nothing to do with a new gold standard, or legal tender laws or ending the Fed. You don't have to be a gold bug to support this. It is simply common sense. What isn't common sense is the U.S. having the only darn gold hoard in the world that's valued at the ridiculous price of $42 an ounce, having a Treasury Secretary then talk about selling that asset, and having a Congress that's about to shut down the government because it can't find some money.

You want honest accounting? Well how about accounting honestly for our… that's right, OUR assets?

You know, I'll bet even Obama would go for it. The timing is quite exquisite. Did you know that this very week is the 78th anniversary of Executive Order 6102? That's right. 72 years ago this week, Obama's role model, Franklin D. Roosevelt "forbade the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates" by U.S. citizens. And in his acceptance speech in 2008, Obama talked about people putting “their hands on the arc of history” and bending it “once more towards the hope of a better day”. How auspicious would it be for him to now harken back to the FDR gold confiscation, on the eve of a government shut-down, and finally set the U.S. gold free?

I've even got a catchy name for the new Executive Order. He could call it "Executive Order: Freegold". And it would buy you, Congress, some much needed time; it would buy a new $370 billion deposit in the Treasury account; and it would usher in the currency-stabilizing effects of Robert Zoellick's and the ECB's Reference Point Gold.

I do realize that some of you will scoff at such a "small" figure as $370 billion in the grand scheme of our debt and deficit. But gold becomes more and more useful and efficient at higher and higher valuations. This is not just a cheap accounting trick for the U.S.—rest of the world be damned. No, this is a paradigm of global and personal reserve asset value, based on unencumbered equity and physicality, rather than debt and paper promises.

And not only might these new gold-revaluation dollars be spent on government obligations, but any given periodic rise in the price of gold could also be used as an "asset swap" (gold certs for Treasuries) right on the Fed books in order to mitigate the swelling of the Fed's balance sheet and the money supply, or just to retire some of the debt. Other Central Banks are already well out in front of the U.S. on this Mark to Market paradigm. And once again the timing for a bold move like this is very well suited to the present undertaking of international monetary reform. The U.S. could once again be the hero!

Now, as you all know, I am not an activist. I am only an observer. But if some of you were to send this post to your representatives in Congress as a sort of "Open Letter to Congress", I could certainly look the other way. It would probably take only one member to actually "get it". But then again, that may be asking too much of Congress.

Sincerely,
FOFOA

[1] Obama vows to veto short-term bill -Washington Times
[2] http://www.treasury.gov/connect/blog/Pages/letter-to-congress.aspx (Timothy Geithner's letter to Congress)

236 comments:

1 – 200 of 236   Newer›   Newest»
joeaddout said...

FOFOA -- What is your understanding of the reason(s) why the USA's gold must be valued at $42 per oz.?

FOFOA said...

Hello Joe,

This post should answer your question.

Sincerely,
FOFOA

Pete said...

I wonder if maybe Timmy wants to force congress into giving the Fed more power.

Maybe the gold revaluation is his 'ace in the hole' and he doesn't want to use it just yet. I mean, it could be considered more ammunition in his battle for confidence in the USD's value.

So whilst your point in the article is excellent, maybe Tim just wants to milk a bit more out of congress for the moment?

matt said...

There is no good reason for even the Republicans to be running this close to the edge of they didn't have to.

Zero Hedge had an article recently that said there is no more buyers for the debt. Plain and simple. Considering the US govt is pulling all-nighters to figure this out, I believe it.

costata said...

FOFOA,

A timely post on a hot issue.

Re: Inflationists vs Deflationists

I think the previous thread should be kept alive to continue that discussion. I, for one, plan to check in to look for new comments.

Rick Ackerman has also confimed that he will respond at some point.

JR said...

If I can conquer Blogger's comments (albeit after breaking a few eggs in the process), so can you!!! Many apologies for my transgressions. :-(

Visca el FOFOA!!!!

For those who fancy analogies (which by their nature are of limited import), in much the same sense as the celebration and study of the seemingly unearthly transcendence of "la furia roja" necessitates the contemplation of a deeper and more complete undertaking of the international game of beauty, so too is the insight, largely otherwise inaccessible, that is ushered into the light of day by our humble and gracious host deserving of unfettered praise.

May each of us see and appreciate, in our own subjective fashion, the humanity and graciousness our host has extended to us all is defying the conventional opposition to economic inevitability. For those who eschew the "transient explanation" of that which commands a more elaborate and informative exposition, cheers to you for heeding the wisdom of those whose insight transcends the ages:

Gold. Get you some.

nirvs said...

FOFOA's solution would work, BUT....the Powers would never allow it to happen because it would telegraph to the whole world that Gold is NOT some barbarous relic...it goes against everything they have done in the past...

JR said...

nirvs,

You will first have to demonstrate how "the Powers could never allow it to happen" before asserting "the Powers would never allow it to happen."

Cheers, J.R.

Terry said...

Sent to House Budget Committee, and both Florida Senators.

Thanks FOFOA!!

Wejn said...
This comment has been removed by the author.
Redhill said...

Thank you FOFOA

Thumbs UP.

dojufitz said...

I think it should be executive order 9999 Fine.

DP said...

It's a game of two halves, and once again the [FOFO]A Team steps in at the crucial last moments, with a great plan that will save the day.

You'll love it when this plan comes togther.

I pity the fool, who won't listen.

Edwardo said...

In discussing, with a friend, the proposal, namely marking to market the gold on Treasury's books, I was asked the following question:

"And if said action were to take place – what In Your Opinion be the effect on gold prices?"

I am trying to come up with as succinct an answer as possible.

What would you say?

One of the conundrums for me is that the "market" price of gold is, itself, distorted, so, while MTM the physical certainly puts it on the books at prices vastly closer to an objective reality, we don't have a whole lot of objective reality where the price of physical is concerned. We know, or think we know, why physical gold prices are distorted, namely as a result of the practices of fractional reserve bullion banking.

Now, as to a quick answer to the question posed, how will this effect gold prices, well, I surmise that once the political class realizes the windfall, as it were, that they realize by having the gold MTM, what stops them from finally putting their weight behind doing what is necessary to encourage a vastly higher physical gold price. After all that would allow government to retire their debt. What stops them from destroying that which suppresses the physical price of gold?

I have my own answers to that, but I would like to hear what others have to say, and what other's answers to the seemingly simple question, what is the effect on gold prices?

In the meantime, how one wonder's is it possible, or likely that Ron Paul is ignorant of the issues pertaining to $42 dollar an oz gold as they relate to his dream of reestablishing a gold standard?

Casper said...

@ FOFOA

You say:

"They simply make sure physical gold is available, tax free, at the floating market price. You can even buy it at the bank."

I assume that you imply that if needed ECB would sell gold if the market price was too low or no gold would be forthcoming?


@Edwardo

You say/ask:

"What stops them from destroying that which suppresses the physical price of gold?"

What stops them indeed... in desiring ever higher price of gold and making that "windfall" over and over again, ad infinitum? I would say that any central bank that issues currency has to be prepared to sell gold for their currency already in circulation in order to avoid that currency going Supernova.

In case politicians can't help themselves making those windfall profits, gold will soon be just a distant memory.

Casper

forwhatitsw0rth said...

Excellent article as always FOFOA.

You inspired me to collect and collate the ECB data into an Excel chart.

[IMG]http://i51.tinypic.com/sgr2hg.png[/IMG]

I am also the mod at www.24knews.com and post several times about you!

http://www.24knews.com/viewtopic.php?f=2&t=3&p=11738#p11738

Regards,

fwiw

Jeff said...

What would floating gold on their books do for the currency? I understand it would increase the value of the asset but the US doesn't make sure gold is available the way the EU does.

What would this do in terms of, ultimately, freegold?

Motley Fool said...

comments...

Indenture said...

For All:

Right click and open this in a new window to follow the comments on:
Big Gap in Understanding Weakens Deflationist Argument

julian said...

Well done, FOFOA

Advantage, MTM!

my thoughts in general,

Regarding Ron Paul, from what little I've read, he is not strictly advocating fixed metal standard, in fact it doesn't even sound like he's pushing that. It appears as though he's advocating the option for alternatives to FRN. Like a (more) free market competition in currencies. Perhaps I'm mistaken though. Either way, that's not quite relevant to this discussion perhaps.

Edwardo writes:

"And if said action were to take place – what In Your Opinion be the effect on gold prices?"

I think, since it is a discussion for elevating thought and understanding, that we could respond with a question of our own. Change "prices" with "value." Ask what do they think the effect would be on the value of gold?

What would be the perception of physical gold's value if they were to take that action? Would the population's value judgement equally extend to the non-physical synthetic gold assets? Perhaps initially. Things move slowly indeed. I imagine the paper claims would maintain equal perceived value to the physical metal for a short while, where nominal price would include gold "promises" still, as a market price discovery mechanism.

I think that USG MTM would assuredly precipitate that of which FOFOA is a keen observer - namely, the advent of Freegold.

The "financially instrumental" value of gold would be immediately apparent to those in power positions, such as average congress people and senate people.

In terms of paper price, I think this action would be a catalyst for gold 2000$ (or a decent 15-35% increase) by the end of the fiscal quarter in which the MTM is made official. It would be a function of the new MTM fervour. USG would be all in favour of that, no? Many North Americans and other Western minded people would shrug off the remainder of their prior notions about "antiquated" metal, perhaps thinking, "If gold can do that for USG, imagine what it could do for me!"

cont'd....

julian said...

cont'd...

I think people would view gold like a child that left home, and came back years later as an adult, more successful, handsome, strong, and virtuous than ever had been imagined by the family to which it returns.

I must mention that I think the average individual might barely notice anything at first, and might not even know more of it than some news headline they hear or read. But many individuals of distinction will take notice, and will move for some physical.

I think this action would be a huge deal in terms of the synthetic supply of gold, also. It would become an apparent burden on the physical stock's value.

Institutions might also try to take similar action - MTM. Please inform me if this is somehow illegal or untenable for accounting / financial reasons.

If it is acceptable, large organizations and groups might try to follow suit. Why not?! This might really be where the paper starts to reveal its nature. I imagine that MTM of gold "claims" would not be allowed. Only MTM of physical gold stocks. This would shine a glaring light on the paper claims' value vs. that of the physical metal.

Then again, my understanding on the mechanics of this is very shallow. The Treasury needs to issue gold certificates in order to monetize the gold stock, but does this allow the Federal Reserve to MTM those gold certificates as though they are physical stock also? My understanding is that they get to put those certificates on the asset side, is this accurate?

I will read "Confiscation Anatomy" as time permits, perhaps therein I might find myself some deeper understanding in this matter. But please share your thoughts and understanding if you're so inclined.

Back to the question shared by Edwardo, I think it's also possible that the price of gold (not its value) goes down a bit, in a bid to strengthen the USD. I think it would all depend on the interests and motives of those who can make the decisions. My understanding is that for USG to strengthen their currency, they would have to sell gold into the market. But if paper claims are still in play, perhaps no physical needs to change ownership for this currency strengthening to happen? I'm still rather unlearned in these matters, but I feel like my notions are not far off.

There's just so much to think about. I will break here, for further contemplation, and some reading too.

Kindly,

Julian

Joel said...

Wouldn't that move imply a decoupling of Wall St. and the Fed? Geithner, et. al., would be causing all their drinking buddies to lose billions of dollars (buddies who own all the mispriced paper gold) due to likely upward price movment? Great idea, but not gonna happen.

DP said...

@Julian: I don't see why MTM gold has to immediately break paper gold? The ECB already MTM at paper market prices - it hasn't broken the market for paper gold so far, right?

Certainly, marking to a physical-only market price[1] would take the equity value of the gold assets of ECB/Fed/whoever much higher still. So it might be even more useful for their purposes if they were to progress still further, towards such a market to mark against.

I do daresay that in the fullness of time the new interest in the market, many of whom will buy physical I would imagine, will exacerbate the problems we are already watching. This might then help force the separation of the paper/physical markets. But not immediately I think.

[1] Clearly a physical-only price would be much higher, since demand would not longer be satisfied by mere paper promises of that which doesn't, and never will, exist.

ad said...

The ECB already MTM at paper market prices - it hasn't broken the market for paper gold so far, right?

I think the euro itself as a new currency got all the attention, not the reserves backing it. Whole different story re the dollar considering its history with gold and being the reserve currency. This should be taken into account.

Christo said...

FOFOA, nice idea but I believe they lie on their balance sheet and actually own zero gold. Fort Knox is full of emptiness!

ad said...

From JS Mineset

Jim adds: “The new reserve currency will be a virtual currency (an average of the major currencies). It will be (remotely) tied to gold via a worldwide M3 type liquidity. It won’t be convertible (will be used between central banks, not you and I). Today’s existing currencies will continue to be used but valued one to the other. A measure will be created similar to the old M3 (which reveals government pumping) but to reflect their entire past money creation. Upon initiation, the M3 level and the level of gold will be considered as 100 on the virtual index. Contributions of gold to BIS or IMF (agent of the virtual reserve currency) to participating currencies in the index will have to rise to meet rising liquidity. All situations, like now, will resolve themselves via a commodity currency. That is the entire story.”

victorthecleaner said...

FOFOA,

concerning Europe. Sometimes this blog sounds as if
1) you can buy physical bullion from the teller at every bank
2) the European governments encourage their citizens to buy gold

I think this is misleading. It is probably true that the PM retail infrastructure in Europe is better developed than in the US, but the difference is merely quantitative, not qualitative.

In order to buy gold at the bank, you need to go to a main branch in one of the larger cities, say population at least 250000. In the smaller branches, you can ask them to have some gold delivered to that branch, but it will take a couple of days, and you might not be able to lock in the price.

As a rough estimate for comparing Europe with the US, I think I remember that in 2010, about 220 tonnes of gold were sold in Europe whereas only 90 tonnes were sold in North America (including Canada).

But if there is a lack of confidence in paper money, I do not think the market for physical bullion in Europe is liquid enough to prevent a run on other tangible assets, say food and energy. In October 2008 and May 2010 (Greek crisis and European bank bailout), basically all coin dealers and all banks were sold out for several weeks. Even if they had not used the paper price of gold, but rather the coin dealers had allowed their own price discovery and allowed the premiums to increase arbitrarily, I think the market would have become illiquid, simply because the inventory sold rather quickly and there were basically no sellers.

A run on food and energy (in absence of physical bullion) is definitely possible in Europe, too, if there is a crisis of confidence in paper money.

Victor

Robert said...

With today's jump in POG, that makes it approx. $380 billion. Hey! We might need that extra $10 billion!

Edwardo said...

I can say with absolute certainty that I don't really follow, in its entirety, Jim Sinclair's "new reserve currency" post. I can also say that it doesn't sound like anything but convoluted claptrap. Perhaps, on that basis, I should believe it, even though I don't follow it.

mortymer said...

If you missed it:

http://bphouse.com/honest_money/2011/04/01/open-letter-to-emu-heads-of-state/

mortymer said...

@VTC:
Isn´t it great that Europe can disperse 200t among their citizens? IMO Most likely to strong hand as at this price and economical condition not many new buyers buy thought new "fear investors" seem to challenge this my view. Let us see what Lidl step to this market will bring :o)

Ad yours n.2):

***Council Directive 1998/80/EC of 12 October 1998, supplementing the common system of value added tax and amending Directive 77/388/EEC - Special scheme for investment gold. [Official Journal L 281 of 17.10.1998]***

http://europa.eu/legislation_summaries/taxation/l31012_en.htm

-> "...In certain circumstances, Member States may designate the PURCHASER rather than the SELLER as the person liable to pay the tax (reverse charge procedure) in order to prevent tax fraud and reduce the costs of the transaction.
With regard to transactions on a REGULATED gold bullion market, Member States may be authorised not to apply the special scheme and introduce simplification measures..."

-> "...In order to promote the use of gold as a financial instrument, this Directive introduces a tax exemption for supplies of investment gold..."

=> Bit more about it here in comments section: http://fofoa.blogspot.com/2011/01/who-is-draining-gld.html

This is also quite relevant and you will find it (I hope) interesting:
http://www.oecd.org/dataoecd/40/31/35391062.pdf

costata said...

mortymer,

More great links. Thank you.

Breaking News from ZeroHedge tucked away in the comments on this post:

http://www.zerohedge.com/article/surprising-observations-trimtabs-are-central-bankers-loading-gold

The mighty DoChenRollingBearing is once again buying gold!

Central Banks are apparently following in his footsteps.

costata said...

Euro

http://www.cnbc.com/id/42479791

“China and Taiwan have tried looking further afield in their diversification, to the Australian and South Korean bond markets” says Mellyor. “But there are only two places that are deep enough to absorb reserves of this magnitude: the Euro Zone and the US.

“Euro/Dollar is trading without reference to the underlying debt markets” says Mellor. “In fact it’s our contention at BNY Mellon that the entire move in the Euro since 2001 have been driven by the Asian central banks need to diversify."


Chalk up another one for A/FOA.

mortymer said...

@ad:

Zoellick:
"...Leading powers are not going to accept the SDR as a new global reserve currency, nor the IMF as a global central bank..."

see: costata´s post
http://tinyurl.com/625cw54

Edwardo said...

I think I posted that ZH link about CBs loading gold in the previous essay as "Biderman gets a clue."

ad said...

Edwardo, Robert's latest acquisition was the real breaking news in this case.

Mortymer. He does bang on about the new reserve currency however its the first time I have read him fleshing out his thoughts a little more. If one ignores the SDR bit and starts to read at around Today’s existing currencies he is almost making the case for freegold.

Indenture said...

costata: I read Toxic Dollar: Why Nobody Seems to Want US Currency and spiced it up with a Freegold Filter. Something new to try: Read the highlights in a Reference Point Gold context.

Texan said...

FOFOA, I love your "altruism" in trying to help out Congress!

Gold would skyrocket. Way past today's price. You are talking about voluntarily bringing about " the singularity" - it would be an instant devaluation of the USD of many magnitudes.

But the unintended consequences could be horrifying. You might have instant dollar repudiation worldwide. Hyperinflation. Maybe even some very angry large-scale holders of US debt....

I know you think this will all happen eventually anyway, but I really prefer the approach you have suggested of a " managed devaluation" , or what used to be called a " crawling peg".

It didn't hit me until this week that this may actually be the agreed plan. Because the chart action is so beyond bizarre I can't even begin to explain it. Levels are defended for months with violent bear raids...until suddenly they arent. And the price moves higher - but never way higher. It just slips up into what appears to be a new trading range, with a new top that will be defended for awhile. That
Is a crawling peg.

They aren't going to let gold spike to $5000 in a day, then $15,000 the next after panic really sets in.

But interesting idea!

Edwardo said...

Pray tell, who is DoChen/Robert?

Robert said...

Edwardo, shh, please don't say anymore!

Robert said...

costata, to be fair, I DID give a couple of days of advance notice before re-entering the market as a buyer (please see my Press Release of maybe a month ago at ZH).

This allowed the kind inhabitants of ZH to front-run me!

costata said...

Indenture,

I think you have highlighted the key words in that piece.

Cheers

Edwardo said...

Okay, not another word about he who shall remain nameless, at least from me. Now, on to something else.

I seem to recall Costata? asserting the importance of the action of the ten year bond. Well, it would appear to be embarking on a big move towards higher yields. And FWIW, the dollar, applying some plain vanilla TA, has broken down out of a multi-year triangle pattern that eventually targets... wait for it... approximately 47 on the DX chart.

FOFOA said...

Hello Texan,

That's an interesting concept. So if the biggest debtor in all of history suddenly acknowledges that he still has an asset of real value, that asset might explode in price to heights that would almost cover his debt just from the act of publicly acknowledging it? Hmm.

Let us think of analogies. I know someone who is buried in debt. A large mortgage and HELOC, two car loans, lingering student loans and a baker's dozen of credit cards. A prime candidate for bankruptcy. But let's say he also has a hidden asset that, even though it is not collateral to his debt, is still valuable enough to almost cover it. He hasn't filed for bankruptcy or stopped paying on his debt yet, so even if he reveals the secret asset, his creditors won't have a claim to it. Yet if he reveals it, they may actually extend him more credit that he will then use to keep rolling over his debt, because his books will no longer look so underwater.

Or how about this? I know two people, each with a million dollar debt hole. One guy has no assets and can't get any more credit, so he'll probably have to declare bankruptcy. The other guy has two million in assets and he has no trouble getting more credit.

Now I'm not saying that rolling over debt is a good way to manage one's finances. I'm just saying this is an interesting concept that you've brought to the table. That if Congress were to publicly reveal this U.S. asset, that it would suddenly skyrocket in value. So how would that translate into a repudiation of the U.S. dollar worldwide? Or hyperinflation? Actually, I think the U.S. proactively ushering in Freegold (even if they didn't know what they were doing) could potentially be the ONLY way to possibly avoid the worst of those things.

A dramatically fast and public rise in the price of gold, the kind you say they will never allow, would absorb a lot of the monetary pressure and keep it away from essentials like food and gas. That's the best and highest function of gold. To absorb. To consolidate. To sequester monetary pressure. To bottle it up and put it on display for all to see. For all to not only marvel at, but to partake in as well. And to do so in a way that doesn't affect vital economic commerce. This is the elegance of the ECB/MTM party concept. This is the elegance of Freegold!

Sincerely,
FOFOA

Robert said...

To be fair to costata and Edwardo, I post the below comment by someone best left unnamed. Note that that whoever this is also seems to be interested in, what, bearings? WTF? The giveaway is 52100 steel.

This was in response, if I correctly interpret this, to Lt. John Chard (ZH Infantry?)...


by DoChenRollingBearing
on Thu, 04/07/2011 - 15:15
#1146473

The central bank of DoChenRollingBearing took delivery of some gold today as well.

...

DCRB's CB is also working to get some $ wired south to buy some other hard goods, made of 52100 steel!

Aaron said...

Hi FOFOA-

"Now I'm not saying that rolling over debt is a good way to manage one's finances. I'm just saying this is an interesting concept that you've brought to the table. That if Congress were to publicly reveal this U.S. asset, that it would suddenly skyrocket in value. So how would that translate into a repudiation of the U.S. dollar worldwide? Or hyperinflation? Actually, I think the U.S. proactively ushering in Freegold (even if they didn't know what they were doing) could potentially be the ONLY way to possibly avoid the worst of those things."

I realize my next comment might be way out there, but is it possible the rest of the world is not ready to let bygones be bygones? I myself choose for peace, but there are many whom would still choose for spite. If we were to restate our assets in recognition of this new reality (look at this awesome forest I have -- I can pay you in firewood for our past transgressions), is it not possible the rest of the world will say, "Thanks, but you are a day late and many trillion short. We are happy you have joined us at the All Inn, but today, for you, there is an entrance fee."

--Aaron

Aaron said...

Perhaps the entrance fee is, "You must first take back your bonds -- we want the dollars to access your domestic markets. Then and only then we move to Freegold.

--Aaron

Aaron said...

Chris Martenson interviews Paul Tustain, Founder and CEO of BullionVault.

"BullionVault is an internet gold and silver bullion exchange, founded in 2005 by Paul Tustain.[1] It is owned by Galmarley Ltd.[2] and based in London, United Kingdom. Purchased gold and silver is held in personally allocated storage with Via Mat International in either London, New York or Zurich depending on the client's preference."

In the interview Tustain describes how as long bonds (30y) mature, holders of those bonds (guess who) roll the proceeds over to short bonds which act more like cash. If true, it certainly provides cause for the Fed to buy long bonds to keep I-Rates down.

Long bond holders turning to short bonds? 1-3y bonds acting like cash? Base money velocity? Uh-oh.

--Aaron

Aaron said...

Whoops, let me correct my words. "firewood" was a poor choice.

My post should have read:

(look at this awesome (-forest) pile of gold I have -- I can pay you in (-firewood) Gold Eagles for our past transgressions).

Is it not possible the rest of the world will say, "Thanks, but you are a day late and many trillion short. We are happy you have joined us at the All Inn, but today, for you, there is an entrance fee."

FOFOA said...

Hello Aaron,

What past transgressions will we be paying for? We've OVER-paid for Saudi oil for 30 years now, with low priced Western gold. And China has been eating up our Treasury paper for a decade now, like they just can't get enough of it. Yes, there is a transgression we'll pay for, but it is not our national debt. It is the entanglement of the paper gold market in the dollar/IMF architecture.

Yes, the U.S. will ultimately mobilize its gold in defense of its failing transactional dollar, as I intimated in the post. But that will be at a much higher price of gold relative to "April 2011 constant dollars". So the gold will go a lot further than it would if we mobilized (physically sold) it today. But it will also be during a crash in the dollar relative to real necessities like food and oil. FOA wrote about this.

I have written in the past that the only hope there is to avoid a full-blown hyperinflation would be for the U.S. to proactively introduce Freegold, even inadvertently. This is not something I just thought of. But I have also pointed out how this scenario has a near-zero probability because the morons in Washington would never think to do that. But heck, it's worth a shot, isn't it?

It is difficult to visualize the coming crash because you have to understand how Freegold and currency collapse can happen simultaneously, yet be separate events. And one can actually absorb some of the other. Quicker, sooner, more open Freegold (less gold in hiding) might equate to a little milder currency collapse.

You suggest the world may say, "Thanks, but you are a day late and many trillion short. We are happy you have joined us at the All Inn, but today, for you, there is an entrance fee."

This will have a lot more to do with the failure of paper gold than paper Treasuries. Treasuries perform by running the printing press. Paper gold performs by delivering physical gold. Try to imagine international claims against the U.S. made up of a "basket" only containing gold and dollars. The dollar is collapsing in value while gold is skyrocketing, and the U.S. has to settle some of these "basket claims" during this dynamic time. Less and less physical gold will combine with more and more dollars to keep the basket even. Can you see the dynamic?

Cont...

FOFOA said...

On a quick search of the archives (I'm not sure this is the best example), here's a taste from FOA:

As most of you will no doubt agree, almost all gold discussion still centers around "the dollar's war with gold". Truly, the evolution of this story will be how that war ended then and now the dollar's war with the Euro began! A very large part of that war strategy, employed by the ECB/BIS, was to let the dollar/IMF faction hang themselves by expanding and supporting the whole arena of this dollar paper gold market. Inflating the gold marketplace with so much "paper gold" that we would eventually have to bankrupt ourselves just to keep the dollar in the war game against the Euro.

Because Saudi Arabia is a member of the BIS and marks its currency to the SDR, we are going to be hard pressed, for oil reasons, not to ship [gold] against demands. Perhaps, oil's continued settlement in dollars is directly tied to gold,,,, Do ya think?

Further, much of the current credit in our modern gold market place is backed with this "legal tender" [the SDR] of the IMF. As we have contended for years, 90% of the entire modern dollar gold market is a paper game first, and that will burn as the dollar loses its position as the reserve currency. All these Giants that are holding physical gold and "credible paper" are going to win big as escalating gold values displace their dollar asset base. There are a few of you smart cookies out there that "NOW" understand what we have been getting at for such a long time.

[…]

At the right time the Euro Zone will withdraw from the IMF, leaving the US and its factions as the only support for dollar credit assets held overseas. Then the evolution of SDR use our guide knows so well will be complete. This will leave the SDR interpretation open to only one avenue to finding support: its basket currency function dissolved, gold will have to flow from American based [gold stockpiles]. With most of the present official credit gold leverage built upon IMF protocols, the US will find itself shipping ever higher priced gold to defend an ever lower valuation of dollar exchange rates.

With the world credit gold markets paralyzed in default and dollar credibility placed in question along with American economic stamina; physical gold will return to official hands in Europe in exchange for Euros. A paradox observed as high gold places more demands upon Euros and sends the dollar ever lower.


Sincerely,
FOFOA

costata said...

Edwardo,

I'm looking at 74.86 on the DX right now.

Check out the FX quotes over at Kitco. IMO the interesting thing about the recent FX action is that the supposed "risk trade" currencies (Aussie and Canadian) are rising strongly with the "safehaven" currency (Swiss Franc) and the "anti-dollar" (Euro) as well as gold posting a record nominal weekly close. To add insult to injury even the Ruble is posting new highs against the US$.

The specs and traders have the whole weekend to fret about all of this. Things could get very ugly come Monday.

Edwardo said...

Costata,

If they, the specs that is, have any sense, they will fret even more now that a "historic" joke of a budget deal has been tentatively agreed upon. After all, paring a measly 39 billion dollars from the budget- pending a vote of course- is, yet again, proof positive that The Federal Legislature isn't remotely up to the task of addressing the fiscal situation, unless, letting the patient bleed to death, albeit just a tad more slowly than before, is someone's bright idea of a decent response to the situation.

Texan said...

FOFOA,

The USD is still the ROW'S reserve currency (to their increasing consternation). A "reserve currency" that can be conjured at will gives the issuer enormous advantages, bordering on omnipotence.

Imagine, if you will, that you could pay for any lifestyle you desired simply by charging it. Put it on my tab......And secure in the knowledge that no one would ever ask you to pay it back!

But then your creditors start to get a bit nervous. So you say, hey guys, how about I sort of collateralize my tab with gold?

I believe two things would happen. First, the creditors would stop extending credit unless it was EXPLICITLY gold convertible somehow. Second, holders of dollars would no longer view dollars as a store of value. And I am talking for both that this could happen with everyone all at once, or it could start on the margin and then snowball.

Or none of that could happen. But the point is it MIGHT. Which means that probably the single most important tool for the USG at the moment - it's ability to "charge it" at will, the way you and I take a breath every morning ( we hope!) - MIGHT be taken away.

I don't think there are many that want to risk this happening, and if they do, they certainly don't want it right away. Gradual and managed, maybe. But a world without a trade currency would be very complicated and fraught with asymmetric event risk similar to what we are witnessing now in MENA. Or worse, hyper inflationary.

So while it's a great idea, I seriously doubt they will implement it. I did however find Geithner's comments that the USG would "lose credibility" if it sold it's gold to be very supportive of your overall message on this blog!

costata said...

Hi Texan,

You wrote:
I did however find Geithner's comments that the USG would "lose credibility" if it sold it's gold to be very supportive of your overall message on this blog!

Working at the BIS seems to be a right of passage for senior central bankers.

http://www.bis.org/press/p050509d.htm

Timothy F Geithner appointed CPSS Chairman
9 May 2005


The Governors of the central banks of the G10 countries have appointed Timothy F Geithner as Chairman of the Committee on Payment and Settlement Systems (CPSS) with effect from June 2005.

Desperado said...

I have some strong doubts about the viability of this treasury MTM of the gold reserves:

1. We don't have any proof how much gold their really is. I know that Fofoa is nearly certain that all this stolen and other gold is still in the vaults, but I am not so certain.

2. Any MTM would require a plausible audit. For some reason there has been no audit since the 1950's. I don't really wonder why. Even if the gold "officially exists", I doubt that anyone in the government is absolutely certain that all these "official" gold reserves are really there. This audit would take some time especially since issues like purity and Molybendium cores would likely rear their ugly heads.

3. Much of the US's gold reserves are not "pure" 9999. I recently read an article where it was claimed that the reason Nixon closed the gold window was because there were no London Good Delivery Bars left! If the coin-smelt gold were to be made available for redemption it likely would have to be refined, taking even more time.

4. The bullion banks likely would have to stop their market manipulation and front running or they would have to be offered a "buy in". And which side of this would the Fed be on?

Edwardo said...

Texan wrote:

"Second, holders of dollars would no longer view dollars as a store of value."

-I'm pretty sure, especially given the performance of gold over the last decade, that holders of dollars don't view the dollar as a store of value, but, rather, the dollar is held primarily for its real and perceived "network value."

"...the single most important tool for the USG at the moment - it's ability to "charge it" at will, the way you and I take a breath every morning ( we hope!) - MIGHT be taken away.

-The ability to "charge it" is being removed at a steady clip. One simply needs to note the steady decrease in world trade conducted in dollars. Going forward, all we should really be concerned with is when this on going trend reaches a critical stage such that what has been a relatively orderly process becomes rather disorderly.

Texan said...

Edwardo, 99% of holders of dollars view them as a store of value. If they didn't, they wouldn't hold them. I am not sure what "network effect" means in this context, but I don't think China holds a trillion dollars for any other reason than as "savings".

As fro being able to charge it, I disagree on that as well. There is unbelievable demand for Treasuries, especially ST. Bills trade at 0%. That's where everyone parks their "excess work". I think money market funds are $3 trillion plus, much of that in Bills. Heck even 10y Ts only yield 3.6%, which after tax is not much higher than stated CPI core inflation.

Why mess with that? Or why risk it " on your watch"? Kick the can down the road, so to speak. It's not very responsible, but it seems to be the policy. And maybe they are going to gradually let gold remonetize as well.

At least I hope so. I don't want a sudden shock, and I am in no hurry to pay higher prices for my savings!

Edwardo said...

I guess we'll have to disagree Texan, To me, your argument-if they didn't think their dollar holdings were stores of value they wouldn't hold them-seems a bit of sophistry.

Major dollar holders, like The Chinese, are furiously scrambling to hedge their dollar holdings. They may all the while be trafficking in dollars because circumstances dictate they do,
but that doesn't mean they view their holdings as stores of value.

And whatever the seeming robust demand for Treasuries may be, that is as much about inertia as anything else in my view. In any event, as per the trend in global trade in dollars, which is in a secular and seemingly irreversible downtrend, the U.S. dollar reserve currency train is set to be mothballed even if few around these parts care to admit it.

Indenture said...

costata: "“The key development is that the US dollar is in fact breaking down. This is something that we have been talking about for a few weeks now and the dollar index here in Europe is at the lowest levels since November of 2009. We’re closing in on those lows of 74.17, once that level breaks the floodgates open. Put another way, the dollar falls of the edge of the cliff.” James Turk

Which reminds me of FOFOA's The Waterfall Effect
(Newbies should read it)

ad said...

Texan

Edwardo, 99% of holders of dollars view them as a store of value. If they didn't, they wouldn't hold them. I am not sure what "network effect" means in this context, but I don't think China holds a trillion dollars for any other reason than as "savings".

I think that ROW views them as a means to devalue their currency to protect their export sectors.

Indenture said...

Two nuggets from 'The Waterfall Effect':

"We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars."

"Hyperinflation (a currency event as Jim Sinclair so eloquently tells us) is always concurrent with deflation (economic malaise) when measured in real terms (gold). The dollar is only paper, and it is being printed like crazy. So to measure things in dollars becomes very confusing when looking to the future."

ad said...

Interesting interview with Paul Tustain founder of BullionVault especially this angle on the in/deflation debate.

But it hides the thing that is really going on. And this is the thing that really worries me. When you just print even a little bit of money, if you just print whatever it is, seven hundred billion dollars, or whatever, it sounds modest next to coins and notes of some fifteen trillion dollars in circulation, but it sends a very powerful message to savers. Now if you look at that monetary stock, it has got this time element built into it. You think of the hundred trillion dollars of bonds, they are basically spaced out over broadly about a twenty-year period. Most of that money was frozen into the bond market freely by people who owned the debts. But they basically had this signal from QE that it is no longer safe to put money out to twenty years. And indeed, you will see that the likes of PIMCO have basically withdrawn all their money from U.S. Treasuries because they think that it is so fatal.
Now what that means is that you give the markets that signal that you are going to print money whenever the going gets tough, but eighteen-year bonds or twenty-year bonds are all still eighteen and twenty-year bonds. And the clock has to wind down, allowing those bonds to get to the short end. And you see steadily, and this of course already happened in Greece, you see a mountain of money, as it gets redeemed, even a twenty-year bond which gets redeemed, is going to be re-invested in the short end. Nothing goes back out to twenty years. And so you get this hump of money at the short end and short-end money behaves very much like cash. That is why it is kept at the short end; you can sell a short dated bond for very near its cash value, its nominal value. You cannot necessarily do that with a long-term bond. So with this pile of money at the short end, you have got, instead of having twenty trillion in coins and notes and near-term money, you suddenly go up to one hundred and twenty trillion in coins and short-term notes but getting there, is going to take fifteen years. And that is the point. The switch has been flicked and it is not possible to un-flick it. So that shift to the short end is clearly happening. If you look at quantitative easing now, it is essentially making the financing of bond purchases very cheap but the bonds themselves are still, lets say in the fifteen-year end, anything from seven years up, which is basically in the quantitative easing stock. But they are only being bought by banks, because the banks can put them back to the central bank because the central bank has got a mandate now to buy illiquid long-dated quality bonds. So that is where they all end up, everyone connects it and goes back into cash which is provided by the central bank when it buys these long-term bonds and converts all the holder’s money back into cash. So it creates this mountain of short-term money. And this is why you get inflation and deflation at the same time.
What you have got now, is an increasing glut of short-term money chasing all the things that people buy with short-term money, and that seems like your shopping basket or the gasoline for your car. But you have got a shortage of long-term money and that is what you would use obviously to buy a house. So your house, there being a shortage of money, is falling in price but the things that you buy in your shopping basket, they are all increasing in price. So the inflation has switched round from where it was in 2005 but it was the other way around as all of the money was swept out to the long end to finance house purchases.

ad said...

The links for the above at Chris Martenson:

Paul Tustain audio

Paul Tustain transcript

ad said...

Its pretty much FOFOAs pyramid in action. I need to reread some posts :)

ebikeguru said...

I regularly advise my friends in Europe and Switzerland to go into UBS and ask for a 1,2,5,10 or 20 gram kinebar for a rainy day. I did so just this morning infact.

I know quite a few friends now who every month convert a bit of paper into gold. And yes, it really is as easy as walking into a bank. I also ordered and paid for and locked in the price of, 3x100gram silver bars. These were delivered 24 hrs later. I know a chap at work who bought a 1 kilo silver bar last month, and yes, also over the counter at UBS.

Casper said...

@FOFOA

I think you yourself wrote that the USA were an outlaw ever since Nixon closed the gold window in 1971. Or at least they have lost all the chips on a poker table and decided to not deliver them to the winners.

It was said that should USA wanted to bring them back in play they would face a tsunami of claims from BIS and other central banks at gold price per ounce of $42. Maybe Aaron had this transgressions (showing the creditors the middle finger) in mind.

To a creditor it means nothing if a debtor comes up with new found wealth but can't be secured in case of a default (which US has done at least once). So if US decides to bring those chips back in play and not face the wrath of others it has to somehow transfer value of their gold hoard to others. They could do that by sacrificing the paper gold market and in essence launch Freegold project. Of course that means a sudden death to an empire that was built on a dollar dominance as a wealth reserve but that may be the price of dollar surviving as a currency and a waiver to past "transgressions".

Casper

Texan said...

Edwardo,

The Chinese do not traffic in dollars. They trade for dollars, which they keep. Same with the Gulf oil states. Same actually with Brazil, and Russia, and yes, Europe. So whatever. The ROW accepts dollars, and they buy Treasuries. They aren't happy about it, but they do it.

And the price they pay - and know they will pay - is inflation seignorage. Just as long as that cost isn't too high, or too sudden, I think they will keep paying it.

But the second the UsTreasury offers the Fed gold as " collateral" , the ROW is going to say " me too".

FOFOA said...

Hello Casper,

Yep, those "golden outlaw" comments come from this post. That would be a huge problem and a big risk for the U.S. if it were to ever try another gold confiscation, or another gold standard in which the U.S. tried to fix the price of gold, or any method of controlling gold other than Freegold for all.

And creditors are very interested in the asset side of your balance sheet. If you default, they go after your stated assets in court. So placing them on your balance sheet properly demonstrates that you are a safer credit risk the larger your assets. Hiding or misrepresenting / underrepresenting your assets to your creditors likewise shows you are a poor credit risk. One with significant assets is less likely to default than one who has no assets and only debt.

If Freegold (the end of paper gold) comes about as an exogenous event, the U.S. would have no choice but to resist it, which would end very badly for the dollar. But on the outside chance that the U.S. somehow induced Freegold, things would unfold differently. It would not necessarily be sudden death. Of course this scenario is so unlikely it's not worth wasting much energy on it.

Did you ever come across Ender's "chicken" comments? Here are a few links and snippets:

November 10, 2008 9:27 AM:

"If I have a barn full of chickens in the quantity and quality matching my neighbor, yet I have an ounce of gold on reserve for every chicken, does that make my chickens better? As you have seen, I am a simple man that can overly simply complex situations…

"If the gold held on reserve is collateral, then we should look closely at collateral. At Dictionary.com, an interpretation is that collateral is “security pledged for the payment of a loan” (but that is not the only definition).

"…I made reference that in a FreeGold system those administering the currency would have to “commitment to openly use the gold”. It would seem that we view the same picture yet describe it differently. In both cases, there is intent to use gold.

“You are arguing that money should be convertible in gold.” Sort of, I might change this to suggest that gold should be available for purchase just like anything else.

"If a currency can purchase gold,
Then that currency can be converted into wealth,
Which means that currency is usable,
Which gives function to that currency."

November 12, 2008 10:20 PM:

"You see, the point of view is not that the gold gives the chickens credibility, but that if the chickens were not fraudulent, then the farmer would have a gold reserve. The gold reserve shows that the chickens are not fraudulent, or rather, they are chickens that have proven their value. The wealth displayed by the owner shows that her chickens are to be had."

November 13, 2008 8:56 AM

"In a slightly different color, if one acquires the chickens provided by an issuer that clearly holds a wealth reserve he need not worry about the chickens because the wealth reserve demonstrates that the chickens do not go home to roost."

Sincerely,
FOFOA

Aaron said...

Hi Casper/FOFOA-

"It was said that should USA wanted to bring them back in play they would face a tsunami of claims from BIS and other central banks at gold price per ounce of $42. Maybe Aaron had this transgressions (showing the creditors the middle finger) in mind."

Thanks Casper. That thought wasn't the first that came to my mind, but I think we're getting at the same idea.

My thought was more emotional than logical. In convincing the world to accept the dollar as their primary reserve, we did in fact buy up a lot of private property with our dollars. We also killed a lot of folks with our military powered by (oil priced in) dollars.

The fact that the USofA might preempt Freegold to buy some time and/or some what mitigate hyperinflation makes sense. I'm just wondering if given the lives and property we've taken from everyone else, if perhaps the ROW might expect us to cough up some gold simply to sit down at the table -- or else give up some other property of value. I was thinking more about property or otherwise, Casper I believe was focusing on gold.

Perhaps my question is one of paying retribution before being allowed to sit down at the table again.

--Aaron

Biju said...

@FOFOA

Regarding your comment that USA will not allow freegold pricing of it's Gold, Jim Rickards has been saying this for more than 2 years. He said a higher price like $5000/oz will help to pay of dollar debts.

Also you mention that if USA reprices it's Gold at freegold price(unknown now), you say it will not lead to high price inflation in food and essentials, which I agree. But any idea how this play out in a country like India where most middle class and above people atleast have 7 ounces of 22k Gold.

I think even in India even when Gold is priced at $10,000 /oz, people will not sell it assuming prices will go up and since they have a history of accumulating Gold, will continue to do so.

Indenture said...

ebikeguru: Thanks for the update on purchasing gold in Europe. If anything changes please let us know.

costata said...

Hi All,

This piece has a decidedly Freegold-RPG flavour about it. (My emphasis)

http://www.telegraph.co.uk/finance/currency/8437266/Aussie-dollar-boosted-by-its-own-gold-standard.html

However, Australia has significant resources of gold, uranium, iron ore, coal and many other important and valuable commodities. They are in the ground, not in a central bank, but this is the nearest thing the world has to the old gold standard. That’s why the Australian currency is so strong.

The same is also true of currencies in Canada, South Africa and Russia. They are effectively backed by commodities in the ground.


What would this picture look like if we all traded in our own currencies? How could we price them without Reference Point Dollar? Perhaps, Reference Point Euro (overlaid on Reference Point Gold)?

What does a doubling in the price of a clutch of curencies do to their "market share" of world trade? The USA peaked around 32 per cent of world trade in 1997 and is already down to under 20 per cent (measured in that silly statistic - GDP). Could this be one of the motivations for kicking the can down the road? Reduce the importance of the USA to world trade to the point where the impact of a collapse is minimised.

In other measures of economic activity the USA could already be in single digits as a percentage of world trade. If you exclude the US military-industrial complex it could be a very low single digit.

Many of the (nominally) US multi-national corporations are enjoying strong growth outside the US. Could they survive the "cleansing fire" of hyper-inflation in the USA to reset the US economy, debts and currency back to a foundaton for renewed growth? The answer may well be "Yes".

Think about what a hyper-inflation actually does. It corrects the over-valuation of a currency back to its' "resource backing" compared to your trading partners. Resources having a much wider meaning than minerals in the ground. The only weapon the Statists can fight it with is a depression.

If Rick Ackerman is still looking for an example of deflation (priced in currency), he need look no farther than the countries listed in this article.

This would be a good time to become your own "resource backed" Central Bank. To have your own resource backed "currency" IMVHO. As the Sage of Omaha says of gold, you dig it up in one place and bury it somewhere else. How is that different to the very thing this journalist describes? Resources are "dug up" and then become someone else's resource - plumbing for a house in China for example.

The trick is to make sure the "somewhere else" the gold gets buried is your somewhere else. So you can dig it up again one day and trade it for "resources" you need at the time.

FOFOA said...

Hello Texan,

You write: "The Chinese do not traffic in dollars. They trade for dollars, which they keep. Same with the Gulf oil states. Same actually with Brazil, and Russia, and yes, Europe. So whatever. The ROW accepts dollars, and they buy Treasuries. They aren't happy about it, but they do it."

Texan, your view is simplistic to a fault! Do you remember when I wrote that people "have a really hard time wrapping their heads around Freegold because they are so focused on monetary currency that circulates when what really matters is monetary wealth that lies very still"? Randy Strauss had a great comment along these same lines the other day:

"…Given that you’re likely to get paid in dollars for the rest of your life, moving some of your investments away from dollar-denominated assets could help hedge your bets if the dollar falls further.

"RS View: As far back as fifteen years ago I regularly espoused the same sentiment represented in that concluding remark as being the basis of an ideal diversification — that is, while working for an income that represents 100% exposure to the dollar itself, it makes natural sense to mitigate the depth of that exposure by putting 100% of savings completely outside the dollar system — i.e., in physical gold."


Texan, what portion of your income is quickly turned around into expenses, versus accumulated as savings? Is it 90% expenses, 10% savings? If so, good for you, because you're up there with the rest of the world. For most Americans it's more like 99% expenses, 1% savings. So why on Earth would they need to be paid in gold for 99% of that when they're just going to turn around and give it away, increasing the velocity of the gold which damages the value of the 1% they just saved in gold?

You need to think like this: Currency circulates while savings accumulate.

If we look back at the last 15 years, the U.S. imported from China a total of $2.8 trillion in goods. [1] Some of that $2.8 trillion was turned right around to buy goods back from the U.S. Some was used to buy oil from the Middle East. Some was used to buy gold from London. And some was used to buy Treasuries. Of that $2.8 trillion we sent them over the last 15 years, about 41% or $1.154 trillion still sits in Treasuries. [2]

Now if we look at oil over that same 15 years, the U.S. has imported $2.1 trillion in oil. [3] Yet somehow the oil exporters only have 10% of that money, or $215 billion, still sitting in Treasuries. [4]

So you see, Texan, your "They trade for dollars, which they keep" is not totally correct. In the case of the oil exporters, they trade for dollars of which they keep 10%. And in China's case, they trade for dollars of which they keep 41%. But you've also got to understand that Central Banks don't "save" for the same reasons that you and I save. Central Banks "save" to manage the value of the currency they print. So China's ginormous 41% savings is more a representation of a highly managed currency than it is a high savings rate in the same sense that you and I save.

Cont...

FOFOA said...

...

And that brings us back to how gold is not only a better savings vehicle for you and me in our reasons for saving, but it is also a better currency management reserve for Central Banks. Here's another good comment from Randy:

RS Comment: "Central bankers will increasingly prefer gold reserves over the paper reserves created by other countries. Not only for the reasons of reliability/trust as cited in this article, but moreso because in choosing predominantly gold over foreign paper for central banking reserves will give those various national monetary officials an improved degree of latitude in their pursuit of an independent monetary policy.

"WITH gold reserves, a central banker in a vibrant national economy can choose to enjoy a strong currency relative to gold, but, importantly, it can still alternatively choose to exercise loose monetary policy (for economic or political reasons) in which its currency is made weak as measured relative to gold. But regardless of choice for the relative strength or weakness of the national currency, the abiding benefit of choosing gold reserves is the superior stability — the systemic strength against procyclicality — that gold offers to the asset side central banking balance sheet.

"WITHOUT gold reserves, pursuit of a national currency policy that is (according to their preference) generally strong OR generally weak is made less expedient either way because the health of the central bank’s balance sheet is subordinated to the quality of its foreign paper reserves which are themselves subordinated to the particular monetary policies being pursued by those foreign governments. Generally this structure of foreign paper reserves offers only the option for national monetary weakness built upon other international weaknesses, and worst of all it exposes the national monetary balance sheet to procyclical systemic failure — a domino whose fate is written largely in the hand of its neighbors."


In my honest opinion, those of you that insist on injecting your own emotions with regard to retribution against the U.S., global justice or whatever into this conceptual paradigm, will continue to be confounded as time unfolds revealing unexpected and unwanted surprises. And as you always do, you'll conclude that TPTB must have planned it that way, because you simply couldn't see it coming.

As the "wealth" held in Treasuries deflates and vanishes, it will be directly replace by rising gold. Net-net, the wealth will still be there. If the U.S. somehow induced Freegold, redemption would come through that act alone. And in a floating, physical-only global Freegold marketplace, the U.S. could safely mobilize all of its gold without the worry of losing it. Let's think this through.

Today China's CB (currency management) reserves include $1.154 trillion in Treasuries and $50 billion in gold. At $42.22/ounce, China's dollars could buy the entire U.S. stockpile of gold 100 times over. At $1,475, China's dollars could buy the U.S. gold three times over. At $55,000/ounce, China's dollars could buy 8% of the U.S. gold, or 650 tonnes, that is, if it were some sort of an off-market deal. But in Freegold, China would run the price if it tried that and only get a fraction of that amount, maybe 300 tonnes.

Today, China has 1,054 tonnes. Combined with its Treasuries, that's a MTM value of $1.2 trillion. The U.S. induces Freegold and China's number jumps 250% from $1.2 trillion to $3 trillion. And China's gold alone overtakes its Treasuries by $600 billion. You tell me. Does this sound like something that would piss them off?

Sincerely,
FOFOA

mortymer said...

PIN
IMF Executive Board Considers Use of Gold Sale Profits

http://www.imf.org/external/np/sec/pn/2011/pn1148.htm

"On April 6, 2011, the Executive Board of the International Monetary Fund (IMF) held a preliminary discussion on the use of profits from the Fund’s limited gold sale, which was completed in December 2010..."

costata said...

Wendy,

I found this while trawling for something else in the FOA archives. It appears that Saddam Hussein's demand for Euro settlement was used as we discussed.

Make no mistake, the world has seen the very last of cheap dollar oil. The next dynamic of that process in the transition of oil settlement support into Euro denominations. Notwithstanding Iraq's move as a convenient trial balloon, the mass of this transition will not begin until the US has clearly embarked on a slowdown. And that slowdown, energy induced as it is, will, this time, force the fed to fight it with a super inflationary buyout of anything and everything that defaults. Right down to your shoe laces. This, my friends is the inflation dynamic unleashed once a currency is removed from reserve status.

Gold Trail 3
FOA (02/09/01; 14:24:03MT - usagold.com msg#59)
Current background

I'm also going to post this comment on the previous thread.

Jeff said...

Here is a Don Coxe conference call. While it covers other areas in addition to gold, he makes a very interesting statement on the GLD holdings just after the 13:00 mark.

http://www.bellwebcasting.ca/audience/index.asp?eventid=70081727

Texan said...

FOFOA,

I agree CBs will increasingly prefer gold, if in no small part due to being long up to their eyeballs in US securities (treasuries, stocks, mbs etc. I am sure the Gulf SWF funds, as well as their family money, is in excess of several trillion). But, they continue buying these securities, whatever their reasons.

And I am sure they are also buying gold, as quietly as possible and while trying not to push up the price.

I think it was you who said that oil has been sold cheaply in exchange for cheap gold, I see no reason why they would want to change that arrangement. Or why the Chinese would want to take a 75% deval on their dollars in gold terms. In fact, I see such a move as a disaster for all 3 parties. Oil would soar, making the Arab states ripe for military intervention. The US economy would collapse, and with it trade with China. And would the Chinese countinue to "traffic" in dollars? If not, what would the US pay them with?

So my view is that they are managing the price of the USd down (bernanke as much as said that is the goal), without allowing a huge "break". That gives CBs time to acquire gold and adjust worldwide their payment terms on various trade agreements.

I don't disagree that this adjustment process appears to be inevitable. I just don't think the USG will voluntarily precipitate it, nor would the major powers want such a "break" to occur.

Casper said...

@FOFOA

I had read Ender's comments you've kindly provided a long long time ago and was refreshing to go through them again. I've been trying to go through some of you posts from previous years to refresh or at least to maybe see at things a bit differently now that my understanding has improved.

That said I understand perfectly that credibility goes to the printer of the currency and not currency itself (chickens) when holders of the currency (debt) see the printer's (debtor) balance sheet improving by adding gold. But this gold has to be available for purchase/seizure and I assume you agree since you have stated in your answer to Aaron that gold would move offshore in an ever shrinking amount for the same amount of dollars coming onshore (price of gold in dollars skyrocketing).

I'm interested in your statement that the west has been paying too high a price for oil in gold. For all we know the amount of ounces that accompany the nominal price in dollars (as stated by Aristotle I think) could have already shrinked to a level supporting the assumption that oil is only worth 1/1000 of an ounce of gold and not 1/10 of an ounce which can currently be derived from dollar spot prices for both.

Casper

mortymer said...

Ken Robinson: Changing education paradigms

http://www.ted.com/talks/ken_robinson_changing_education_paradigms.html

radix46 said...

Mortymer,

Robinson attacks abstract thought. How can a child move into advanced conceptual thought - necessary for anything above the level of an animal - without learning to abstract?

He derides the individual, whilst exaulting the collective, ignoring the fact that the collective is just a bunch of individuals. He complains that the 'old' method of teaching abstract thought is not as good as teaching creativity and divergent thinking, but creativity requires a mind that can form multiple layers of abstract concepts and integrate them. This requires information in the brain from which to make the abstractions.

He says that children have to find one answer and they shouldn't copy, which is bad in school, but called collaboration outside of school. But outside of school, the people collaborating are already educated and are using the abilities they learnt there to perform productive tasks. This is not comparable with the process of education. When we collaborate, we share information that we have taken in, integrated, conceptualised, abstracted, reformed and then expressed. This requires the learning of how to form abstract theoretical concepts in the first place.

He then claims all the best learning happens in groups. Really? I've always found learning in a group to be annoying - you are always brought down to the level of the lowest. Do you learn to spell in a group? Do you learn algebra in a group? Chemistry? Physics? Engineering? No, you may produce the best work in a group, once you've done the basic learning yourself.

This is thinly veiled advocation of collectivism, using amorphous bogeymen such as 'Industrialisation' and 'ADHD', which he simply hangs out there like disconnected ghouls to scare everyone into his 'divergent thinking' from the veritable communist manifesto 'Breakpoint and Beyond' that he cites as a reference, estolling all the 'virtues' of the New Left such as egalitarianism as opposed to meritocracy.

Overall, an unclear mishmash of populist crap, characterised by his final line 'it's crucially about the habits of our institutions and the habitats that they occupy', and I have absolutely no idea what that means or how it relates to his talk.

I hate that video.

Did you post it for a freegold reason?

Indenture said...

Dollar in danger of 'waterfall' decline, Norcini says in KWN metals review
online audio

FOFOA said...

Hello Casper,

"But this gold has to be available for purchase/seizure..."

Why? No it doesn't. If the price was set free by US decree, any purchase of gold, of any size, by any US creditor could be made on the open, free market. That's where purchases and sales are made in Freegold. Why are you so obsessed with the US reopening its old gold window? I'm not saying it wouldn't under this extremely unlikely scenario. I think it probably would. But is that gold somehow different? Is it better? Even if it was sold right out of the Fort Knox gift shop, we'd still be in Freegold-land, so the Treasury could turn right around and buy it back from the open market. China would get that old coinmelt gold and the US could replenish it with quality LGD bars.

Why does your understanding of Freegold go right out the window the minute you let your feelings about the United States creep into the conceptual picture? Do you think there is some kind of grand justice at work here? Do you think the West owes MORE gold to the East? Do you think the East would get extra gold in some kind of arbitration settlement if the US somehow induced Freegold?

The high price the West paid for cheap oil was through its fascination with the paper gold trading arena (still ongoing), for which it shipped too much physical eastward. In reality, gold reserves are any physical gold inside your currency zone, no matter who owns it. It's not just CB gold that counts, but all gold inside a zone. And in that way, our reserves have been depleted by a lot so that we could have cheap oil in dollars. How much? Who knows? I don't even know what's possible. 5,000 tonnes? 10,000 tonnes?

I pointed out how the Chinese have around 40% of the dollars we sent them in Treasuries while the oil exporters only have 10%. Well, if the oil exporters had been putting another 10% into gold that would be more than 10,000 tonnes. At Freegold valuations we're getting close to having paid them in the $20 trillion range in today's dollars. That's what I meant by overpaid.

Sincerely,
FOFOA

Alan2102 said...

BIJU: you wrote:
"a country like India where most middle class and above people at least have 7 ounces of 22k Gold."

I have an intense interest in this: the actual ownership of gold by the people of India and elsewhere in the third world. Particularly peasants and the poor, but middle class also. (Or: non-rich, non-elite, non-banks.) Do you have any links, sources, references on this? I've googled a bunch and can find some info, but still looking for more. I had never seen that 7 oz figure.

Thanks!

mortymer said...

@Radix46: I think that one reason for posting that one was the part of looking at things differently and challenging authorities or checking why do we do certain thing certain way. Freegold is the same, many being fed-up with the present system.
I may agree with some his parts and disagree with other but look what we do here... we post different ideas and let others to evaluate just like you did now. That is great! I like that you spent time in writing down clearly what you do not like. Group more than an individual. :o) Sorry it did not fulfill your expectations but thanks I learned from your way at looking at this one.

FOFOA said...

Hello Biju,

"any idea how this play out in a country like India where most middle class and above people atleast have 7 ounces"

For generations the West has enjoyed an elevated standard of living due in part to the exorbitant privilege of the $IMFS. America, especially, has not had to save in order to enjoy this lifestyle because the rest of the world supported the $IMFS, extending its natural timeline that would have otherwise ended in the 1970s.

But as you point out, much of the third world and emerging economies along with the BRICs never stopped saving. Not only that, they never stopped saving (at least partially) in gold, to one extent or another, because of their own past experiences with terrible price inflation.

This will turn out to be a great advantage for the rest of the world as the $IMFS ends its timeline and we move into a new system. Their standard of living will rise as the standard in the West declines in a kind of a see-saw effect. But just because someone's savings greatly increases in value doesn't mean they will immediately run out and spend it all.

You are correct, they will be much more wealthy in a global context; they will be able to buy themselves a better standard of living in the global context; they will be able to consume more of their own production, reducing their trade surplus; but they will not stop saving. And as the West is forced to start (or increase) saving, those in other parts of the world will see the value of their savings grow right along with their standard of living.

Sincerely,
FOFOA

mortymer said...

http://en.wikipedia.org/wiki/Anglo-Persian_Oil_Company

http://en.wikipedia.org/wiki/1953_Iranian_coup_d%27%C3%A9tat

Aaron said...

I'll be the first to admit I have a habit of getting lost in the woods. Something seems to distract me, I miss a few Trail markers, one more step and where the hell am I?

Freegold is nothing more than a monetary evolution, but for whatever reason my mind wants to somehow factor in Judgement Day. Where the hell did the Trail go? Ahhh, I think I see a marker about a mile back -- right where I coincidentally dropped my flashlight and compass -- who woulda thunk it.

--Aaron

Casper said...

FOFOA,

maybe I have expressed myself badly somewhere since I didn't want to imply that there was somekind of "grand justice at work". I'm merely interested in a debtor/creditor relationship and their rights/obligations that go with it.

To make myself perfectly clear I understand quite well what you mean by saying that there is no difference between gold (as a store of value) in Ft.Knox or gold around a neck of some Indian housewife. I also understand that gold at $10.000 has the same utility as gold at $1.475 (maybe even more) so I don't think that West owes more gold to East what I do know is the west owes east a proper gold market, which implies higher nominal/real prices and a recognized transfer (not ounces but buying power stored in these ounces) of wealth from west to east.

Since my educational background is based in math and physics I'm always interested to finding out how exactly things work and when describing new system I tend to give a great weight to results when those systems are stress tested. That means how they perform at margin or in extreme situations. In case of Freegold I asked myself:

"who provides gold if there is none to be bought in a particular currency zone?"

I also assume that the creditor (owner of a currency, not the issuer) isn't interested in anything else from the debtor (issuer). And the answer has to be - the issuer will provide gold and that is the central bank.

I know that gold at $42 or at $1.475 doesn't really mean much and is only an accounting gimmick to provide excuse for additional cash to fund fiscal policies but if you intend to usher in Freegold you have to be ready to sell gold at first since since the amount of dollars is huge and would certainly put some pressure on a currency zone since as you yourself pointed out »West has overpaid for oil in the last few decades – in gold ounces«. Later the economy itself can take over and provide all the gold needed – at much higher prices!

Casper

Biju said...

@Alan2102

I don't have any official estimates of Gold ownership in India, but I know 7oz is the minimum.

(1) Most people I know whose only have a small plot of land will have to give at least 20 sovereigns of Gold to marry off their daughter. Each sovereign is 8 gms [BTW on a personal Note: I don't think giving dowry is bad. Both my sisters were given dowry because they were given their share of my father's property as Gold, which is very liquid and Gold is the last thing women want to part with in case of financial emergency). My cousin sister who belongs to less than Middle class was given 50 sovereigns, 6 months ago. Also please remember that due to historical reasons black money has always hidden and still now hide in Gold in India.
[Before British, the mughals used to have severe inheritance tax on property and hence people also hid wealth in Gold, so there is a lot of unaccounted Gold in India]

(2) During the period of 1998 to around 2004, Daughters were given more Gold because it was cheapest in local currency then. Now it is back to 25 sovereigns again. My Mother got 22 sovereigns in 1972.
My father who was a foreman then, told me it cost 60 days of labour to buy one sovereign but now it costs only around 30 days of labour for the same foreman to buy a sovereign. I still see Gold cheap measured in units of labour.

(3) During a much earlier period say 1920's(before Independence), Women had very little Gold, maybe an ounce of Gold then. People could not afford Gold then as per my Grandmother who is now aged 94. Maybe it would have been related to taxation during pre-independence period, but Gold has been abundant to India only in the last 60 years, I think.

Biju said...

@Alan2102

On a side Note - on my visit to India a month ago even with this high price of Gold, there is no shortage of people in Jewelery shops - they are still packed.

Silver is still an after thought which is only bought in certain states as utensils(plates/spoons/glass/...) but not as Jewelery. I have never seen Indian women wear Silver Jewelery in a Traditional setting (nowadays you see some modern women wear silver jewelery but it is still rarity).

Angel Eyes said...

1997: "According to a recent report, India possesses approximately 29,000 tons of gold... of which only 400 tons is held by the Government and the remainder is in private hands."

link

Casper said...

@FOFOA,

I hope my latest postz is still in your inbox since the Blogger removed/deleted it.

Casper

dojufitz said...

Article in todays 'The Age' - Aussie Melbourne paper with headline

'Silver's so hot it out-glitters Gold'

First time i've seen Silver in the biz section in a long time.....

Nothing worth reporting on the article for this blog.

Angel Eyes said...

"who provides gold if there is none to be bought in a particular currency zone?"

The Arbitrageur: No gold available? The bid rises in that currency until it is.

******
"...a proper gold market, which implies higher nominal/real prices and a recognized transfer (not ounces but buying power stored in these ounces) of wealth from west to east."
******

"...if you intend to usher in Freegold you have to be ready to sell gold at first..."

To usher in Freegold you don't have to stand ready to sell gold, only to discredit/expose paper gold, which can be done with a high bid for physical only.

Freegold is established by the bid, not the offer.

Casper said...

Hi Angel Eyes,

where were arbitrageurs in Zimbabwe? I know that by know this case is overused but a theory to stand has to provide same answers to same problems/issues.

I also think that Freegold is established by the bid.... of gold for currency and not vice versa as you suggest.

You see, the $IMF has been ready to sell and actualy has sold tonnes upon tonnes of gold in the last 30 years to support the value of dollar. The thing is, that gold was paper gold, so by destroying this market (establish physical only) would in a way negate the supply of gold for this time period.

Casper

radix46 said...

Mortymer,

“@Radix46: I think that one reason for posting that one was the part of looking at things differently and challenging authorities or checking why do we do certain thing certain way. Freegold is the same, many being fed-up with the present system. “
I can see that there are some parallels with regard to this aspect. However, what worries me is just that it is tempting to jump at something new when the old has gone sour. This allows an opening for those skilled in rhetoric to push a deeply flawed and immoral system, which is often simply an extension of what is causing the problems. Many of the ideas that Ken Robinson pushes have already been part implemented and it is their intrusion that I see as being a big part of the problem. They need rolling back, not development and further introduction.

The corollary here with the financial system is when Capitalism is blamed and it is Socialist policies that cause the mess - the socialisation of loss and the privatisation of profit. It is the banks that are the most visible beneficiaries and they are equated with Capitalism (and everything it represents in the public eye), so Capitalism is blamed. In a real Capitalist system this massive misallocation of capital could never have happened. It is the Socialist intrusion into the Capitalist system which has allowed (demanded) it, but this is not identified. As a result, when the system fails, people clamour for the opposite, or ‘something new’, which is actually something old and the very thing that is causing the problem in the first place. It is into this misinformation/knowledge gap that the ideologue manoeuvres himself, exploiting mismatch between reality and public perception. This is the same mechanism that ushers in Fascist dictators, money printing to fix excess money printing, retreat from reality to counter the effects from a previous retreat.

“I may agree with some his parts and disagree with other but look what we do here... we post different ideas and let others to evaluate just like you did now. That is great! I like that you spent time in writing down clearly what you do not like. Group more than an individual. :o) Sorry it did not fulfill your expectations but thanks I learned from your way at looking at this one.”

It is not a case of it not fulfilling my expectations, the problem is that it DID fully fulfil my expectations (sorry for the capitals, I don’t know how to do the html thing). He gets away with outrageous logical fallacies, opportunistic rhetoric, bashing of straw men all to support his deeply flawed conclusions. I see this trend advance in the world, due to an absence of the very things he despises so much in education – a thorough grounding in critical thinking and the fostering of abstract thought would allow an eleven year old to sail an aircraft carrier fleet through the holes in his “arguments”.

I’m glad you posted it. This sort of thing needs to be brought to more peoples’ attention.

Indenture said...

‪Central Bank Buying - Mike Maloney‬

JR said...

Hi Casper,

I also think that Freegold is established by the bid.... of gold for currency and not vice versa as you suggest.

This is what Angel Eyes wrote:

No gold available? The bid rises in that currency until it is.

When lots of people offer currency for gold at current prices but no one is offering gold in return, there is no "gold bid" for the currency. Those offering the currency for gold have to offer more to induce a reciprocal bid from gold.

********
********

I don't follow your reference here:

where were arbitrageurs in Zimbabwe? I know that by know this case is overused but a theory to stand has to provide same answers to same problems/issues.

Here are some ideas. Zimbabwe didn't usher in Freegold, they had a hyperinflation that was ameliorated by tying their currency to the dollar (and so far, there is a gold bid for the dollar):

Hyperinflation is very hard to stop once it starts. The only way you can stop it is by switching to a harder currency. But unfortunately for the dollar, this will not be a realistic option.

If the dollar tries to peg itself to a new parity with gold (a new "emergency" gold standard) in the middle of the hyperinflation process, it will experience a run on any gold it puts up as backing. Imagine if Zimbabwe had tried to stop hyperinflation by opening a "gold window," selling gold at a fixed price in Zim dollars. (See image at the top!)

In Zimbabwe, they only stopped the hyperinflation by officially switching to a harder currency, the US dollar. But what currency could the dollar switch to? The euro? This is a possibility, but more likely the hyperinflation will simply run its course over a few months and by that point we'll ALL understand Freegold.


Just Another Hyperinflation Post - Part 2

Cheers, J.R.

pipe said...

The majority of the gold community believes that the USA govt. has little or no physical gold. If they don't, this would help explain the inertia in repricing it. Obviously there are other good reasons for not repricing it as well.

Also, the refusal to permit an independent audit of the fed's books or of the physical inventory of the presumed national gold speaks volumes.

If there was any gold on hand, you would think there would at least be some spirited debate about using this 'barbarous relic' to pay down debt. Just the discovery that it doesn't exist (in physical form) would immediately crush the banking sector, if that is the score.

Aaron said...

Hello Pipe-

FWIW -- FOFOA believes the Treasury still has our gold. He said this in his It's the Flow, Stupid post.

"And for those of you that keep asking me if I think the US gold is still there… yes, I do."

--Aaron

pipe said...

Aaron--It would seem to me that an audit of this physical gold would precede any repricing, don't you think?

The US Treasury has made some subtle changes in the characterization of this gold over the years. That does not necessarily mean the gold isn't there, or even prove a change of ownership. But it curious, to say the least.

So if we get an independent audit, that might be a signal that a repricing is imminent.

Joel said...

Hi FOFOA,

Your quote:

In reality, gold reserves are any physical gold inside your currency zone, no matter who owns it. It's not just CB gold that counts, but all gold inside a zone.

You have said this twice in recent posts, can you please expand upon it? I am having a hard time understanding how gold in private hands lends credence to a currency if it is not backed by/redeemable for that gold in some form or fashion.

Michael H said...

Joel and Casper,

Casper said "who provides gold if there is none to be bought in a particular currency zone?"

That's a good angle from which to look at how freegold would work.

The way I see it, the flows would be like this:
1) Zone B sends goods to zone A.
2) Zone A sends currency A to zone B in payment.
3) Zone B spends currency A; mostly to cover current expenses, but some is 'spent' on gold as savings.
4) Step 3) will bid up the price of goods and services denominated in currency A. If there is no gold in Zone A, then another zone, call it Zone C, might offer gold to Zone B in exchange for currency A, which Zone C will then spend on current expenses.
5) If there is no gold in Zone A and no real goods being exported from Zone A either, then neither Zone B nor Zone C will want currency A, and the currency exchange rate of currency A will drop with respencts to other currencies. Then, Zone A will no longer be able to afford imports from Zone B.

To paraphrase what FOFOA has said, in freegold, someone, somewhere must be willing to trade your currency for gold at a floating rate.

Aaron said...

Hi Michael H-

You've got some good points there, but it's hard to tell how accurate your description is since you didn't specify which currency is being sent to whom. For instance, when you mention:

"2) Zone A sends currency A to zone B in payment."

I can't tell if, for example, Zone A is the United States, are you sending dollars or Yuan to China? The correct answer is of course, Yuan, and if that's what you meant it would have made more sense to me if you said:

"2) Zone A sends currency B to zone B in payment.

Anyway, could just be a misunderstanding on my part.


Below is a cut-n-paste from an email exchange I had with FOFOA a while back. In this exchange FOFOA describes international transactions/currency exchanges/gold valuation (post Freegold) in a very accessible way and perhaps this content might be of use to Casper. I find I have to re-read it frequently to solidify the concept in my mind.

Begin Email from FOFOA to me (bold emphasis is mine):

~~~

Regarding [Purchasing Power Parity], if you want to buy some Chinese goods in Freegold, you don't send your dollars to China. You take them to the currency exchange and buy yuan. You hope you get a good PPP rate at the exchange for the yuan, which you then use to buy Chinese goods. And vice versa.

A CB will use gold instead of foreign currency reserves in Freegold. If the CB wants to weaken its currency it will buy gold from the market. If it wants to strengthen its currency, it will sell gold.

So if a CB thinks the PPP of its currency is out of whack, it will correct it in the gold market.

If dollars buy less Chinese goods than they buy US goods, the Treasury would have to sell gold for dollars to raise the US$ PP. The most likely purchaser of that gold will be people in another currency zone that can buy the dollars cheap on the exchange (cheaper than Americans have to work for their dollars) and buy the gold. This currency exchange arbitrage will raise the PP of the dollar relative to that other currency zone.

So by the Treasury selling US gold, US dollars will thereby buy more Chinese goods.

If a currency finds itself too strong, meaning it can buy much more foreign goods than inside its own zone, which makes it hard for export businesses to sell its goods in foreign lands, it will use that strength to buy gold from the market. The ones that will sell gold will mostly be foreigners because they are getting a better price from the US Treasury than they would get in their home currency zone.

The arb will then bring down the value of the dollar to where the CB wants it.

Now think about whether it makes one lick of difference whether the gold seller/buyer is the CB or the aggregate public inside that zone.

~~~


--Aaron

Michael H said...

Aaron,

Thank you for posting that email from FOFOA.

I did mean that the country A sends its own currency to country B -- your 'incorrect' version. For example, if someone in the US was buying goods from China, that person would send dollars to China.

What difference does it make whether the American buyer, the Chinese seller, the American CB, or the Chinese CB makes the actual currency exchange transaction?

I understand how the CB would use gold to affect exchange rates, and why that means that the CBs would not hold foreign currency as reserves. But I would think the CBs can still be conduits for the trading of currencies en mass from their constituent private banks.

victorthecleaner said...

I'd like to draw your attention to these two articles by John Hussman on what is empirically known on the relationship between monetary base, short term interest rates and comsumer prices:

Sixteen Cents: Pushing the Unstable Limits of Monetary Policy
Charles Plosser and the 50% Contraction in the Fed's Balance Sheet

Victor

Angel Eyes said...

Casper,

Were ZIM$ bidding for gold, or for US$?

ZIM$ long had competition as store of value from US$, an acknowledged harder currency.

You can see the arb in action in the ZIM/US exchange rate in this case, not with gold as gold was not the harder currency being sought.

Poverty stricken Ziwbabweans, having no way to directly earn US$ in many cases, took to panning for gold to directly exchange for bread, in this video at the rate of 1g per loaf(!)... this is the arb in action in Zimbabwe.
the Arbitrageur is supplying the bread... one can triangulate the gold-bread-ZIM$ to find the ZIM$/gold rate, but I suspect in the real world at that time there was little interest in this rate.

This is the problem with theory... often it is extrapolated too far from the real world, requiring mental contortions that real life situations just don't use. Obviously theory has manifold applications(!), but it is also subject to the law of diminishing returns.

I would say that bread was overvalued maybe x50 (against normal circumstances), but this is marginal utility in action. Bread is lower down the real world pyramid than its golden capstone after all, and much lower down than Exter's inverted pyramid of abstracts that sits atop it.

Joel said...

Michael H,

Appreciate the comments, but my question was different from Casper's. You may have indirectly pointed me to the answer, though. Maybe FOFOA's comments about private gold being counted as reserves were related to a post Freegold environment; prior to a gold-backed currency environment though, I still don't see how gold held in private hands would ever lend additional credence to a currency. If everyone in the US bought huge sums of gold for their stores of wealth, I don't see how that would make our governmental balance sheets any less risky.

Michael H said...

Joel,

The 'post-freegold environment' is different from a 'gold-backed currency'.

Try this:

"If everyone in the US *ALREADY HAD* huge sums of gold in their stores of wealth ...", then continue your thought experiment.

Further, the governmental balance sheet is immaterial. Now, in this post FOFOA argues that revaluing the USG's gold hoard would indeed help the USG balance sheet, but that point only applies to official USG gold, not gold held in private hands within the US.

Where gold held in private hands within the US comes in is in lending credence to the US dollar.

"If everyone in the US *ALREADY HAD* huge sums of gold in their stores of wealth, then would foregners be more willing to trade in USD, knowing that there was plenty of gold available to store their excess production, for sale in US dollar denominated transactions?"

DP said...

Joel: I still don't see how gold held in private hands would ever lend additional credence to a currency. If everyone in the US bought huge sums of gold for their stores of wealth, I don't see how that would make our governmental balance sheets any less risky.

I think you'll find it is the people selling their gold, not the buying, that will provide their local currency with... well, currency. By people selling their gold in exchange for the currency, the external party that is looking to dispose of that currency and replace it by gold, will find a counterparty to their desired trade.

Who gives a damn about governmental balance sheets? We're talking about external partners looking to get rid of the paper of said government, not take on more.

DP said...

However, the governmental balance sheet will be important to the people within that currency zone. If they don't trust the currency, they will also try to sell it for gold. That's no good to anyone.

DP said...

What you're looking for, as an issuer of a currency, is an open and free market for people to exchange your currency for gold, and vice versa.

Provide the means for people to vote with their wallets, but then just don't give them any good reason to sell the currency for gold. Ideally, you want people within your currency zone to feel like they want to sell their gold for currency. That sold gold can then be passed on to other people, outside of the zone, who really want gold -- without having to draw down CB reserves to satisfy them.

FOFOA said...

**Blogger's "Good Comment Filter" strikes again**

Casper, I must draw your attention to two nice replies you received that were unfortunately sequestered by Blogger's daft software while it simultaneously let through one TRUE spam which can be found at the bottom of page 2 of the comments on More Freegold Fodder (in case any of you were in the market for "Bridal Jackets").

First, JR replied here about 8 hours ago. And Angel Eyes replied more recently here. Thanks to both of you for lightening my workload while enlightening others. ;)

Sincerely,
FOFOA

FOFOA said...

Hello Joel,

You mention my statement:

"In reality, gold reserves are any physical gold inside your currency zone, no matter who owns it. It's not just CB gold that counts, but all gold inside a zone."

Then you ask:

"I am having a hard time understanding how gold in private hands lends credence to a currency if it is not backed by/redeemable for that gold in some form or fashion."

Then later you surmise:

"Maybe FOFOA's comments about private gold being counted as reserves were related to a post Freegold environment; prior to a gold-backed currency environment though, I still don't see how gold held in private hands would ever lend additional credence to a currency."

The fact of the matter is that my statement at the top is true whether anyone understands it or not. Kind of like gravity exists whether or not you understand why. That's why I prefixed it with "in reality." It is true in Freegold, it is true today, and it was true back in the 80s and 90s when the dishoarding of private Western physical gold (in favor of paper gold) lent credence to the "oil-backed dollar" of the time. In Freegold, large centralized gold reserves like you'll find in CB vaults will be somewhat superfluous to the real reserves that are in private hands within any currency zone. The total reserves in any currency zone should be viewed as Centralized Reserves + Private Reserves, of which you'll never, ever know the exact count.

This not-knowing will drive Westerner's like you crazy, because they like to know (and have grown used to knowing) exactly who has all the "wealth" (for various and sometimes nefarious reasons) and to obsessively publish those names on fancy lists like those found in Forbes and the World Gold Council. In Freegold you'll know where the real wealth is in the same way we know where black holes are. We cannot see them directly, but we can see the gravitational pull they exert on everything around them, which is how we know they're there. The existence of invisible, privately-owned gold (which often dwarfs official gold) acts in much the same way; with a sort of "gravitational pull."

While one may be forgiven for thinking it was the paper gold market in the 90s that made the dollar strong, it was actually the out-flow of private physical that lent it the credence it needed amongst those who really counted; those that held the power to cast the judgment of value upon the dollar. And you'll also notice that the official physical reserves lay very still during this period, imagined conspiritard theories notwithstanding.

To use your words, currencies are mostly "backed by/redeemable" [for] goods and services… in the private sector. And in the process, they (the private-sector currency transactions) generate savings for those who produce more real goods and services than they consume. So what is most important for a currency's credibility among "super-producers" (those with the greatest power to pass judgment) is that those accumulated extra currency units are also "backed by/redeemable" [in] something other than goods and services, for the purpose of storing value.

Cont...

FOFOA said...

p.2

Now I ask, and this will take some thought on your part: Do you think those "super-producers" would rather redeem those extra currency units from the private sector, or at an official government "window" from the centralized reserves? Now this gets a little complicated as we consider all the possible variables. We have the possible variable of a "fixed gold backing" like we had during the Bretton Woods system. This not only limits the redeemability to central banks only, but it also keeps those "savings" fixed in value to a currency that is all-the-while depreciating against goods and services, rather than allowing savings to properly float against currency, goods and services. And it also creates a one-way, asymmetric flow of gold, which, while it serves certain special interests, is ultimately unsustainable.

Or we could have a "dirty float gold backing" where redeemability is available to anyone anywhere through the private sector. But the float is made "dirty" by the public sector enabling and assisting a confidence trick to keep physical flowing in one direction (similar to the fixed system), this asymmetric flow being key to certain unpublicized agendas, but likewise ultimately unsustainable and untrue to the value of savings.

Lastly, we could have a completely free floating gold backing. In this case there is no need for a government-run "gold window" because the price will be such that gold is available anywhere in the private sector. And gold being gold, there is no difference between official gold or private gold. If you accept my currency units in the trade of goods and services and you are the one (of the two of us) that ends up with extra units (because you produce more goods and services than you consume), then you can trade those extra units for gold on any major corner, in any city.

Now let's think about how the flow of gold will be different in this last, free floating gold backing scenario, than in the asymmetric one-way flows (West to East) of the first two options. We'll start small and local and then we'll expand our view to see a larger portion of the fractal pattern that emerges. And hopefully you'll start to see that the REAL currency reserves are in private ownership inside each currency zone.

Let's first think about the gold trade inside any currency zone. We'll think in broad-enough concepts that they would apply whether the zone is the US, China, the Eurozone or the Middle East. Doesn't matter which one. At the most basic level you have some people in a currency zone that are buying (physical) gold, and some that are selling. There are many reasons for them doing these two acts, but it will be helpful to us right now to simplify it down to "savers" (or economic net-producers) that are buying, and dishoarders or dis-savers (perhaps the elderly, retirees or ex-net producers) that are selling.

These basic transactions are net-neutral to the local economy, the value of its currency and the price of gold. As the young net-producer takes the gold and leaves some of his widgets on the table for the old-guy to consume, he hands the old-guy his excess currency with which to buy those widgets left on the table. Equal supply and demand—no net effect on the price of gold or the currency. But what if a zone has more savers than dishoarders, perhaps a zone with a growing, younger economy? Or vice versa, what if we have more dishoarders than savers as with an aging population, an older contracting economy?

If we have more savers than dishoarders the price of gold will rise until new dishoarders are created. These new dishoarders are people that are willing to dishoard as they see the price of gold (in that currency zone) rise, but they will also have competition from two other sources: 1. the local Central Bank currency manager, and 2. potential dishoarders from other, external currency zones.

Cont...

FOFOA said...

p.3

So in a growing, young, vibrant economy with more young savers than retiring dishoarders, the price of gold will tend to rise—which means the price of the currency is falling. But this will be met internally by new dishoarders especially if the (privately-owned) gold reserves are plentiful in that zone, which will keep the price of gold from rising too far or the currency from falling too far, which makes perfect sense in a vibrant economy.

If (the private) gold (reserve) is not so plentiful in that zone, the currency will continue to fall until gold is either supplied by the local CB (because it wants to strengthen the currency and keep it from falling further) or by the arb that develops to import some more gold to meet the rising demand (inflow of gold into this vibrant zone), which again makes perfect sense, and keeps the currency from falling too far.

So if you have a vibrant, growing economy, gold already within the zone will tend to accumulate in private hands rather than public reserves, and the net flow of gold across the border will be INTO the zone, rather than an exodus of gold out of the zone. A CB, in this case, that wants a strong currency to go with its vibrant economy, will sell public gold to its own people (perhaps through an official mint program). Or one that wants to keep its currency value suppressed will join its citizens in buying gold, increasing the physical inflow until it ultimately stops because the CB issued too much currency.

But what if we have more sellers of (physical) gold than buyers inside this currency zone? We will now have pressure from the supply side that will drive down the price of gold while driving up the strength of the currency, which as we all know from our $IMFS overlords, is bad for exports. In this case, the price of gold will fall until new savers are created. That is, until it reaches a price low enough that someone decides it is going to be profitable to become a net-producer by simply consuming less and buying gold instead.

But what if the economy is so dead that the price of gold would have to fall very far to create new savers from within that contracting economy? So far, in fact, that it would destroy the economy further by completely disabling any remaining economic competitiveness through the exploding value of the currency (remember, currency exchange value rises as gold price falls).

This scenario will be met, once again, by one of two (or both) forces. Either 1. the local CB will print currency to buy up some of that extra gold supply (already within the zone) and take it into the "official reserves" weakening that currency that is rising too fast by bidding up the price of gold with currency from thin air, or 2. foreign buyers will show up for the arb that develops to export that low-priced gold from the dishoarders inside the zone to savers outside the zone. Either (or both) of these forces will keep the currency from rising too far. And a net-outflow of gold from a currency zone with a contracting local economy, once again, makes perfect sense. Likewise, inside the zone, any gold that stays within the zone tending to flow from private into collective ownership also makes sense within a shrinking economy.

In an economy that consumes more than it produces, gold will tend to exit the currency zone in aggregate. And any gold that remains within the zone will, in the end, be mostly in public (collective) ownership. As the ability for the collective in this zone to tax its own contracting economy dwindles, and the dishoarding of the citizens finally subsides (because they simply ran out of gold to sell), the currency will start to collapse and any remaining collectively-owned gold will ultimately have to be deployed (mobilized) in defense of the fatally free-falling currency.

Cont...

FOFOA said...

p.4

Now if the people within this fatally-contracting currency zone are truly of the elderly, retiring and dying variety, this final collective dishoarding may be enough to carry them and their dwindling needs gently into that good night. But if they are not all 65 and over, if there is something more sinister at play in this zone, like youthful laziness/poor education, or decades of malinvestment funded through debt-financed consumption, or a compulsively expansionary collectivist government parasitically attached to its contracting host, then we will most-definitely observe a different outcome when this dire gold scenario is finally reached.

So Joel, it doesn't matter what you or anybody else says, writes, purports, knows, believes or understands. The reality is, and always has been, that the real reserves behind any currency are primarily the physical gold held in private ownership within that currency zone's physical boundaries, and secondarily the collective reserves held on public display. Those collectively-owned (official) reserves are only for the management (or mismanagement) of the currency until and unless they are finally used in defense of a full-blown collapse of the currency, the ultimate end of a mismanagement timeline, or in times of all-out war when gold becomes the ultimate (and only) transactional currency among distrusting neighbors.

Viewed this way, we can now see clearly how the US confiscation of gold by FDR in 1933 was the ultimate "Hard Money Socialist" act. Attempting to bring the entirety of a great nation's REAL reserves into collective ownership and then spewing them off in the most reckless currency mismanagement possible. Then came Bretton Woods, more Hard Money Socialism. The US then spewed off nearly 65% of its total reserves over 20 years while disallowing its own citizens to accumulate new real reserves.

We are truly arriving at the very end of the dollar's long and storied timeline.

You wrote:

"I am having a hard time understanding how gold in private hands lends credence to a currency if it is not backed by/redeemable for that gold in some form or fashion."

Then later you surmised:

"Maybe FOFOA's comments about private gold being counted as reserves were related to a post Freegold environment; prior to a gold-backed currency environment though, I still don't see how gold held in private hands would ever lend additional credence to a currency."

If I have done my job; if I have painted the picture that I set out to paint, then these statements should seem a little silly to you now. The first one is the complaint of someone trained by that great Hard Money Socialist FDR. "How on Earth could gold in private hands be more important to our trading partners than gold available at the great American gold window?"

And the second one, that perhaps I was only referring to that small window of time between the collapse of today's paper gold market and the next great Hard Money Socialism experiment by the great US government to which the world always bows in monetary allegiance… should seem likewise silly. I hope that I have illustrated through my clumsy paintbrush of words that I was speaking universally when I wrote what you questioned:

"In reality, gold reserves are any physical gold inside your currency zone, no matter who owns it. It's not just CB gold that counts, but all gold inside a zone."

If not, well then I have failed. But still I'll push onward. And luckily, as I wrote, "it doesn't matter what you or anybody else says, writes, purports, knows, believes or understands. The reality [simply] is."

Sincerely,
FOFOA

Casper said...

JR, Angel Eyes

Thanx for your answers but I have some issues:

I never intended to suggest that Zimbabwe tried to usher in Freegold. I merely suggested that as an issuer you need to buy the currency you issue in order to support it (and prevent hyperinflation). Do you now what the Zim CB was doing.... that's right, they were buying US dollars and selling Zim dollars (quite the opposite). SInce they had a bigger purse than ordinary people they were able to outbid them for those US dollars (the IMF and their lending policy insured that).

Hyperinflation didn't stop when they switched to US dollars, it even deteriorated... in Zim dollars! There was no hypeinfl. in US dollars because the US dollar didn't suffer from this diseas so prices remained stable while still skyrocketing in Zim dollars before it was abandoned alltogether.

To make myself clear... I'm not questioning Freegold I'm only trying to understand the mechanism that will? :-) facilitate the transition. I only suggest that the issuer will have to be ready to sell gold into the market before Freegold revaluation.

Casper

Casper said...

FOFOA writes:

»As the ability for the collective in this zone to tax its own contracting economy dwindles, and the dishoarding of the citizens finally subsides (because they simply ran out of gold to sell), the currency will start to collapse and any remaining collectively-owned gold will ultimately have to be deployed (mobilized) in defense of the fatally free-falling currency.«

Indeed.

Casper

DP said...

@FOFOA: smiley_98.gif

smiley_76.gif

mortymer said...

Hearken to the Sacred Geese of Juno Moneta
http://www.professorfekete.com/articles.asp

enough said...

China supporting euro/euro zone debt again and the euro shows its appreciation by pushing to 1.45 vs $

MADRID, April 12 (Reuters) - China will carry on buying Spanish debt and will help fund a restructuring of the euro zone state's savings banks, a Spanish government source said after the countries' leaders met in Beijing.;

"China has shown itself to be a very good friend to Spain as we've confronted the difficulties of the financial crisis, which fortunately are being solved," Spanish Prime Minister Jose Luis Rodriguez Zapatero told Spanish radio stations from Bejing.

Michael H said...

That is a great explanation, FOFOA. Worthy of its own post.

Indenture said...

HEARKEN TO THE SACRED GEESE OF JUNO MONETA

Indenture said...

the above link is to an online Google page not a .pdf download

FOFOA: I was thinking the same thing as Michael H. A lot of people don't read this far down in comments and your 'reality' deserves it's own linkable page.

JR said...

Hi Casper,

You may or may not be right , but your relative certainty in your worldview is not in dispute.

I'm sure you will continue to enjoy your monologue, as the fondness you have for your insights is apparent.

Cheers and enjoy your voyage, J.R.

Jeff said...

Cash4Gold, proudly arbitraging dishoarded western gold (2005-201?)

Casper said...

To JR and to anyone that may have been offended by my remarks.

I sincerely apologize if my approach has been too strong and arrogant. Something was missing in my understanding and after some days of re-reading I still didn't get an answer so I decided to intentionally provoke a more heated debate.

I got my answer now and would again apologize for the perceived "roughness."

Casper

mortymer said...

Side-note:
"June 11 1973: Libya nationalizes Bunker Hunt concession"
~wiki + http://tinyurl.com/6jedhtg (pg 145)

mortymer said...

Stripper Well Revitalization

http://www.fossil.energy.gov/programs/oilgas/marginalwells/

whiteelefant said...

Concerning the purchase of physical gold and silver in Europe:
in Germany you can walk in a store like proaurum with up to 15k eur cash and buy gold, silver, platinum anonymously (on the spot, no ordering).
in Switzerland you can buy gold kinebars and silver bars at UBS or at a cantonal bank (easier if you have an account): you fix the price and get the delivery a couple of days later (not really anonymous).

Once you have done it the first time, you just wonder what the fuss is about: walk in and just buy! There is absolutely nothing complicated about it.

Indenture said...

Jumping the Treasury Shark

Fantastic Inverse Pyramid I have never see before

victorthecleaner said...

whiteelefant said...

> you just wonder what the fuss is about: walk in and just buy! There is absolutely nothing complicated about it.

I have never lived in the US. I just wonder what would be different if you walked in a coin store in the US?

Victor
PS: In 2010, there were 90 tonnes of retail gold sold in North America - so it seems that coin stores do exist.

Joel said...

FOFOA,

Great explanation, yet another brilliant layout for the common man. Many thanks for taking the time to educate me. One bone to pick with you, though. I never said nor implied that your statement wasn't true. To lead with "my statement is true whether you understand it or not" is so condescending that it does an injustice to the rest of yet another fantastic blog of yours. "You wrote: "So Joel, it doesn't matter what you or anybody else says, writes, purports, knows, believes or understands", and "If I have done my job; if I have painted the picture that I set out to paint, then these statements should seem a little silly to you now." Think it through, man. It was my STATEMENT that created your RESPONSE, and therefore, my UNDERSTANDING. So my questions/statements may be silly to such a learned man as yourself, but they certainly are not silly to me. I ask questions not to question the "reality that simply is" , but to LEARN WHY the reality simply is.
This entire blog is absolutely amazing, with some of the smartest, most powerful discourse on economics on the entire internet. If the folks here could muster up even an ounce of humility, the medicine would go down much easier...

FOFOA said...

Dear Joel,

My sincerest apology for any perceived condescension. You should know that was not my intention because I'd have to be pretty stupid to be rude to someone who has so recently supported me in the stand-out way that you did (and of course only you and I know what that means).

As I have stated several times, when I write replies like this I may address them to the original poster but my intended audience is usually a much wider crowd, and in some cases it is actually everyone BUT the addressee. In this case I spent hours on that reply because it was you, but it was actually written to cover more than just your comment. So I'm sorry if you took any of my "rhetorical flair" personally. Unfortunately (or fortunately?) it was you that gave me a large target to take down publicly. And you should know by now that not all of my comments will make you blow milk out of your nose. ;)

On some views I try to make the reader think things through on his own by applying a little intentional ambiguity. On others, I try to be as unambiguous as possible. And that occasional abrasiveness you feel, unfortunately, is a byproduct of my attempt at clarity (sloppy though it may be). I'll have to try to work on that ounce of humility. :)

Sincerely,
FOFOA

JR said...

Stiglitz calls for new global reserve currency to prevent trade imbalances

Apr 10, 2011 (Bloomberg) — The world economy needs a new global reserve currency to help prevent trade imbalances that are reflected in the national debt of the U.S., said Nobel-prize winning economist Joseph Stiglitz.

A “global system” is needed to replace the dollar as a reserve currency and help avoid a weakening of U.S. credit quality, said Stiglitz, a professor at Columbia University in New York. The dollar fell to an almost 15-month low against the euro last week, and the U.S. trade deficit widened more than forecast in January to the highest level in seven months.

“By taking off the burden of any single country, we don’t have to have trade deficits,” Stiglitz said in an interview in Bretton Woods, New Hampshire. “Things would be much worse if it were not the case that Europe was having even more of a problem, but winning a negative beauty pageant is not the way to create a strong economy.”

… “Reserves are IOU’s,” Stiglitz said. “When IOU’s get big enough, people start saying maybe you’re not a good credit risk. Or at least, they would change in their sentiment about credit risk.”

Stiglitz, who won the 2001 Nobel Prize for economics, was attending the Institute for New Economic Thinking’s conference in Bretton Woods at the hotel where U.S. and European officials met in 1944 to remake the global monetary system.

… The existing monetary system means “there’s a very good risk of an extended period of low growth, inflationary bias, instability,” Stiglitz said. It’s “a system that’s fundamentally unfair because it means that poor countries are lending to the U.S. at close to zero interest rates.”


****

RS View: Forgive my old friend Joe for not speaking more clearly on this matter. He said, “Reserves are IOU’s,” which could inadvertently lead a dim listener to draw the erroneous conclusion that reserves must be IOU’s. He should have said, “As presently practiced, reserves today are largely IOU’s”. Expressed in this latter form, it clears the stage of clutter so that any reasonable thinker can more easily see that the practice of reserve management/accumulation has a natural course of evolution ahead, which will shift away from holding IOU’s and move more predominately toward holding that one reserve asset in the present assortment which is NOT an IOU. Gold. Physical gold.

FOFOA said...

Hello Victor,

Well, you have made it abundantly clear that you are less-than-impressed with the Eurosystem's "public gold distribution advocacy" that otherwise impresses me. From my American perspective, I find it quite significant that you can buy gold in actual fiat banks, not to mention the zone-wide special VAT treatment gold receives over other commodities. Granted, I have varying anecdotal reports from different readers, both in comments and by email. But taking them all into consideration, I still find it remarkably significant.

The gist of the negative reports I receive seems to revolve around that gold is not openly publicized at the banks (me: what, no neon signs?); there's often no physical stock available at the local branch, so there's a delay in delivery time; the manager tries to dissuade the customer from buying gold (sheesh, banksters); or not all banks have the gold thing going (are you sure? Did you ask? Took me years to discover my dentist also sold coke). But these all seem to me to be minor, mostly subjective complaints. The kind of anomalies you'd expect to see in a relatively new system that has been architected for something not yet launched.

What would impress you, Victor? TV ads for your bank showing off their gold products? "Gold4Cash" billboards? A nice glass display case when you walk in? As for the availability of physical, I imagine that's a bit problematic at today's prices, with thousands of branches to stock. There are a lot more banks in Europe than there are gold dealers in America! But at Freegold prices these banks could easily match their cash on hand with gold on hand. Whereas today they'd each need 100 ounces, in Freegold they may only need 100 grams. A little gold will go a long way after "launch day".

As for America, there have always been coin dealers here, even before it became legal again to buy gold bullion. Back in the 60s they sold collectible coins, even gold ones! But they were prohibited from selling any gold coins so abundant they could be considered bullion.

Personally, I always preferred the face-to-face privacy of a brick-and-mortar coin dealer. I also liked the direct cash-for-cash, here-and-now exchange. But even today, dealers—and especially trustworthy ones—are few and far between. In a large metropolitan area near me with a population of more than 15 million people, I know of two reputable dealers. How many banks do you think there are for 15 million people? In another area with 3 million I know of one good dealer. And sales tax issues vary somewhat from state to state, and also according to the size of the purchase in some places.

I'm not saying there aren't more dealers in those cities. There are, and I've talked to a few of them and rejected them from my list of those with whom I'd do business. I'm just telling you the number of dealers that have been recommended to me and that I would recommend. And that's about three for 18 million people. I've also had several readers in the US tell me they would have to drive several hours if they wanted to buy gold in person. In fact, I, myself, would have to drive six hours to get the best price from a dealer in person. And frankly, that's not as convenient as going to the bank because I have two of those less than a mile away.

Here's a great story from a great American coin dealer who was selling gold all the way back in the 1960s. Burt Blumert owned Camino Coins in California from 1959 until 2008. I posted the following story—as told by Burt in 2002—the week of his passing, which was just about two years and two weeks ago. Burt called it "The King Doesn’t Like Gold, Never Has, Never Will – Unlike Mr. Chang." And I simply called it "Mr. Chang's Gold"...

Cont...

FOFOA said...

Saturday, April 4, 2009
Mr. Chang's Gold

Will the price of gold ever go up? Yes.

Will the house of cards collapse? Yes.

Will the paper dollar be repudiated in the marketplace? Yes.

When?, you ask.

There will be a clear signal. The fat lady will finally sing when there is a hemorrhage of dollars leaving the US. That will be your indicator.

Where will those dollars go? Nobody knows – but it won’t take many of the greenbacks seeking refuge in precious metals to cause an explosion in price.

By the way, as the gold price increases, the king’s intervention will become more desperate. Remember, the king doesn’t like gold, never has, never will.

The last small rally that gold enjoyed carried it to $306 per ounce (it has since fallen back to $290). One of the reasons given for the run-up was that new money was pouring into gold from Japan and China.

We don’t get much reliable information about those markets but I’ve experienced very strong inclination among Asians towards gold.

Which reminds me of my favorite Chinese customer, Mr. Chang.

I don’t remember when he first became a customer but it had to be a decade before 1974. He barely spoke English, and I’m not even sure he was legally in the US. He worked in food service at United Airlines, and his wardrobe was Shanghai c.1930.

We didn’t have much in common. His English was primitive and my Chinese non-existent.

The only thing we shared was his interest in gold and my desire to sell it to him. In those days we were prohibited from selling anything that could be considered a bullion coin. That didn’t matter to Mr. Chang.

There was only one coin he would buy and that was the US $20 Liberty Head coin. He was familiar with it from China and to him the Liberty $20 gold coin was gold and gold was the Liberty $20 gold coin. Any other gold item might as well be counterfeit.

Through the years I saw him almost monthly. He brought his paycheck, would negotiate price, and then decide how many coins he wanted. (The $20 Liberty cost about $50 each.) I would give him change against his check.

Originally, I was amused that he came with his own balance scale. It was made of bamboo with a plate at one end and a weighted rock at the other. It was designed to balance the $20 Liberty. If a coin failed, it was either shaved or counterfeit.

After about a decade I became annoyed with his scale. "Mr. Chang, when in heaven’s name will you trust me and not need a scale?"

Cont...

FOFOA said...

...

He considered the scale just part of doing business, but he got my message and was embarrassed. Although his scale was present for the next purchase, I never saw it again after that.

In those days it wasn’t easy getting information about the gold price. There was no US market and the London AM and PM fixings were sometimes available on the radio but it often required seeking the financial pages of the Wall Street Journal to learn the value of an ounce of gold.

Mr. Chang followed the price very closely. He would call almost daily, and ask, "Wuddah prica London gol?"

Upon getting the information he would respond: "Very thank you," and that was that. There was never any doubt about it. It was Mr. Chang on the phone.

Then we didn’t hear from Mr. Chang for months.

"Has anyone heard from Mr. Chang", I asked? I was sure he was ill or worse.

Then one day there he was. "Wuddah prica London gol?"

I had answered his call and asked, "Mr Chang, have you been ill? We’ve missed hearing from you."

Dead silence.

How in heaven’s name did I know it was him, he wondered. Gold dealers are amazing, with wondrous perceptions. I guess he believed that every customer said, "Very thank you."

Mr. Chang retired. I don’t know if he had social security checks coming in, but his gold coins provided for his retirement. He came in as regularly as when he was a buyer. Only this time with one or two gold coins to sell. As he came in the front door, I noted he had coins in his hand, wrapped in tissue paper. He pretended he might be buying to keep me honest, but of course I knew that was not the case.

Then we learned from one of his old Chinese cronies that Mr. Chang had passed on. In fact he had gifted several coins to the friend who gave us the sad news. We dearly missed Mr. Chang, although "Very thank you" had become a part of the language in our office.

Some year or two later a young Chinese woman, whom I later learned was Mr. Chang’s grand niece, came in. She was an accountant and evidently had found Mr. Chang’s check stubs with Chinese characters on them breaking down how he had spent each check.

She was convinced there were gold coins some place and wondered if we were actually storing them. It was clear that she was not part of Mr. Chang’s inner circle.

She left rude and angered.

As if rehearsed, my employees looked at me and in unison we all said: "Very thank you."

_______________________________

Burt Blumert died on Monday after a battle with cancer. He was a friend of Ron Paul, a coin shop owner and the publisher of LewRockwell.com.
_______________________________


Sincerely,
FOFOA

enough said...

More competition of Comex's paper gold casino.......


Reuters) - The Singapore Mercantile Exchange will launch cash-settled gold, silver and copper futures contracts on April 15, the exchange said in a press release, which may carve out a new market for speculators seeking arbitrage opportunities.

"(The) exchange will begin trading cash-settled gold, silver and copper futures contracts from April 15, 2011, in contract sizes of 100 troy ounces, 5,000 troy ounces and 5 metric tons (MT) respectively," the exchange said in the note.

victorthecleaner said...

FOFOA,

thanks for your reply and for posting the nice story about Mr Chang.

The reason why I was insisting on the comparison of the retail bullion infrastructure in the US with that in Europe was the following. If there is a serious issue about confidence in paper money, I would not with to bet on the Europeans being able to distribute enough gold in order to avoid a run on other tangible assets such as food and fuel. People might wish to take this into account when they decide how to prepare.

Here is another, unrelated, comment. According to Reuters, the Chinese already hold 25 bn euros in Spanish debt and are now thinking about supporting Spanish savings banks (cajas) with another 9 bn euros.

Have the Chinese already decided that the US dollar will collapse and that they better support the next 'best' (i.e. most widely used) currency? If they prop up Spain well enough so as to prevent a further act in the debt crisis of the euro zone, the euro might keep standing while the US dollar goes belly up. They can then worry about the European sovereign debt a few years later when the dust has settled.

Although the sovereign debt crisis in Europe is as bad as a year ago (Ireland fell and now Portugal - and on top of this they are now considering hair cuts on Greek debt), the euro has not declined any further. In particular, gold in euros has been basically stable since the end of May 2010.

Victor

pipe said...

Enough, you posted, "MADRID, April 12 (Reuters) - China will carry on buying Spanish debt and will help fund a restructuring of the euro zone state's savings banks..."

If you dig around, you will see that it is China's 'Sovereign Wealth fund' that will buy the Spanish debt. So I guess my question is, what Sovereign Wealth Fund assets will be used to acquire the Spanish bonds, and how will the exchange work?

I believe the Chinese Sovereign Wealth fund holds USA Treasury bonds, among other things. Can they just hand the Spaniards some Treasuries (electronically speaking) and take delivery of the Spanish Bonds, or do they have to first sell the US Treasuries to get dollars, then convert the dollars to Euros, then buy the Spanish bonds?

Probably doesn't matter. Either way, it is the American taxpayer that is bailing out Spain, not the Chinese. Unless you assume that US Treasuries are worthless and will never be honored, in which case none of this matters anyway.

Notice how they didn't say, China will hand deliver physical gold to Madrid to pay for the Spanish bonds", lol?

Edwardo said...

FOFOA wrote:

"I also liked the direct cash-for-cash, here-and-now exchange."

These days it's checks for gold since paying cash above a certain amount obligates the dealer to fill out tedious paperwork for Uncle Gorilla.

Blondie said...

A few threads back Michael H made the following statement, to which I would like to reply:

"Just to make sure I understand you correctly: are you saying that the current monetary system is a result of concentrated power, and not vice versa?"

No, I'm saying concentrated power is a result of concentrated value, which is itself an effect of the current monetary system's use of promised value trading at par in the market with existing value.

Future value (debt) dilutes current value, and the issuer, spending it first into the market without the effort of creating it first, has value, and consequently power, flow to it. This is a real diversion in the flow of value, a misappropriation. After a time the only way to support such a system is to cut the masses in too, via the extension of credit to purchase value beyond their current productive efforts. Give them something for nothing too.

In our (current) value exchange (monetary) system, you cannot get something for nothing unless someone else gets nothing for their something or a group get less than market value for something.

It is a zero sum game. We can only actually consume created value; promised value (debt) can only be saved for future collection of payment. There are no "real" savings left, which is to say all the real value in our collective savings has been consumed already by those getting something for nothing. Governments get something for nothing, and redistribute part of it, at the expense of... net producers.

In a zero sum scenario deferral of payment (debt) requires an offsetting deferral of purchase, with both deferrals being of real as opposed to nominal value.

sean said...

Joel, I must thank you for asking a question which most of us here, I'm sure, were either too embarrassed to ask or wrongly assumed we knew the answer to already. I doubt there are many readers who can say that FOFOA's answer didn't help them deepen their understanding of Freegold. In fact I'm now starting to understand how Freegold will work "whether we understand it or not".

mortymer said...

@vtc, this is important to understand - Oldies-goldies:

http://armstrongeconomics.files.wordpress.com/2010/01/armstrong-economics-creating-the-floating-exchange-rate-system-011110.pdf

...related to your last post, between the lines - how one can not stop government/"public will" & how the only hope is that gold price in currency should be "freed" and VAT and widely distributed. :o)

mortymer said...

There was a q which I can ow post a bit insight:
"...How much gold is there in India? This is a quintessential question, but the answers are many. For reasons obvious in a country of continental dimension, it is not feasible to collect direct data by way of census to get a handle on the stock held, particularly by private households. The official estimate puts the figure at around 9,000 tonnes, although much higher estimates range between 10,000 and 15,000 tonnes..."

Deregulation of Gold in India
A Case Study in Deregulation of a Gold Market

http://www.scribd.com/doc/6725105/Deregulation-of-Gold-in-India

mortymer said...

And now from the IMFs kitchen again :o)

Council on Foreign Relations

POLICY INNOVATION MEMORANDUM NO. 1

Date: February 22, 2011
From: Moritz Schularick
Re: Managing the World’s Dollar Dependency

http://tinyurl.com/6j234uz

"...The global financial crisis has exposed a weakness in the international monetary (non-)system. Desired levels of currency reserves in emerging markets have jumped over the past decade. The dollar’s unique reserve-currency status has caused the bulk of these reserves to be parked in the United States, and the resulting capital flows have contributed to the under-pricing of risks in the world’s leading financial center. This underpricing formed part of the backdrop for the global financial crisis and may set the stage for the next one. To prevent a repeat of the past, policymakers must establish mechanisms to avoid excess reserve accumulation in surplus nations. In the early 1970s, U.S. treasury secretary John Connally could tell Europeans that the dollar was “our currency, but your problem.” Today the world’s dollar dependency is a problem for the United States, too.
The strategy proposed here rests on two pillars. First, a novel policy tool called the excessive reserve procedure (ERP) should be implemented to discourage reserve accumulation beyond prudent levels. Second, the need for precautionary reserve holdings should be reduced via unremunerated reserve requirements (URRs). Such a dual strategy would go a long way toward stabilizing and ultimately reducing the ratio of foreign exchange reserves to global GDP.The global financial crisis has exposed a weakness in the international monetary (non-)system. Desired levels of currency reserves in emerging markets have jumped over the past decade. The dollar’s unique reserve-currency status has caused the bulk of these reserves to be parked in the United States, and the resulting capital flows have contributed to the under-pricing of risks in the world’s leading financial center. This underpricing formed part of the backdrop for the global financial crisis and may set the stage for the next one. To prevent a repeat of the past, policymakers must establish mechanisms to avoid excess reserve accumulation in surplus nations. In the early 1970s, U.S. treasury secretary John Connally could tell Europeans that the dollar was “our currency, but your problem.” Today the world’s dollar dependency is a problem for the United States, too. The strategy proposed here rests on two pillars. First, a novel policy tool called the excessive reserve procedure (ERP) should be implemented to discourage reserve accumulation beyond prudent levels. Second, the need for precautionary reserve holdings should be reduced via unremunerated reserve requirements (URRs). Such a dual strategy would go a long way toward stabilizing and ultimately reducing the ratio of foreign exchange reserves to global GDP..."

mortymer said...

...cont:

"...The mechanism proposed here would be similar to the dispute settlement procedure at the World Trade Organization (WTO). An international organization would determine the legitimacy of sanctions, but sovereign governments would implement them. In the case of the new ERP, the IMF, after consultation with the parties, would authorize individual countries to take measures to safeguard financial stability. The U.S. Treasury would then announce a date after which interest payments on newly purchased Treasury securities by residents of country X would be reduced TO ZERO. [Mrt: !!!] To receive interest payments on Treasury securities purchased in primary and secondary markets after that date, the custodian banks would have to ensure that the beneficiary was not a resident of the country in question.

This approach would require cooperation from the major custodian banks. Because of their location and the focus of their business, they are highly motivated to remain on good terms with prominent governments in the international system. Indeed, more than half of the emerging economies’ reserve assets are held in custody at the New York Federal Reserve [Mrt: !!!], giving U.S. policymakers a significant advantage in administering this sanction..."

mortymer said...

cont2:
..."If it is to sanction excess reserve accumulators, the United States must be willing to reduce the attractiveness of Treasury securities to foreign buyers despite its large budget deficits. Since medium- and long-term U.S. budget discipline is desirable in itself, this is a price the United States should be willing to pay. Moreover, lower foreign demand for treasuries would be coupled with less currency intervention and hence a weaker dollar, which should boost U.S. growth and make necessary deficit reduction less painful."
[Mrt: Something along the lines of a certain individual who dropped holding US treasuries and went short?]

Reven said...

Here's something that's been bothering me about freegold.

According to Wikipedia, the total US dollar value of all gold ever mined is approximately $7.5 Trillion.

If freegold pushes the price to $55,000 an ounce, that would make the world's existing gold supply worth approximately $275 Trillion. However, the total assets of the world are estimated to be worth about $140 Trillion (debt assets + equities only). And it should be noted that global debt assets exceed equity by a sizable margin, making those debt instruments nearly worthless in a hyperinflation.

I can see gold going between $5,000-10,000, but it's difficult to imagine gold becoming greater than the entire combined assets of the world. And in a real hyperinflationary collapse, many of these paper assets would disappear, making the disparity between freegold's value vs. all assets that much more out of balance.

I would appreciate your input, because I am preparing to purchase a sizable amount of gold. Should we input all land and other tangible assets into the comparison of gold vs. all assets? That's all I can think of.

enough said...

Hi Pipe,

It seem to me less important what assets or currency china sells to support the EU/euro. Rather what seems very clear is that China stands with europe in a very committed way.

Several months ago China took huge private placements of Greek and Portugese debt when there was no other buyers. At that time even the ECB had not begun buying periphery soveriegn debt in any meaningful way.

China has chosen to stand by the Euro. Is it just a business decision, diversification or something more? I think we will get that answer soon enough.

FOFOA said...

Hello Reven,

Here's the post you are looking for:

How Can We Possibly Calculate the Future Value of Gold?

It is a fallacy to compare a snapshot of gold with a snapshot of "global asset values" because it ignores the time dimension in which gold flows. Even if you are correct about everything in the world (other than gold) being worth $140 trillion in 2011 constant dollars, the value of all the gold can be many many multiples of that amount. It is theoretically unlimited, unlike paper wealth which is self-limiting by its own objective metrics and economic ties. Paper wealth is limited to the upside but unlimited to the downside. Gold is the inverse of paper, unlimited to the upside, limited to the downside. It's not the total stock of gold that matters, but the flow from those that already hold it.

From the post:

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.

[...]

This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.


Cont...

FOFOA said...

...

And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequalled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.

[...]

Commodities and paper investments are limited to the upside by economic forces and future earnings metrics respectively. Yet they are unlimited to the downside for the same reasons. Gold, on the other hand, has none of the upside limitations that everything else has. It will only find its point of equilibrium when enough "stock" is reassigned to "flow" to meet demand.

[...]

Lastly, understand that currency flows
through assets, not into them. In fact, a limited amount of dollars can flow through the same gold many times, over and over, driving it higher and higher with each pass, as long as new gold stock is not coaxed out of hiding. And the interesting thing in this process is that, as I said above, it actually causes the opposite of the expected supply/demand reaction. With each pass-through of the dollar more "flow gold" is moved into "stock gold", not the other way around like commodities and paper.

This is the feedback loop. It is confirmation to the gold investor that his gold is a good investment. And it also says something very distinct about the alternatives. Namely that they are failing. And with this confirmation, it is from existing gold holders that less supply comes. This is not true of any other investment class because they all have objective metrics for valuation or economically limiting forces. All except gold.

[...]

So, cutting to the chase once again, the biggest fallacy in your model is using "Total above ground gold" as your point of comparison. It's not the stock that matters, it's the flow.

Now, if you have a supercomputer you can try to run this unimaginably complex flow algorithm. But be careful with your assumptions. One wrong assumption can throw the whole thing off by orders of magnitude.


Sincerely,
FOFOA

Reven said...

Many thanks for the excellent response FOFOA. Indeed, I failed to consider flow. Many of the giants who know the value that gold holds will never sell under any circumstance.

I find it interesting that there is very little gold available for sale on Craigslist. I had expected to see many individuals transacting on there, but it's virtually nonexistent in my home city which numbers in the millions. This is just further proof that gold flow is severely limited at current pricing. Physical gold holders are not like your typical buy/sell investors.

FOFOA said...

Hello Edwardo,

You wrote:

"These days it's checks for gold since paying cash above a certain amount obligates the dealer to fill out tedious paperwork for Uncle Gorilla."

For 99% of the population there are perfectly legal and moral paths for those who value 100% privacy with no paper trail whatsoever. For those capable of a little thought and ingenuity this is not a problem.

Ever been to an actual coin show? The premiums are usually better than APMEX by $5 or $10 per ounce, you can find some real deals on beat-up coins barely over spot, and you can find them all over the country with a little research.

At any given show there are usually dozens of vendors selling bullion products that will transact in cash. They'll give you their business card and a receipt of the price and transaction for your records, but they will not even ask your name if that single transaction was under $10,000. And if there's someone with you, you can each do a $9,999 transaction anonymously with this vendor, right there on the spot.

And this is just one legal path. There are others as well for those capable of a little thought and ingenuity. I'll also note that on domestic flights there is no requirement to report any amount of cash or gold.

http://www.coinshows.com/

http://www.numismaster.com/ta/inside_numis.jsp?page=CoinShowsCalendar&@mc=1&ThisWeek=1

http://www.coinweek.com/Events/?eventcategory=coin-shows

http://www.centralstates.info/shows.html

http://www.pnna.org/reference/coinshow.html

Sincerely,
FOFOA

pipe said...

Hello Enough,

You said, "China has chosen to stand by the Euro. Is it just a business decision, diversification or something more?"

It would seem that it is 'all of the above'. You mentioned Greece and Portugal debt offerings of a few months ago. At that time, I think it was leaked that US Treasuries were used for the debt purchase, so they seemed to be deliberately vague about it this time.

Buying the debt of new countries is a business decision, to aid market penetration. Swapping one pile of subprime debt for another is a form of diversification, albiet a lame one.

And the 'something more' could be simply keeping the game going. The chinese are big buyers of gold. I'm sure they would like to keep the current game going a while longer as they accumulate more.

costata said...

pipe,

When you see a surplus country like China using their sovereign wealth fund to buy assets around the globe bear in mind that the surplus cannot be spent in their domestic economy and two thirds of all global trade is conducted in US dollars.

Deciding not to purchase other assets is a de facto decision to hold US dollar exposure. If you value your US dollars at, say, 50 per cent of face value it could make many investments attractive that a local investor would find perplexing.

Writedowns on these debts are coming, no doubt about it. As Professor Michael Hudson often says: "Debts that can't be repaid wont be repaid". If bonds purchased by China are written down 30 per cent, payable in Euro and they carry a healthy interest rate it could be a great deal from China's perspective.

This return would be on top of any political and economic benefits they secure by playing the white night.

costata said...

mortymer,

That last series of quotes you posted show why the IMF are on the wrong side of history. This "plan" is the laughable "paradox of thrift" writ large. Penalizing trading partners for running a surplus in trade with you to stop them "over-saving" instead of putting your own house in order.

It is as specious an argument as the undervalued Yuan. Take a look at this analysis.

http://www.voxeu.org/index.php?q=node/6335

As the author explains, China is credited with an export to the USA of around $180 on every iPhone. In reality their value add is $6.50 (just the labour). The rest is paid out to components suppliers and intellectual property holders from Germany, Japan, Sth Korea and the USA. How would revaluing the Yuan resolve their trade imbalance with the USA?

If this IMF plan was ever attempted it would utterly cripple international trade whereas Freegold-RPG will improve the international trade system.

All those pining for a Yuan revaluation should be careful what they wish for. Real interest rates in China are negative. If the Yuan was floated it might revalue alright - downward against many other currencies.

Gabriel said...

Interesting story about Libya, monetary policy, and gold:

http://www.zerohedge.com/article/libya-all-about-oil-or-all-about-banking

battle on who is going to benefit RPG, and who will stay enslaved?

enough said...

From GFMS

via UBS morning metals report...

3) On the demand side, perhaps the most significant development was the shift in the composition of investment demand towards physical holdings. GFMS’ measure of physical bar investment surged to a record 880 tonnes (66% growth) last year, with most of the buying coming from Asian private investors, most notably from China and India.

In China, the physical bar story is a combination of supply push – as sellers expand their coverage by adding more and more outlets – and demand pull – as negative real interest rates prompt investors to flock towards gold. The other region that showed impressive growth was the Middle East at 88%.

Fairly flat Comex net positions further suggest that stronger hands were behind the rally. The expectation that the move towards physical bar investment will continue this year is positive for gold because it means the market will be less vulnerable to heavy washouts in the futures market

pipe said...

Hello Costata, you said, "If bonds purchased by China are written down 30 per cent, payable in Euro and they carry a healthy interest rate it could be a great deal from China's perspective."

Agreed. If you have some US Treasury Bonds, with a face value below some threshold, perhaps a billion dollars?, they are one of the most liquid assets on Earth, due to the size of market. On the other hand, if you have a trillion dollars worth, like China or Japan, they are worth basically nothing.

But what if you could take some intermediate amount, like $10 billion, and swap that for Euro denominated debt in a country with at least some sovereign gold, such as Spain or Portugal?

Then at some future point, they are desperate for more bailouts, and you already have your foot in the door. Then China says they want 5% backing in gold? Meanwhile they will be flooding the Iberian Peninsula with cheap shoes and electronics. Sounds like a win/win for the Chinese.

victorthecleaner said...

mortymer mentioned the article Managing the World’s Dollar Dependency by Moritz Schularick, Council on Foreign Relations.

I think the CBs of the mercantilist countries that have accumulated huge dollar reserves, know that in reality they hold open ended zero bonds:

1) The investment is unproductive - this is what Schularick proposes to legalize: If you accumulate the reserves only to manage your currency exchange rate, you contribute to the imbalances and cannot expect us to pay you any interest.

2) Indeed, more than half of the emerging economies’ reserve assets are held in custody at the New York Federal Reserve. Very prudent of the Americans. Sorry, China, if you want to sell your T bonds, we cannot ship you cash or actual tangible goods. In the interest of the other bond holders, we have to limit your investment choices to dollar denominated fixed interest instruments issued by domestic US counter-parties. This is for your own health and safety. Sorry.

The reserves are trapped. They are trapped in the same fashion as that part of the European gold (5000+ tonnes) that is still in custody of the New York Fed. Just as the dollar reserves of the emerging countries, this gold corresponds to a good part of past trade surpluses. Only the French had the balls to have the physical gold delivered. Everyone else made a generous donation to the American consumer class.

Gold bugs say the Americans are crooks because they closed the gold window. I say they are prudent because long before they did that, they had already made sure that the physical does not leave their shores.

Gold bugs say Gordon Brown is a fool to sell his country's gold. I say the British are clever making sure they have the 1200 tonnes in the GLD vaults on their own turf.

Some people think the Europeans are clever because they never pretended the euro was linked to gold. I say they are careless. Of their 11000 tonnes of CB gold, most is kept in New York and in London. Much of the privately held gold was sold to the Middle East and to Asia.

What do the Europeans have left to sell at the teller windows when their people run on hard assets because confidence in paper money collapses? Gold that is stored in New York? Gold that is stored in London? Sorry, but due to the unforeseen market disruptions, we have to enact strict import/export controls.

Have you ever wondered why Freegold has not happened yet? Is it because the US can still strong-arm everyone else and make sure they keep supporting the dollar?

Who is the patsy at the poker table?

Victor

Blondie said...

Victor said:

"What do the Europeans have left to sell at the teller windows when their people run on hard assets because confidence in paper money collapses? Gold that is stored in New York? Gold that is stored in London? "

The floating price means flow is always adequate to meet demand, Victor, the price just rises.
The European Central Banks could well be bidding rather than offering themselves at that time.
Freegold is not backed by official reserves, it is backed by all reserves, private and public.
The gold can sit it New York and London until the end of time if need be... it matters only who has legitimate claim of ownership. You only need be in direct possession of the quantity you require for flow. The bulk of the world's gold will always lie very still.

"... Under a Freegold Standard, currencies are technically, but not officially, backed by gold - a currency that cannot be exchanged anywhere anytime by anybody for gold will be avoided in favour of one that can. It is privately-held gold reserves that make themselves available for this exchange, at the right (floating) price, not Central Bank gold reserves. CB reserves are for currency credibility purposes, and a national savings reserve for facilitating international trade in times of distrust and/or great monetary stress. A Central Bank buys or sells gold to manipulate the value of its currency, buying to inject currency into circulation thereby weakening its exchange rate, and selling to remove currency from circulation and strengthen it..."link

"Have you ever wondered why Freegold has not happened yet?"

Sure. link

Blondie said...
This comment has been removed by the author.
Jeff said...

To add to Reven's comment on gold/silver, I just helped a friend sell some silver. We sold for 90% of spot; as the price has risen the premium on physical silver has dropped. Also, the velocity is very high; physical silver is flooding the market. Even dealers are selling silver coins for spot now. By comparison I see little gold for sale, possibly less as time passes and as the price rises. I believe physical gold velocity is falling. As Another said: (Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises.)

I suspect a top in silver is near.

Blondie said...

Jeff,

FWIW I just swapped the bulk of my remaining silver for gold privately, at the current GSR. No premiums, fees or hassles. Just barter.

I too have noticed diminished gold at market, but lots of silver.

I don't care if a top is near in silver or not, BTW.

costata said...

Jeff,

I suspect the "pump" in silver is reaching its zenith. Next comes the "dump". If my theory is correct the dump will be spectacular.

Blondie,

Adroit. Congratulations.

Cheers

Texan said...

FOFOA, I think your article on the time value of gold was one of the smartest things I have ever read. It was nice to see it again in the comments. Thank you for that. I analogize this valuation cpncept to extremely high end real estate or rare fine art, but of course it's even better than those stores of value for numerous reasons ( and more accessible). If the stock of gold is indeed all current and future excess savings, the price is much, much higher.

Then when you cut that total stock down to available stock, well who knows at what currency value it would clear. No one would sell unless they had to or really wanted something else that they could not otherwise obtain from their currency earnings.

It's actually an absolutely staggering concept, and frankly very frightening. I have no idea how society would reorganize around this concept

SS said...

America and China are already in a trade war.As per Paul Craig Roberts I think Libya is a ploy to destroy China's fifty trade contracts there and remove the only non co-operative African leader.China's support of Spain is to try to help the dollar on its way down the shute.What will Rossi's Energy Catalyser do to the oil price if it is really 'cold fusion'? First one Megawatt demonstration plant due to be in operation in October.

Blondie said...

Texan,

That's a great comment.

Gold is also fungible, which the other store of value assets you mention are not, and it's barely subject to entropy either.

I have previously called gold a pure equity in this respect:

"When (physical) gold is revalued by the free market, in order to give payment in full to the current surplus of claims (dollars), it will represent to its holder a pure equity position.

A pure equity position in what? In human value, no less.

A bold claim? Let's examine it a little..."


i think society will reorganize just fine, but debt will be replaced by equity, as per Metamorphisis.

Edwardo said...

V the C said,

"Gold bugs say the Americans are crooks because they closed the gold window. I say they are prudent because long before they did that, they had already made sure that the physical does not leave their shores."

Sounds like criminal behavior to me. And after the last several years, what reasonable onlooker of financial affairs, to mention just one key arena, here in The Land of the Free and the Home of the Brave can doubt that the crooks have been, and are, in complete charge. That's one major reason why "The East" is buying up physical like their lives and livelihoods depended on its acquisition.

Edwardo said...

Thank you for your response, FOFOA. When I wrote my brief comment I had in mind a well known local dealer who operates through a storefront and does not accept cash for purchases of a certain size. I am aware, though thanks to you my awareness has now been expanded somewhat, that one can transact in cash without burdensome paperwork in certain fora.

costata said...

Texan,

I second Blondie. Great comment.

Edwardo,

If silver continues into the mid-forties would you mind checking your local dealers to see if they are showing reluctance to buy?

Edwardo said...

Costata, after reading some of the recent comments wherein you, and a number of other posters, seem to feel that silver is approaching its zenith, I'm inspired to make that call when silver gets into the mid forties.

costata said...

Edwardo,

Thank you.

All,

Re: Euro

The site this piece comes from requires registration so I am extracting some hefty chunks to try to give you a sense of the significance of this article.

Consider the impact on demand for Euro from this development in the currency wars. My emphasis.

While the mutual fund was born in the United States, its European cousin – the Ucits fund – is becoming the dominant form of collective investing around the world.

To be clear, the US fund industry is still the largest in the world with assets of more than $11,000 billion. European funds, by contrast, have less than $8,000 billion in total assets.

But Ucits funds are rapidly gaining acceptance in Asia and Latin America – the fund markets that have been growing the fastest and have the highest potential for future growth. Ucits now have a majority share of the funds market in Hong Kong, Singapore and Taiwan. Similarly, they have become popular in government-sponsored retirement plans in countries such as Chile.

Why are Ucits beating out US mutual funds? Because they are taxed more favourably, although the greater investment flexibility of Ucits also plays a role.

A Ucits fund, on the other hand, is not generally required to distribute its realised gains each year. Instead, these gains are retained by the fund, and its share price increases in value to reflect these gains. Fund shareholders pay a tax on these gains only when they sell their shares in the fund.

NewCITS have three advantages over most hedge funds. First, they provide investors with more protections. For example, NewCITS are subject to the same rules as Ucits on conflicts of interest, disclosure of information and segregation of assets.

Second, NewCITS must allow investors to redeem their fund shares at least twice monthly. Investors in hedge funds, by contrast, are usually given an opportunity to sell their fund interests just once during a calendar quarter – or maybe even less frequently – and then only after giving notice.

Most importantly, NewCITS cost significantly less than hedge funds. The fees on a NewCITS will usually be in the range of 1.5 per cent to 2.5 per cent of assets per year. A hedge fund usually charges a similar annual fee plus 20 per cent of the fund’s annual realised net gains – but not 20 per cent of its realised net losses. US mutual funds do not have the investment flexibility of NewCits.

Amazingly, there were 33,000 funds in Europe in 2009, compared with just 7,600 in the United States that same year.

victorthecleaner said...

Blondie said...

> The floating price means flow is always adequate to meet demand, Victor, the price just rises.

I know that. But if they cannot sell any CB gold in significant quantities and rather have to induce private selling, they better have a good plan B. Remember that in summer 1922 it was a period of just two weeks and then the avalanche took off, unstoppable.

So the ECB may have only a comparable time window of a couple of week in which they would have to reprice gold and establish a credible and liquid private-to-price gold market. Otherwise, people will go for other tangible assets such as food or fuel.

Good luck with that.

Victor

victorthecleaner said...

Wanted to say "private-to-private". This thing does not have an 'edit' button, so all typos are for eternity...

Casper said...

Hi Victor,

I assume you're implying to Germany. We must not forget that there has been inflation of more then 10% p.a. raging for a couple of years prior to the onset of hyperinflation.

I can tell you fist hand that pepole can live quite calmly in an environment where prices are rising more than 10% p.a. for years. As Blondie suggests - if stuff flows (oil and gold) no problem, if it stops we have a problem.

That is why in post above I was suggesting that the CB's will try to use their gold (sell it - to oil!) to buffer the transition to Freegold. They'll make sure (or at least try) to keep the flow going.

Even FOFOA suggested that when gold exchanges stop trading paper gold we will hear of gold being shipped to ME for oil.

Casper

Blondie said...

Victor said:

"So the ECB may have only a comparable time window of a couple of week in which they would have to reprice gold and establish a credible and liquid private-to-price gold market. "


I don't know that this is a problem for the ECB as much as it is for the BIS, but a credible and liquid market is still required to allow gold to publicly find a level that creates equilibrium...

Neither is it the job of any CB to "reprice" gold; the market does that.

What you want to know, to entertain the possibility this whole Freegold thing could fly, is who will be the market maker in physical only gold, and where is their infrastructure?

Another and FOA stated that the BIS would be the market maker, and I see no reason to assume otherwise. They also stated that gold would stop publicly trading for a time, before restarting at a much higher level.

The BIS is the governing body so to speak of almost all Central Banks, so it would be safe to assume also that these would be the entities acting under the co-ordination of the BIS, and these CBs in turn have much to do with commercial banking operations and the flow of currency through these.

It is not too much of a stretch to think that physical gold windows to both buy and sell, with a small spread to cover expenses, in a co-ordinated 24hr live market, could be established at local banks the world over at fairly short notice, under the direction of the BIS through the CBs.

By opening this market with a fairly high bid, at a level the BIS is comfortable in their knowledge of the CB gold market is legitimate, Freegold is established. Probably fairly volatile to begin... flow from profit taking private holders (esp "traders") to begin, until they see that the price just keeps rising for the most part. We actually need very few transactions in this forum before most gold may just cease to flow altogether... those without it prior may have just been priced out of ever owning quantities as vast as several ounces... but the market has established a price, and the stock of value (wealth) has been redistributed.

Gold flow is only large when it is undervalued.


There is thus never a need for "CB gold in significant quantities" as you put it to ever be mobilized. The flow, quantity of gold wise, is tiny. The flow of value is huge. If you didn't buy prior to the event, tough. The real prize in Freegold is the equitable system, not the redistribution of wealth, so you'll get over it.

The BIS has large reserves and much credibility (gold continued to flow at CB level all the way before, during and after WWII via the BIS for example) to stand behind this system.

Private-to-private transactors can establish their relativity from this market.

As we have already agreed, physical flow will actually be relatively small at much higher prices, so I can't see a liquidity issue. Very small denomination coins have been proposed in Switzerland recently.

pipe said...

Hello Edwardo, you said, ".......silver is approaching its zenith, I'm inspired to make that call when silver gets into the mid forties."

If you, like me, suspect that the dollar system is starting to break down, then doesn't it follow that dollar pricing, especially for things that have served as money in the past, is not the way to value those money-like things?

Another poster mentioned selling silver based on the GSR. Now that makes more sense to me.

What doesn't make sense to me is the idea that precious metal portfolios should not be diversified. It seems to me that the higher you think gold will go in buying power (not dollar value), the less you need of it.

Example. Let's say an investor has enough gold to buy $1 million worth of stuff in today's prices. If gold increases by two orders of magnitude, in buying power, you would have $100 million in buying power (2011 constant dollar).

What if instead they had half that million in gold, a fourth in silver, and a fourth in platinum and 'other'? What is the worst case scenario? That the silver and 'other' go sideways in buying power? In that case you would have $50.5 million in today's dollar buying power in a freegold situation.

If you think a free gold situation would give you more than two orders of magnitude of gold buying power (likely) you should probably diversify even more.

Indenture said...

Greetings All: It is the 15th of the month and time to remind the Fellowship that we must Defend the Precious. If you are like me you come to this site every day to learn not only from FOFOA but also from the diverse, intelligent commenters who have turned this web site into the most valued and insightful discussion on worldwide economic theory anywhere on the net. FOFOA's recent piece Big Gap in Understanding Weakens Deflationist Argument sparked Rick Ackerman to say, "You might try tuning instead to the hyperinflation arguments of Steve Saville, Peter Schiff and a few others who seem less concerned with trouncing, slicing and dicing opponents than with presenting facts that might better prepare you for the financial crisis ahead. The very best of them, in my opinion, is FOFOA blogspot, where the essays are erudite, the discussion elevated and the arguments as knowledgeable as any you will find on the web. ZeroHedge can be pretty informative too, provided the hairy-knuckled provocateurs who hang out there have been fed red meat within the last 24 hours. (my bold:)"

That is exactly why we, as a collective, must help FOFOA maintain this forum.
Please donate today.

costata said...

pipe,

Wrong headed, more tomorrow.

Bon nuit

DP said...

pipe, you haven't given your reasons why you would buy silver, platinum/other?

If you "get" that gold will be revalued by orders of magnitude, and why gold and gold alone, then I don't understand why you would wish to diversify? What will you get out of hoarding other metals than gold? Is it perhaps "unfair" if you were to gain too much, because you came to understand the inequity of the present system and contributed to bringing it down (to the benefit of all) through taking delivery of gold? By not buying gold, you are in fact diluting that effort of yours.

Are you personally going to make use of these useful industrial commodities? Are you simply hoping to deprive that part of them from others, who do need them and will be forced to pay a higher price to coax you into dishoarding so they can go about their business? Do you think they will offer you leverage to the gold price rise, they will rise even moreso than gold?

I'm just trying to understand your reasoning in your last comment, above.

pipe said...

Hi DP,

I'm saying that I 'get' the FreeGold angle, and I 'get' that IF it happens it will increase gold's buying power by a couple of orders of magnitude (or more). I'll even go farther and concede that it is very likely to happen.

What I'm not willing to concede is that it is a 100% certainty. Nothing but death and taxes are in that category. And the latter could seriously impact your gold holding, the various comments about 'confiscation' not withstanding.

To me, the best argument against diversification would be if you could argue that silver, platinum, rural property, etc. are likely to go DOWN in buying power or economic worth in an economic environment where FreeGold is introduced. I believe the opposite is true: i.e. that in a FreeGold situation that silver, platinum, and a few other things will go up in buying power, even though they wouldn't go up as much as gold.

Obviously, silver has just had a great run. Someone that is in an all-silver portfolio would be nuts not to be averaging some of those winnings into gold. You have to use a bit of common sense here as to when to buy silver. But on general principal, arguing against any diversification puts a very high burden of proof on you.

As I said before, I love gold, to the tune of 30% non-land portfolio presence, and that is soon to be increased with silver exchanges.

DP said...

pipe, thanks for clarifying a little.

Everybody has to form their own conclusions, and despite the plain fact that I cannot offer you any 'proof', I no longer share your doubt that Freegold will come.

I just don't know when, or I would be even closer to 100% all in (although I am already very close by most people's standards, including yours).

I am just now doing my last bit for the cause, disposing of my final remnants of silver, that I mistakenly accumulated over a long period some time ago and in fair size (relative to my means) when I thought that was the best thing to do, replacing it now with gold. I now don't want to be keeping it from someone who has a real use for it, and I want to ensure my efforts towards breakdown in the existing system are concentrated, where they will make the most difference. In the course of this exchange, I have also received an education in the relative difficulty of disposing of silver compared to gold.

I also have come to believe that the price of silver, contrary to the effect on gold, is currently artificially and unsustainably inflated by speculation. This clearly differs from your opinion; an opinion I also used to hold. I will continue to spend any surplus each month, little as it might be, on gold and gold alone. I'll be hurting nobody, and helping everyone.

We each need to plot the best course for ourselves, based on what we have come to understand to date. Bon chance mon ami! ;-)

raptor said...

http://www.eurozine.com/articles/2009-08-20-graeber-en.html


Debt: The first five thousand years

Throughout its 5000 year history, debt has always involved institutions – whether Mesopotamian sacred kingship, Mosaic jubilees, Sharia or Canon Law – that place controls on debt's potentially catastrophic social consequences. It is only in the current era, writes anthropologist David Graeber, that we have begun to see the creation of the first effective planetary administrative system largely in order to protect the interests of creditors.

tek said...

I know FOFOA's post with Dagen McDowell was several weeks ago but Dagen seems most intent on cementing her status as "most clueless". In this video, she interviews Bill Fleckenstein:
Inflation: Really That Bad?

First time poster here...hope you enjoy.

Aaron said...

Today is the 15th and the polls are open people! Scroll on up if you'd like to Vote -- I just did.

--Aaron

victorthecleaner said...

One news item I am still waiting for is the following: Riots in Saudi Arabia. The royal family is overthrown. US military goes in "to ensure a smooth transition to democracy". Everyone thinks they are just after the oil. Then you learn that a couple of hundred members of the royal family were safely evacuated and wish to move to Switzerland. What you will not read about is who took the gold and why the US military is withdrawing so soon after the event.

You see, the real crook at the poker table spends every Krugerrand at least twice. Or even several times, once every 60-70 years.

When you are playing poker and you are convinced the ugly guy is cheating, but you know he is the only one with a gun, this does affect your perception of the rules, doesn't it?

Blondie,

> Another and FOA stated that the BIS would be the market maker, and I see no reason to assume otherwise.
> They also stated that gold would stop publicly trading for a time, before restarting at a much higher level.

If there is a substantial time lag before gold trades substantially higher, I said I would be concerned that the euro might collapse together with the dollar, just because I do not see how you would stop or divert the run on everything tangible.

Victor

Michael H said...

Victor,

Do you think the Euro would be able to recover and continue to function as a currency if there is a "run on everything tangible" in Euro terms? I.e., if there is a delay in the repricing of gold, and the gold does not flow immediately, do you think the Euro is done for good?

My opinion is that the Euro will see a severe dislocation, just like the USD. But whereas the USD will continue to sink into the abyss, only to re-emerge 0.5-3 years later with several zeroes lopped off, I think the Euro will be able to stabilize after a few months of severe inflation.

Blondie,

Thank you for the response. I will continue to think it through.

matt said...

Victor

"""I do not see how you would stop or divert the run on everything tangible."""

throughout most of Europe you can walk into a bank and exchange your Euro for physical gold at a floating market price.

And don't say you can do this in North America. I have tried it. They only sell paper gold in NA banks at the paper gold floating price. Most NA banks are authorized participants of the GLD ETF and will gladly sell you some paper. I have my doubts that there will be lineups at NA banks to buy GLD certificates.

matt said...

Edwardo

Silver is not topping out and probably will not for a while. Don't get to high on anti silver. There could easily be a silver/platinum/palladium bubble forming that could last 5 years or so. And it could buy the IMFS more time too. 180 is a better guess then mid 40.

Anyone who understands FOFOA knows that the silver bugs will eventually have a rude awakening.But it takes way longer for this stuff to play out then you can imagine. Peter Schiff knows the dollar and the treasury market is done and he has been waiting over 10 years now.

victorthecleaner said...

matt,

> throughout most of Europe you can walk into a bank and exchange your Euro for physical gold at a floating market price.

Remember October 2008 and May 2010? What was not possible for several weeks because the inventory was gone on day one?

Also, imagine you are a bank, and assume you still have some inventory. A long line of a thousand people has formed in front of the branch. They want to exchange their deposits for gold.

You can calculate that when this goes on for two more days and you keep losing deposits, your company will lose all their equity. Do you really think they will sell gold even if they had some left? There would probably also be some unexpected technical issues with the ATMs on that day.

Victor

victorthecleaner said...

Michael H,

> I.e., if there is a delay in the repricing of gold, and the gold does not flow immediately, do you think the Euro is done for good?

I think this is basically unpredictable. But I am concerned it is a possibility.

Just take a look at the balance sheet of the euro system and see how the euro is backed today. A lot of this is toxic or near-toxic government debt. When the dominoes start falling again, even French government debt will become illiquid and drop like a stone. If you followed the news in May 2010, you will have learnt that on the Friday before the weekend on which the European governments agreed to bail out the euro, eh, the banks, that even French government bonds had stopped trading and were in free fall.

The situation is made worse by the fact that the ECB cannot fully use the gold reserve to prop up the currency, for example, because a lot of it is stored elsewhere (London, New York) and not readily accessible.

The ECB has painted itself in the corner just in the same way as the Fed - just a tiny bit less seriously so.

Once there is a run on the deposits and people start buying tangible goods, the classic defence would be
1) raise interest rates
2) sell gold into the market

Raising interest rates would mean something of the order of 5 percentage points in one step. Volcker style.

The problem is this would immediately backfire because it would render basically all governments (including Germany by the way) insolvent within a few days. Unfortunately government bonds is how the commercial banks are refinanced by the ECB through repo transactions.

So either most of the commercial banks go belly up and people lose their deposits,

or the ECB converts the toxic government bonds into base money. Well, you have been discussing why this is not such a good idea either.

Victor

Terry said...

Another Doctor Paul, son of the feckless (per Edwardo) Doctor Ron Paul, is considering running for the Senate. We need more feckless leaders like the Pauls!

mortymer said...

@VTC:
IMVHO ECB does need to do anything, just to withstand the storm and so far it is doing rather "good" job.

The deal has been done, long time ago, behond the closed doors, many of them, the gold is being repriced. It is just not seen to public or anywhere on Comex/LBMA... Why should it anyway at this point?

Remember the first China-Venezuela or later on China-Russia swap line? When all newly agreed lines will be in place dollar as a reserve currency is in deep trouble trying to find a floor.

http://futuremoneytrends.com/April_14_2011.html

"...The BRICS (Brazil, Russia, India, China, & South Africa) came out with a statement calling for a revamped global monetary system that relies less on the U.S. dollar. Meeting on the Chinese island of Hainan, the group agreed to establish mutual credit lines denominated in their local currencies, NOT in U.S. dollars. They also stated that the current financial crisis had exposed the inadequacies of the current monetary order (code word for dollar). The BRICS are very concerned right now about the inevitable dollar devaluation due to out of control spending and deficits in Washington. They also were frustrated with the advantages and privileges that the U.S. has controlling the reserve currency, calling for a new "broad-based international reserve currency system providing stability and certainty" in an official statement."

http://futuremoneytrends.com/April_14_2011.html

mortymer said...

n.200 post:

Same issue, different source:

http://shandong.chinadaily.com.cn/china/brics2011/2011-04/14/content_12329531.htm

Sanya Declaration of the BRICS Leaders Meeting
(Xinhua)

"The following is the full text of the document.

Sanya Declaration

(BRICS Leaders Meeting, Sanya, Hainan, China, 14 April 2011)

1. We, the Heads of State and Government of the Federative Republic of Brazil, the Russian Federation, the Republic of India, the People's Republic of China and the Republic of South Africa, met in Sanya, Hainan, China for the BRICS Leaders Meeting on 14 April 2011.

2. The Heads of State and Government of Brazil, Russia, India and China welcome South Africa joining the BRICS and look forward to strengthening dialogue and cooperation with South Africa within the forum.

3. It is the overarching OBJECTIVE and strong SHARED desire for peace, security, development and COOPERATION that brought together BRICS countries with a total population of nearly 3 BILLION from different continents. BRICS aims at contributing significantly to the development of humanity and establishing a more EWUITABLE and FAIR world.

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