Monday, September 12, 2011

Once Upon a Time

_________________

The story I am about to relate to you was first told in a lecture hall at the School of Political Sciences in Paris (L'École des Sciences Politiques) on March 17, 1932, from the depths of the Great Depression. It is, perhaps, more relevant today than it was on the day Jacques Rueff delivered it. Rueff began with this:

"The story I am going to relate covers a long period. It is the life story of the gold standard, now afflicted with so grave an ailment that only time will tell if the victim will succumb or be left, at the very least, in a state of virtual paralysis." [1]

He said “only time will tell”… well, some time has passed, and it did "tell".

So what grave ailment was he talking about in 1932? What did time reveal since then? And how has this important story been misread over the years? I will try to answer these questions and to retell Rueff's story the way I think it should be told today. And my hope is that this will, in your mind, bring together many dissonant concepts, as it did in mine, into a grand, unified, long-line view of Freegold.

Jacques Rueff told the story of two different monetary conferences, two "committees of experts" that both met in Genoa, and changed the course of monetary history. The first committee gathered in October, 1445, and the second one began in April, 1922, so Rueff's lecture had ten years on this second conference. The two committees gathered under similar circumstances, to respond to monetary disorder in the aftermath of a protracted war, yet they came to opposite conclusions.

The first committee declared gold the new, sole monetary reserve, unleashing its 500-year reign as the governor of supply and demand that would act as the natural counter-balance to international trade for the next half a millennium. The second committee, under the guise of improving this system, destroyed it, laying the groundwork for the unchecked growth of global imbalance, perpetual malinvestment and the series of periodic monetary crises we have experienced for the last 90 years.

The 1922 Genoa Conference. The British Prime Minister Lloyd George on front row, left.

Prior to 1922, gold was a vibrant, fertile member of the global economic ecosystem — what I like to call the Superorganism that governs naturally, far above the ability of mere mortals. Rueff put it this way:

"Gold… governs all the components of our international transactions with faultless effectiveness… it is a forceful but unobtrusive master, who governs unseen and yet is never disobeyed. Nevertheless, it is too wise to oppose the inclinations of men. It never, for example, prohibits the purchase of foreign securities; taking all their actions into account, it guides the conduct of men in order to prevent the upsetting of the balance it is supposed to maintain. We should also point out that while guiding men's actions it respects their freedom of choice. They are always at liberty to buy according to their preferences, but the monetary mechanism, in its omnipotence, will raise the price of those items whose purchase is contrary to the general interest, until such time as consumers decide of their own free will to stop buying them. The gold standard thus resembles an absolute but enlightened monarch; he does not destroy man's freedom, but employs it for his own ends."

The sustainability (and, indeed, the very survival) of the global economic ecosystem is predicated not on balance in the monetary realm, but on the delicate balance between real production and real consumption. It is the flow of actual physical gold that, at least prior to 1922, moderates and regulates this complex balance because gold, like real production and consumption, exists in the physical realm and is therefore not subject to the politics of easy money. But following the economic destruction of Europe in WWI (1914-1918), the US experienced high inflation accompanied by a dramatic inflow of gold. So in the early 20s, along with raising interest rates and federal budget cuts, the US began a policy of gold "sterilization" to resist the natural price mechanism—inflation—that would have otherwise acted not only as a brake on the inflow of gold all through the 20s, but also as a spur on the struggling European economy:

Federal Reserve Sterilization of Gold Flows

When a country imported gold, its central bank could sterilize the effect of the gold inflow on the monetary base by selling securities on the open market…

Sterilization of gold flows shifted the burden of the adjustment of international prices to other gold standard countries. When a country sterilized gold imports, it precluded the gold flow from increasing the domestic price level and from mitigating the deflationary tendency in the rest of the world. Under the international gold standard, no country had absolute control over its domestic price level in the long run; but a large country could influence whether its price level converged toward the world price level or world prices converged toward the domestic price level…

Traditionally, economists and politicians have criticized the Federal Reserve for not playing by the strict rules of the gold standard during the 1920s.

…Federal Reserve sterilization in the early 1920s probably served the best interests of the United States.

-Leland Crabbe, Washington, D.C., 1988
Board of Governors of the Federal Reserve System [2]

The price mechanism is the Superorganism's governor in the delicate balance between production and consumption. It is what keeps the economy in a sustainable balance somewhere between starving shortages and ruinous waste. And the flow of unambiguous real gold has always been a key international transmitter of the price mechanism because gold is the physical-monetary proxy for economic goods and services, subject to the same physical limitations as goods and services. Modern currency, on the other hand, even though it flows and trades like a commodity, is subject only to political limitations, not physical ones, and is therefore qualitatively different (an inferior, infertile transmission medium) from the perspective of the Superorganism.

The flow of gold is the flow of real capital, even if today it is obscured by an electronic matrix of imaginary capital (infertile media). Today's debt (the bond market) is imaginary capital in that it cannot perform in real terms; with "real terms" defined as economic goods and services (under current economic conditions) plus gold—and this part is important—at today's prices. It is all nominal debt, but the price of goods and services—as well as the price of gold—is what connects it to reality. And at today's prices of each, bonds are imaginary capital. It is our obsessive compulsion to centrally control the price mechanism that sterilizes the vital signals that would otherwise be transmitted to billions of individual market participants keeping the monetary and physical planes connected.

The outflow of real capital from any zone signals the need to produce more and consume less. The inflow of real capital signals the need to consume more and produce less. The price mechanism transmits this signal to individual actors in the economy. The inflow of real capital will raise prices vis-à-vis real capital, which makes exports more expensive abroad, lowering exports and raising imports. The country with an inflow of real capital will have to start consuming more of its own production or else it will just pile up and rot.

Likewise, the country with an outflow of real capital will have to start producing more than it consumes. Again, this signal is transmitted to individual actors via the price mechanism. With less real capital upon which credit flourishes, credit will contract, general price levels vis-à-vis real capital will drop, the purchasing power of real capital will rise, and real capital will become more expensive in terms of goods and services. Exports will rise because exportable goods will fetch a higher price abroad, imports will slow because local prices have fallen versus the vanishing real capital, and people will have to begin producing more than they consume in order to survive.

The monetary plane, that electronic matrix of imaginary capital, obscures the simplicity of what is actually happening today, and it does so by design. But it's really simple, and hopefully I can help you see through all the noise. Everyone knows that the sovereign debt in Europe is a problem today. But all we hear are complex solutions proposed within the monetary realm. Consolidate this paper, roll over that paper, haircuts, pay cuts, job cuts, interest rate cuts, print, sell, buy, repo, reverse repo, reverse-reverse repo, rescue funds, POMO, SOMA, EFSF, SMP, EMP, ETA, ESPN; it can make your head spin after a while.

The lesson from the monetary changes made in the post-war 20s is that if you want the debtors to ever be able to repay their debts in real terms, you do not sterilize the vital spur and brake function of gold by locking its purchasing power. It is the price mechanism—price changes in goods and services—that transmits the arbitrage signal that causes gold to physically flow to where it has the greatest purchasing power. For a struggling economy to grow and expand to a point at which it can repay its debts, the gold not only needs to flow, but it must be a fertile member of the economic ecosystem so that it can perform its vital function.

I know this is difficult to see, so I want you to try a little thought experiment with me for a moment. I want you to imagine that the complex and confusing monetary plane doesn’t exist. You can still imagine the debt existing, but imagine that the debt is denominated in physical goods and services. So there’s only real goods and services… and gold—gold being the proxy for goods and services that floats in value against those goods and services.

(We can eliminate currency from the equation in our thought experiment because we know that we want a relatively stable currency—not too much inflation, not too much deflation—for the purpose of contracts and debt if we want a vibrant economy.)

Now imagine you have one country with debts denominated in goods and services. Let's call it Greece. Greece owes Germany X goods and services. Meanwhile Germany is still exporting goods and services while Greece is still importing. This leaves Germany with a structural surplus in its Balance of Payments and Greece with a deficit. But gold can reverse this flow in an instant on the BOP at a high enough price. And once it does, it will begin to exert the brake and spur forces on the two countries until the flow of actual goods and services finally corrects and reverses. Once that flow corrects, the gold flow (which is opposite the flow of goods and services) will reverse and subsequently the brake and spur forces will also reverse.

Gold flows in the opposite direction of goods and services. Remember when ANOTHER said, "gold and oil can never flow in the same direction"? Well it's the same thing with other goods and services. Germany and Greece may both be exporting and importing, but Germany is exporting more, which shows up on the BOP as a Trade Surplus and a Capital Account Deficit. At a high enough price, a small amount of gold can (and will) flow in the other direction, from Greece into Germany, and if its value exceeds the (net) trade difference between Germany and Greece, it will turn Germany's Trade Surplus into a Trade Deficit and a Capital Account Surplus.

Now jump back to post-WWI. Europe was the debtor with debts denominated in goods and services owed to America. But Europe's economy was struggling to get back on its feet, making it difficult to pay its debt in actual economic goods and services. So the proxy—gold—flowed from Europe to America in unprecedented amounts. This flow should have acted as an incremental brake on the American economy and a spur on the struggling European economy. But instead, the US sterilized the effects of this gold flow in 1920 and '21 while implementing "intelligent and courageous deflation" (President Harding's words), and then in 1922, the Genoa Conference sterilized gold's natural mechanism globally.

Once sterilized, gold flowed uncontrolled into the US right up until the whole system collapsed and beyond. This would be similar to Greece selling gold at today’s prices to pay off its debt. The gold would quickly be gone and then the economy would collapse. The sterilization of gold may be at least partly responsible for the roaring 20s, the Great Depression, the rise of Hitler and the Second World War.

You can't squeeze blood from a turnip. That's an old saying. It means that you cannot get something from someone that they don't have. In order to pay its debt in real terms, Greece needs to ultimately get back to producing more than it consumes. And as counterintuitive as this may sound, they will first need to run a BOP surplus in order to get there. You do that by exporting more value than you import.

I realize how backward this sounds, but that’s only because we haven’t seen gold function properly in more than 90 years—beyond living memory. And this is why the limited stock of physical gold is far more valuable than the paper gold promises of New York and London would have you believe. This is why Greece will never part with its gold at today's prices. It is far more valuable. Greece ultimately needs to get back to importing gold which is what happens when you produce more than you consume. But you can't get back to that place by spewing your real capital at imaginary capital prices.

At the true value of physical gold set by the Superorganism, Greece will automatically start running a Trade Surplus on its BOP and Germany will automatically run a Deficit with Greece. The high price of gold is the only factor that can achieve this goal. At that point Greece will be paying its debt in real terms and gold will be flowing. This will spur the Greek economy until that flow of gold is reversed and it starts flowing back into Greece. At that point Greece will have a vibrant economy. And then, as the gold flows in, it will start to act as an incremental brake, a natural governor that prevents the overheating of the new Greek economy. This will occur naturally. This is the future in real terms, regardless of all the monetary floundering. And this future cannot be managed by a committee of experts no matter what economic school of thought they practice. This is Freegold.

The elegance of this natural regulator is that, as long as it is free from systemic counterfeits, it functions regardless of the shenanigans of monetary "experts". That's because the Superorganism's price mechanism is a function of the purchasing power and flow of real capital, not the purchasing power and flow of imaginary capital (paper promises). To wrest control away from this "forceful but unobtrusive master" one must render its purchasing power and flow infertile in the global economic ecosystem.

What the 1922 Genoa Conference did was to institutionalize the "sterilization" of gold for the rest of the world through the reserve structure of the international banking system. And this bit of genius was decided by a "committee of experts" from 34 different countries. They did this by introducing paper gold—or paper promises of gold—into the international banking system as reserves equal to the gold itself. This wasn't the first paper gold, but it was the first time that specific paper gold (that from New York and London) was used as an equal reserve upon which credit can be expanded. What is acceptable as international reserves is critical because trade settlement is a function of the reserves. This conference was the birth of the $IMFS.

In 1922, they officially changed the old gold standard into the new "gold exchange standard", which Rueff said was "a conception so peculiarly Anglo-Saxon that there still is no French expression for it." The stated purpose was "the stabilization of the general price level" which you can feel free to read as code for sterilizing the price mechanism and its elegant governance of an extremely delicate and complex balance. This, of course, gave birth to the arrogance of the managed economy and its attendant science, Keynesian Economics (est. 1936) and its step-daughter Monetarism (est.~1956).

With the gold mostly staying put in London and New York, and paper promises of gold flowing as equal base money elsewhere, the monetary base was effectively duplicated. Credit could now expand without ever having to contract, at least not because of the unwanted flow of gold. But of course that's not how it actually works in practice. The "unwanted" flow of gold is not the cause, but the effect of real imbalances (physical, not monetary ones) between international production and consumption. So, obstructing the adjustment mechanism of real gold settlement set the world up for periodic busts, economically destructive punctuations and regular currency devaluations.

To use a modern buzz word, they expanded the 500 year-old international monetary base into a more flexible "basket" that included US dollars, British pound sterling, and gold. As dollars began to accumulate abroad, they would be deposited back in the New York banks in exchange for a book entry reserve on the foreign country's balance sheet. In this way, the unbalanced flow of trade acted only as an occasional spur, and never as a brake. The only brake would now come in the form of destructive crises and abrupt monetary resets.

Here's a comment I wrote back in May, 2010:

The US exorbitant privilege began at the International Monetary Conference of 1922 when for the first time international banks were allowed to accept not only physical gold, but also US dollars (paper gold) as reserves. But all US dollars held by foreign banks were put on deposit back in New York City banks. And there they were counted as local US deposits, the same as if you and I put our gold into the bank, in addition to being counted abroad.

These deposits were used as the basis for credit expansion in both the US and in the foreign countries claiming them as reserves. This process doubled the money supply paid out through the US balance-of-payments deficit for the last 88 years (except that money which France demanded in gold). US deficits never contracted the aggregate purchasing power of the US after 1922, the way deficit settlement is supposed to. It also exported US inflation outward. And it continues today.

The only solution to this problem is the explosive expansion of the gold base (volume x price). Volume can be expanded through mining, but not fast enough to suffice in a crisis. Therefore price will take the brunt of this reset. The price of gold will explode.

1971 was the first step toward Freegold. The final step is today.

1445

Now let's look back at the first monetary committee that deliberated in Genoa from October, 1445 until June, 1447. The Hundred Years' War was already more than a hundred years old at that time, as was the economic and monetary havoc that protracted war brings. By 1420, the French currency, the livre, was under severe market pressure to devalue. The King valued his livres at .78 grams of gold each, relative to the gold mark, the contemporary unit of weight for gold. But the marketplace was trading livres at only about 11% of that official value, or .09 grams of gold. The market had already devalued the livre by 90%.

Jacques Rueff describes the French King's response: In 1421 Charles VII "resorted to a series of measures bearing a remarkable likeness to those which were to be adopted in France five centuries later: the prohibition of exchange transactions by unlicensed dealers and the fixing of a scale of fees for such transactions; a ban on the export of gold and silver specie; the imposition of fines on notaries who stipulated payments in gold and silver marks, that is, in bullion rather than in livres, the intensive exploitation of France's silver mines; and an attempt to achieve a balanced budget by rigorous and methodical management… But all these efforts did not succeed in alleviating the financial distress. A variety of monetary adjustments—which might be termed devaluations—were devised, as usually happens in such troubled times."

Genoa spent 15 years under French domination during the war, but by 1445 it was its own city-state, a maritime republic and an important trading center and port for international commerce. It was also home to the Bank of St. George (1407-1805), one of the oldest chartered banks in the world. In 1444, the Bank was chartered to manage the public debt and make loans to the government, not unlike a modern CB or Treasury. "Niccolò Machiavelli maintained that the Bank's dominion over Genoa made possible the creation of a 'republic more worthy of memory than the Venetian.'" [3]

The Bank of Saint George

So when the fluctuations, weakness and debasement of the local and foreign exchange currencies "gravely unsettled" its marketplace in 1445, the Genoese government convened a "committee of experts" consisting of mint officials and Bank of St. George trustees to figure out a solution to all the monetary turmoil. The committee labored for almost two years, but could not come to an agreement. So instead, it issued a report in which the majority and minority set forth their views.

The minority report, which was rejected, recommended a "basket" monetary standard (although they didn't use the word "basket") consisting of 1/3 gold, 1/3 silver and 1/3 in the depreciating currencies of the countries involved in any transaction. The majority report on the other hand, signed by 15th century "Trail Guide" Benedetto Centurione of the house of Centurione and trustee of the Bank of St. George, recommended the adoption of the gold standard pure and simple.

Benedetto Centurione appears to have been the head of the house of Centurione, one of the wealthiest influential houses of international commerce. It had many foreign branches, each run by one or more of the Centurione brothers. As Rueff told it, "Nicolo and Giovannie were in Majorca, Raffaelo was at Bruges, and Paolo at Lisbon." They later opened branches in Antwerp and in the Indies, "and Christopher Columbus [a Genoese native] was undoubtedly one of their traveling salesmen."

But in 1445, as Rueff tells it, Benedetto "was quite aware of the fact that for half a century a large number of trading countries had adopted the gold standard. One after the other, Egypt, Syria, Yemen, Hedjaz, and some parts of the Greek world had adopted… gold." (Reminds me of a more recent Trail Guide who noted a certain Eastern taste for gold.)

In his majority report, Centurione wrote, "The banks will be obliged to pay in [gold] florins, exchange will take place in [gold] florins; in this way gold will not leave the country and, in time, by driving out bad money, it will constitute the wealth of the people." This was the opinion that prevailed in 1447. Soon the banks were required to settle credit imbalances in gold, the new banking system reserve, and to deposit one hundred gold pieces as security for fines in case they broke the rules. And all bank drafts drawn on Genoa abroad had to also be denominated in gold, thus making it the new international bank reserve, in the modern sense of the term.

As Jacques Rueff described it in 1932, this "plain and simple" recommendation would "endow the world with the most marvelous instrument of international co-operation in its history… The system was to function perfectly well until it was shattered—also at Genoa—by the second committee of experts, which in April and May, 1922, contrived to demolish the work of the house of Centurione."

Jacques Rueff

Like Centurione, Rueff also turned out to be a bit of a monetary architect himself in his later years. During the Great Depression, Rueff was a major figure in the management of the French economy. In 1941 he was dismissed from his office as the deputy governor of the Bank of France as a result of the Vichy regime's new anti-semitic laws. After the war he served in political office as the Minister of the State of Monaco, as a judge on the European High Court of Justice, and later as a key economic advisor to French President Charles de Gaulle. The 1958 "Rueff Plan" balanced the French budget and secured the convertibility of the French currency.

Rueff was highly critical of the use of the dollar as a unit of reserve, which he warned would cause a worldwide inflation. He was strongly in favor of European integration, and always remained a firm opponent of Lord Keynes' ideas. In 1947, Rueff critiqued Keynes' magnum opus, The General Theory of Employment, Interest and Money. After his critique of Keynes, Rueff's main critic became James Tobin, a Keynesian economist who would later serve as an advisor to both the Federal Reserve and the US Treasury where he would help design the American Keynesian economic policy during the Kennedy administration. It is somehow fitting that Rueff's archnemesis, Tobin, would be best remembered for his 1972 suggestion of the "Tobin Tax", a tax on the exchange of foreign currencies in response to Nixon ending Bretton Woods. [4]

The London Gold Pool

Jacques Rueff's advice led Charles de Gaulle to begin withdrawing physical gold from the US Treasury during the later years (1965-1967) of the London Gold Pool, and then to withdraw altogether from the Pool in 1968 which ultimately led to the closing of the US gold window in 1971. Here is de Gaulle speaking in 1965:



And here is a description of the subsequent failure of the London Gold Pool that I wrote for my 2010 post Living in a Powder Keg and Giving Off Sparks:

The London Gold Pool was a covert consortium of Western central banks, a 'gentleman's club' of sorts, that agreed to pool its physical gold resources at predetermined ratios in order to manipulate the London gold market. Their goal was to keep the London price of gold in a tight range between $35.00 and $35.20US.

London had become the world's marketplace for gold. For more than a half century nearly 80% of the world's gold production flowed through London. The "London Gold Fix" daily price fixing began in 1919 and only happened once a day until the London Gold Pool collapsed in 1968 and an "afternoon fix" was added to coincide with opening of the New York markets.

In 1944 the Bretton Woods accord pegged foreign currencies to the US dollar and the dollar to gold at the exchange rate of $35.20 per ounce. At that time gold was not traded inside the US, but in London it continued to trade between $35 and $35.20, rarely moving more than a penny or two in a day.

Through the first decade of the Bretton Woods system there was generally a shortage of US dollars overseas which lent automatic support to the fixed gold peg. But the US was running a large trade deficit with the rest of the world and by the late 1950's there was a glut of dollars on the international market which began draining the US Treasury of its gold.

Then, in one day in October 1960, the London gold price, which would normally have made headlines with only a 2 cent rise, rose from $35 to over $40 per ounce! The Kennedy election was just around the corner and in Europe it was believed that Kennedy would likely increase the US trade deficit and dollar printing.

That October night, in an emergency phone call between the Fed and the Bank of England, it was agreed that England would use its official gold to satiate the markets and bring the price back under control. Then, during Kennedy's first year in office the US Treasury Secretary, the Fed and the BOE organized the London Gold Pool consisting of the above plus Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg.

The goal of the pool was to hold the price of gold in the range of $35 - $35.20 per ounce so that it would be cheaper for the world to purchase gold through London from non-official sources than to take it out of the US Treasury. At an exchange rate of $35.20, it would cost around $35.40 per ounce to ship it from the US to Europe. So the target range on the London markets acted as a shield against the US official gold which had dwindled substantially over several years.

The way the pool was to work was that the Bank of England would supply physical gold as needed into the public marketplace whenever the price started to rise. The BOE would then be reimbursed its gold from the pool according to each countries agreed percentage. If the price of gold fell below $35 an ounce, the pool would buy gold, increasing the size of the pool and each member's stake accordingly. The stakes and contributions were:

50% - United States of America with $135 million, or 120 metric tons
11% - Germany with $30 million, or 27 metric tons
9% - England with $25 million, or 22 metric tons
9% - Italy with $25 million, or 22 metric tons
9% - France with $25 million, or 22 metric tons
4% - Switzerland with $10 million, or 9 metric tons
4% - Netherlands with $10 million, or 9 metric tons
4% - Belgium with $10 million, or 9 metric tons

And since they, as a group, were doing this in secret, it turned out that they were able to make a substantial profit in the first few years of the pool. Since they were buying low and selling high within a fixed trading range that only they knew was fixed, they reaped substantial profits and even increased their reserves as much as FIVE-FOLD by 1965!

But with the cost of US involvement in Vietnam rising substantially from 1965 through 1968, this trend reversed and the dollar came under extreme pressure. From 1965 through late 1967 the gold pool was expending more and more of its own gold just to keep the price in its range. Seeing this, France (who was one of the insiders and knew of the price fixing operation) began demanding more and more gold from the US Treasury for its dollars.

And as this trend progressed, the world was flooded with more and more dollars that were backed by less and less gold, creating an extremely volatile situation. Public demand for gold was rising, the war was escalating, the pound was devalued, France backed out of the gold pool, and in one day, Friday March 8, 1968, 100 tonnes of gold were sold in London, twenty times the normal 5 tonne day.

The following Sunday the US Fed chairman announced that the US would defend the $35 per ounce gold price "down to the last ingot"! Immediately, the US airlifted several planeloads of its gold to London to meet demand. On Wednesday of that week London sold 175 tonnes of gold. Then on Thursday, public demand reached 225 tonnes! That night they declared Friday a "bank holiday" and closed the gold market for two weeks, "upon the request of the United States". (So much for "the last ingot", eh?)

That was the end of the London Gold Pool. The public price of gold quickly rose to $44 an ounce and a new "two tiered" gold price was unveiled; one price for central banks, and a different price for the rest of us. Even today official US gold is still marked to only $42.22 per ounce, $2 LESS than the market price in 1968!


The Architects

In my opinion, there are two things we learned from ANOTHER via his mouthpiece FOA that outweighed all the other great insights they shared. Those two things are:

1. The true purpose behind the euro and its architecture, and
2. The effect the approaching euro launch would have on gold.

Following ANOTHER's revelations, Jacques Rueff was the first name I put on my own personal list of early ideological euro architects a couple years ago. The ECB itself pegs the beginning of "The Road to the Single Currency, The Euro" at 1962 with the "Marjolin-Memorandum". [5][6]

The Marjolin-Memorandum was the European Commission's first proposal for an economic and monetary union. Robert Marjolin (1911-1986) was a French economist and politician involved in the formation of the European Economic Community (EEC). He was 15 years Jacques Rueff's (1896-1978) junior and, like Rueff, he was an economic advisor to Charles de Gaulle. I mention this only to further the connection between the modern euro and Charles de Gaulle of the 1960s who complained publicly about the exorbitant privilege afforded the US by the use of dollars as international CB reserves, demanded physical gold from the US Treasury, and pulled out of the London Gold Pool which led to the end of Bretton Woods three years later.

What we learned from ANOTHER thirty years later was:

1. The purpose of the euro was to provide an international transactional alternative to the dollar.
2. The consequence of the launch of the euro would be that gold would undergo "the most visible transformation since it was first used as money."

Quote - Monday, August 6, 2001 - GOLD @ $267.20 - FOA: "The result will be a massive dollar price rise in gold that performs over several years."

Tuesday, January 1, 2002 - Launch of euro notes and coins
Friday, February 8, 2002 - GOLD ABOVE $300
Monday, December 1, 2003 - GOLD ABOVE $400
Thursday December 1, 2005 - GOLD ABOVE $500
Monday, April 17, 2006 - GOLD ABOVE $600
Tuesday, May 9, 2006 - GOLD ABOVE $700
Friday, November 2, 2007 - GOLD ABOVE $800
Monday, January 14, 2008 - GOLD ABOVE $900
Monday, March 17, 2008 - GOLD ABOVE $1000
Monday, November 9, 2009 - GOLD ABOVE $1100
Tuesday, December 1, 2009 - GOLD ABOVE $1200
Tuesday, September 28, 2010 - GOLD ABOVE $1300
Wednesday, November 9, 2010 - GOLD ABOVE $1400
Wednesday, April 20, 2011 - GOLD ABOVE $1500
Monday, July 18, 2011 - GOLD ABOVE $1600
Monday, August 8, 2011 - GOLD ABOVE $1700
Thursday, August 18, 2011 - GOLD ABOVE $1800


What I can tell you with full confidence is that this is only the very beginning of gold's functional transformation.


Here are a few more quotes from A/FOA:

It's important to understand that most of the world wanted to at least see another currency that could share some of the dollar's function. It didn't have to replace it. To this end, most every country gave some philosophical and political support in its creation.

++++++++++++

Within this change, gold would undergo one of the most visible transformations since it was first used as money.

++++++++++++

We are, today, at the very conclusion of a fiat architecture that is straining to cope with our changing world. Neither the American currency dollar, its world reserve monetary system or the native US structural economy it all currently represents will, in the near future, look anything as it presently does. Trained from birth, as all Western thinkers are, to read everything economic in dollar system terms; we, too, are all straining to understand the seemingly unexplainable dynamics that surround us today.

Western governments, the public and several schools of economic thought are attempting to define and explain what extent these changes will have within our financial and economic world.

++++++++++++

Asking more; what if the architects of a competing currency system and the major players that helped guide its internal construction, all took a hand in promoting the dollar's extended life, its overvaluation and its use; so as to buy time for this great transition in our money world?

++++++++++++

The actual debt machine that built much of America's lifestyle is now going into reverse as it destroys its own currency; one built upon a stable debt system with locked down gold prices.

++++++++++++

To compete in the new architecture of a Euro System currency, unrestrained trading of gold will advance its dollar and Euro price significantly.

++++++++++++

This not only has "everything to do with a gold bull market", it has everything to do with a changing world financial architecture. And I have to admit: if you hated our last one, you will no doubt hate this new one, too. However, everyone that is positioned in physical gold will carry this storm in fantastic shape. This is because the ECB has no intentions of backing their currency with gold and every intention of using gold as a "free trading" financial reserve. None of the other metals will play a part in this.

_____________

Here's something interesting. In Indonesia, CPI includes gold! This is very $IMFesque.

Inflation up, exports down
Esther Samboh, The Jakarta Post, Jakarta | Tue, 09/06/2011

SNIPS:

An uncertain global economy has put pressure on Indonesia’s economy, as the yearly inflation rate grew in August for the first time since January over surging gold prices, while export growth slowed due to sliding global demand.

Core inflation — the primary measurement of the country’s inflation rate, which includes gold but excludes volatile food and government-controlled prices — accelerated faster than headline inflation to 5.15 percent, well above Bank Indonesia’s 5 percent threshold.

“The increase in core inflation is not across the board. The impact of the gold prices increase is small, as gold is not a primary or secondary need for the people,” Eric Sugandi, an economist at Standard Chartered Bank Indonesia, told The Jakarta Post over the phone.

“In August, there was no help from lower import prices to offset the surge in gold prices,” Destry told the Post in a telephone interview.

Rusman announced that the surplus in the nation’s trade balance fell to $1.36 billion in July, its lowest level so far this year, halving June’s surplus of more than $3 billion. “The trade surplus narrows as exports slide and imports surge,” he added.

Exports slowed 5.23 percent in July as compared to June, reaching $17.43 billion, while imports grew 6.57 percent to $16.06 billion.

BI governor Darmin Nasution said increasing fuel imports and a slight slowdown in global demand may continue to pressure the nation’s current account — which includes trade balance — to book deficits starting in the fourth quarter of this year. “The fluctuation in the current account will be greater.”

“If the current account books a deficit, we will need capital inflows” to maintain a surplus in the nation’s balance of payment to build up the central bank’s foreign exchange reserves, he added.

This is a very interesting news article because it not only demonstrates how 90 years of the $IMFS has distorted foreign government benchmarks at the highest levels, but also how ass-backward this view actually is. Indonesia's Consumer Price Index should include food and exclude gold, not the other way around! In a fiat regime, you want your fiat to be relatively stable against the goods that make the economy healthy. But in this case, what they are registering as inflation (rising price of gold) is actually deflation in real terms because the purchasing power of gold in Indonesia is rising against things like food.

In Freegold, this rising purchasing power of gold against food would have the effect of an inflow of physical gold and a spur on the economy as exports rise due to being cheaper in gold elsewhere. But here's the catch: the signals are all messed up by the $IMFS! Indonesia is already running a trade surplus. And gold is rising versus food everywhere. It doesn't matter if you're producing or consuming more in your country today, gold is still rising. In this way we can know for certain that today's price of gold is not really the true value of gold (gold priced in goods).

And that's because the price of gold today still does not reflect the physical flow of gold that would normally be a function of arbitrage, with speculators transporting gold to where its purchasing power is highest. The flow of gold today is still sterilized by the paper gold trade within the LBMA bullion banking system that, by a recent LBMA survey, was around 250 times larger than the flow of new gold from the mines. That's a total turnover in the LBMA (sales plus purchases) of 5,400 tonnes every single day. That's the equivalent of every ounce of gold that has ever been mined in all of history changing hands in just the first three months of 2011. That's what the LBMA members, themselves, voluntarily reported. And that's a lot of paper gold that is still sterilizing the economically beneficial price mechanism that physical gold would otherwise be transmitting.

Yet things are changing, even today. That's what the rising price of gold since 2002 tells me. This is about much more than just a rising price. It's not just about a gold or even a commodity bull market. As FOA said, "it has everything to do with a changing world financial architecture." Gold's function in the monetary system is changing. And as FOA also said, "None of the other metals will play a part in this."

Gold will return to its pre-1922 function, but that does not mean we will return to a pre-1922 gold standard. This post is not about the merits of the gold standard. It is not about praising the hard money camp’s decision in 1445 over the easy money camp’s decision in 1922. It is about the choice of the Superorganism over the management of men. The pre-22 gold standard, although it allowed gold to function, still carried the same flaw I point to so often; that using the same medium for exchange and savings leads to regular recurring conflicts between the two camps.

This is an important distinction to understand. Gold's true function is relative to the real, physical balance of trade, not man's flawed, political-overvaluation of debt and other monetary schemes. In 1971, the entire planet switched to using a pure token money as its medium of exchange. These symbolic tokens do fail miserably and regularly as a store of value, but they work remarkably well as a medium of exchange. They are not going away.

The whole ECB/Euro architecture was built to turn Genoa 1922 on its head, to reverse the damage done and to restore the function of gold which Jacques Rueff knew all too well. The ECB has one plain and simple mandate, to act with regard to a target CPI that is statistically harmonized across different economies dealing with different economic factors. In other words, the job of the ECB is to maintain stability in the purchasing power of a common currency against the general price level in many different countries.

This simple architecture is designed to work best in Freegold, where the price and flow of physical gold will automatically regulate and relieve the pressure of economic differences between member states. If the ECB had been designed to assist the European economies, it would likely have been given the second mandate, same as the US Fed. The Fed has two mandated targets: CPI and full employment. These dual mandates are like fair weather friends, because when the heat is on—like it is today—they actually become dueling mandates. The ECB, on the other hand, is not mandated to assist the economy like the Fed is. In fact, FOA wrote back in 2000:

"Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold."

Like I said earlier, the monetary plane, which includes all that nominal sovereign debt in Europe, is only connected to the physical plane by two things, the price of goods and services (CPI or the general price level, on which the ECB has a mandate) and the price of gold (which the ECB happily floats). I think we can all agree that the aggregate debt is doomed at today's prices. It is fictional, imaginary capital. But those of you predicting the imminent collapse of the euro as a medium of exchange need to explain how nominal euro debt is more likely to break its connection with goods and services than its imaginary connection to gold at today's prices.

I'll give you a few hints. Unlike the US, where the expenses of the same government that calculates CPI rise along with CPI, and where the CB has conflicting mandates that benefit from a statistically-lowered CPI, the ECB has not only met its mandate, but done so credibly. And unlike Indonesia, the ECB does not count gold in its CPI (HICP). Instead, the ECB floats its gold publicly and without worry. So while you're wondering in which of the two choices the disconnect will happen in Europe, consider this: Over the last decade, the general price level has performed more or less as expected while the gold price in euro broke off in 2005 and rose 325% in six years:

January 1, 2002 – GOLD @ €310.50
Tuesday, November 15, 2005 - GOLD ABOVE €400
Tuesday, April 18, 2006 - GOLD ABOVE €500
Thursday, January 10, 2008 - GOLD ABOVE €600
Friday, January 30, 2009 - GOLD ABOVE €700
Wednesday, December 2, 2009 - GOLD ABOVE €800
Tuesday, May 4, 2010 - GOLD ABOVE €900
Monday, May 17, 2010 - GOLD ABOVE €1000
Monday, July 11, 2011 - GOLD ABOVE €1100
Tuesday, August 9, 2011 - GOLD ABOVE €1200
Monday, August 22, 2011 - GOLD ABOVE €1300


And those of you that incessantly argue that gold is just one of many commodities—an asset like any other that, when push comes to shove, will ultimately be liquidated in favor of symbolic token currency units—need to explain how the monetary plane, insolvent at today's low prices, will maintain any grip on reality at even lower prices. The fact is it can't. And that's why you can only maintain your arguments with fantastic stories of modern day all-powerful overlords enslaving the serfs to their graves. But unfortunately, that's not how a diverse global economic ecosystem actually works.

Our money is credit. “The people’s” money has always been credit. Credit expands and contracts based on the availability of actual money, the monetary base. 1922 was the first time they included a form of credit as the base itself. A Pandora’s box if ever there was one!

But don't assume there is coercion involved when I say credit is our money. It is the best possible money for a vibrant economy. It is how the pure concept of money emerged in the very beginning. When gold first became money, it was as the mental unit of account. I'll give you five ounces of gold worth of cattle and you'll owe me five ounces worth of milk and other goods and services. When we participate in a vibrant economy, we deal in credit denominated in money. When we withdraw from a mismanaged economy, we withdraw into the monetary base, we hoard the reserves. Holding credit is our vote for vibrancy. Hoarding reserves is our vote against the current economy.

Gold is in the process of changing functions in the global economy. And in this transition, "the most visible transformation since it was first used as money," it will plateau at a new, mind-blowing level before it resumes its proper function. This is happening. It must happen, because bullion bank paper promises cannot function like gold. So be careful what kind of gold you're holding (physical is what you want), or you might just miss out on the revaluation of the millennium. Gaining a deeper understanding of what is happening, as you can here, here and here, should help those of you that worry about buying gold now because a few analysts, who have no idea what they're talking about, keep saying this is the top. This is the "top range" prediction I made two years ago:


Here's the main thing, gold will work the same way as a reserve asset in Freegold as it did before 1922, even without going back to being the sole monetary base. Gold is superior to even the entire monetary plane in this regard. It is the sole monetary member of the physical realm. Whether it is part of the transactional currency system or not doesn’t matter to its balance-governing role. It can fulfill that role even in Freegold. That’s what the architects figured out! That was their Grand Induction. That’s how the euro architects are comparable to the Genoa Conference of 1445. And that's how Jacques Rueff is comparable to Benedetto Centurione. Probably far superior!

Sincerely,
FOFOA

[1] The Age of Inflation, Chapter 2, Jacques Rueff
[2] http://fraser.stlouisfed.org/docs/meltzer/craint89.pdf
[3] http://en.wikipedia.org/wiki/Bank_of_Saint_George
[4] http://en.wikipedia.org/wiki/Jacques_Rueff
[5] http://www.ecb.eu/pub/pdf/other/whypricestability_en.pdf p. 51
[6] http://www.ecb.int/pub/pdf/other/ecbhistoryrolefunctions2004en.pdf pp. 15 - 17

"It's worked so far, but we're not out yet." -Leonard "Bones" McCoy

287 comments:

«Oldest   ‹Older   201 – 287 of 287
S said...

ROW - Rest of World

Jeff Snyder said...

Thanks!

burningfiat said...

Paul I said:

The one unifying popular mood in the air is "make the bankers pay for their risk taking". European politicians must see that they can satisfy this popular mood by avoiding taking constitutionally contentious actions.

"Sorry $IMF, our hands are tied"

Win. Win. Protect deposits and nothing else. Force the poison back where it came from, US and UK.


Exactly...
When the bankers are forced to clean up after themselves and eat their losses regarding speculation it's bye bye $IMFS.

But let us see how it goes. I admit leap2020 seems very pro-Euro biased...

/Burning

M said...

@ burningfiat

I hope you are right. My only question is...

Why did they come out with the big Euro bailout in the first place ?

They could have stuck it to the IMFS right then and they didnt for some reason.

burningfiat said...

@ M

Hmm, I really don't know, maybe to buy time.
My belief though is that at some point Europa has to decide whether to go all in on bailouts of the existing $IMFS (which european banks are a part of) or take the Kierkegaardish leap of faith and count on equity to rise in place of the value lost on debt (Freegold).

/Burning

byiamBYoung said...

@Jeff S

My guess, but I read "Rest of World."

Regards,
Bradley

Michael dV said...

In medicine we have a convention regarding acronyms: you may use them in any article but you must define each first. This applies even to such common ones as CBC and WBC..I realize I'm fighting 10 years of bad internet writing but this would improve readability.


i know .....agh (ain't gunna happen)

Paul I said...

--- INTERLUDE ---

This one's for the managers of the $IMFS

"can't you see it's over,
cause you're the God of a shrinking universe"

http://www.youtube.com/watch?v=D5eFm3IGsk8&feature=youtube_gdata_player

JR said...

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

===============================

As The Shadow Banking System Imploded In Q2, Bernanke's Choice Has Been Made For Him

"And with the data confirming that the shadow banking system declined by $278 billion in Q2, the most since Q2 2010, it is pretty clear that Bernanke's choice has already been made for him. Because with D.C. in total fiscal stimulus hiatus, in order to offset the continuing collapse in credit at the financial level, the Fed will have no choice but to proceed with not only curve flattening (to the detriment of America's TBTF banks whose stock prices certainly reflect what a complete Twist-induced flattening of the 2s10s implies) but offsetting the ongoing implosion in the all too critical, yet increasingly smaller, shadow banking system...

...Which explains why tomorrow's decision is a formality: Bernanke has no choice but to continue offsetting the relentless contraction in shadow liabilities, which as of Q2 collapsed at an annualized rate of over $1 trillion. Incidentally this, +$1, is the very minimum that Bernanke will have to bring into reserve circulation to offset the relentless deleveraging of the once biggest contributor to American growth, which ironically is now the biggest adverse factor."


=================================

FOFOA comment

"...Credit money is borrowed into existence from the banks. This is what banks do. They expand their balance sheets to satisfy the debtors and for that risk they earn interest. They take the debtor's promise onto their ass(ets) and create liabilities that can be spent like base money created by the government.

This system will continue in Freegold with the exception of the securitization process. The securitization process allows the banks to offload their assets (risks) to savers relieving them of the need for future prudence. Securitization, or structured finance, was born in the 1970's, expanded beyond mortgages in the 80's, institutionalized for sub-prime debtors in the 90's and blew up in the 2000's."


Cheers, J.R.

M said...

"Deflation is impossible in today's dollar terms because policy will allow the printing of cash"

It is my and Gonzalo Lira's contention that we will get hyperinflation even if Bernanke's computer crashes that day.

Barney said...

"FOFOA’s proposal seems to confirm my identification of the social base of the hyperinflationist camp: a motley collection of petty speculative minnows, who are desperately trying to avoid the predation of the very biggest financial sharks and vampire squids — not to mention the Fascist State itself, which represents the interests of these predatory vermin. The hyperinflationists as a group imagine the dollar has reached the end of the line. They imagine this will lead to a revaluation of gold and the creation of a new monetary system to replace the dollar, driven by the dissatisfaction of the majority of the planet with the monetary policies of the United States."

The above paragraph was a retort to FOFOA's ideas in a very well written piece here http://pogoprinciple.wordpress.com/page/4/
This author believes that all ex-nihlo curriencies EXCEPT the US Dollar will hyperinflate. Neverfox referred to this article a while back but havn't seen any further discussion here. Anyone interested in FOFOA's ideas will find this a must read. cheers.

Piripi said...

Victor,

Can you please expand upon this statement you made earlier on the thread in this comment:

vtc said: "I don't count scrap because that's equivalent to somebody selling bullion stock which does not appear either in these 'commodity' type statistics"

I'm not following your logic; perhaps I'm not interpreting it as you intended. Cheers.

costata said...

Barney,

I read that series of posts which Neverfox linked. It was a somewhat interesting example of Marxian economic "logic" and ideology but it was hardly a "must read".

I'm sorry I don't have the time to go into this more deeply at the moment.

Cheers

J said...

This week the London Bullion Market Association is meeting in Montreal, the biggest gold industry conference of the year. China, Mexico, Russia, South Korea and Thailand central banks are also net buyers of the yellow metal

Tier 1 gold

However, the Basel III initiative is highly significant too because it would trigger a far wider use of gold within the banking system, not quite a return to the gold standard but the next best thing as far as demand for the yellow metal is concerned.

Presently Tier 1 assets include government bonds such as Greek bonds and a widening of Tier 1 to include precious metals is seen as a way of shoring up confidence in the banking sector with assets that do not require official rating because there is zero counter-party risk.

http://www.arabianmoney.net/gold-silver/2011/09/20/lbma-campaigns-for-gold-to-be-tier-1-asset-for-banks-under-basel-iii/

J said...

Blondie,
I can't speak for VTC but I also commented on that earlier. Why should scrap be counted in those stats?

If a gold bar or coin is sold to a dealer or individual it does not show up in these stats? If you go to Asia where there is a massive gold jewelry market a sale does not show up in these stats either. What is the difference? At what point is scrap gold lumped into the same column as gold coming from the mines? Where must this gold travel to?

Why is a sale of scrap gold any different than a sale of a bar? Gold is gold.

Anonymous said...

Blondie,

Can you please expand upon this statement ...

When you read what GFMS or CPM Group write about the gold market, you see that they think gold is a commodity, i.e. there is supply in the form of mining and recycling, and there is demand from industrial consumers (jewelry). They treat gold just as if it were copper or iron ore.

What they don't get (I actually think they downplay it deliberately) is that most of the physical gold that is traded, is a sale of existing above-ground stock. This does not fit into their scheme. Nobody would accumulate 40 annual mine productions of iron ore, store that as an investment, and start trading it.

So when you compare existing stock with new supply, you should count only newly mined gold. Melting down old jewelry and selling it is not materially different from selling some bars from your vault. For some reason, GFMS count the first but have no clue about the latter.

GFMS et al collect statistics about mine supply, scrap, official sales and about jewelry consumption and official purchases. Then they net it, and what's left is called 'other investment supply/demand'. Well, that 'other' is the biggest of all components. Isn't that silly?

Victor

Anonymous said...

The reason why GFMS count scrap but not the bar that is sold from the vault and not the piece of jewelry that is bought second hand in India, is that they get their figures from the large refiners. So they take whatever numbers they get and use them without thinking.

(Well, no, I actually don't think so. They are just part of the establishment and promote the doctrine in which gold is a commodity comparable to iron ore).

Victor

Motley Fool said...

My thoughts on scrap.

We should rather consider flow.

So in my mind mining supply, scrap jewelry and resold bullion all count as flows that will satisfy aggregate gold demand.

In which case the current estimates on the supply side are too low, since resold bullion is unaccounted for.

TF

Motley Fool said...

Granted, that resold bullion satisfies some unaccounted demand. So that side of the equation is also wrong. :P

JR said...

M,

"It is my and Gonzalo Lira's contention that we will get hyperinflation even if Bernanke's computer crashes that day. "

I'm glad that you are so willing to share what you and Gonzalo Lira think. Maybe you would get more mileage out of posting on Gonzalo's blog?

I suspect a lot of people don't really care what you think, because 1) this is FOFOA's blog, so FOFOA's ideas are pretty prominent, and 2) as you have made clear over the past few months, ala this repeated meme about hyperinflation and printing, you haven't bother to understand FOFOA and don't know what you are talking about.

For example, here is a comment from July explaining to you why money printing is not necessary to a currencies' devaluation (like an Icelandic-style currency collapse/hyperinflation) and further setting forward how in the case of the dollar, we will see a running hyperinflation caused by printing because of the ample incentive for these politically connected Power Elite Giants to actually encourage the kind of printing that will take an Icelandic-style currency collapse into full-blown Zimbabwe-style wheelbarrow hyperinflation.

We are in September and its clear that 1) you didn't understand this basic, elementary idea in July, and 2) you haven't been able to grasp it since then. This stuff is not rocket science, so I'm left to conclude you probably don't care to learn what FOFOA's position is and instead just want to keep up with the nonsense.

Enjoy that approach, I hope that works out for you!

Cheers, J.R.

M said...

"politically connected Power Elite Giants to actually encourage the kind of printing that will take an Icelandic-style currency collapse into full-blown Zimbabwe-style wheelbarrow hyperinflation."

Now we are getting somewhere. So with all due respect,unlike what FOFOA says, the deflationists are wrong about more then just one count. If there is no printing, there still will be a currency collapse/devaluation. That makes the deflationists wrong on 2 counts. First they are wrong that the Power elite giants will not print money. Secondly, they are wrong in their assertion that debt deleveraging creates demand for the said currency, because never in history has a debtor nations currency risen in value in the international markets as their economy imploded. Not SE Asia in 1997, not Russia in 1998, not Iceland in 2008.

Everything else about freegold and this blog makes perfect sense to me and I am not trying to start sh*t.

Michael dV said...

GOLD MANIPULATION from Zerohedge:
http://www.zerohedge.com/news/gata-gold-price-suppression-grows-more-brazen-maybe-asia-will-defeat-it

It has been rigged openly through outright sales of gold by central banks, as it was rigged openly in the 1960s by the group of Western central banks that operated what became known as the London gold pool, and, following the gold pool's collapse in 1968, rigged both openly and surreptitiously through central bank sales and lending of gold and by bullion bank short positions and derivatives that are supported by access to Western central bank gold.

Barney said...

Costata,
Thanks for the reply....Yes, "must read" may have been a little over the top there....I was quite hoping to provoke a response. I can see that you were not particularly enamoured by his reasoning.


Barney

JR said...

Cool M,

I'm glad we can try to see more eye to eye.

they are wrong in their assertion that debt deleveraging creates demand for the said currency

Maybe I misread you, are you suggesting FOFOA does not think that the dollar would collapse if the US did not "print" and the economy was forced to deleverage?

A fundamental point of FOFOA's is the hyperinflation is not the "printing," but the loss of confidence in the currency. The "printing" is the response to this loss inf confidence. From Big Gap in Understanding Weakens Deflationist Argument:

Fear is the main emotional motivator in any currency collapse, just like it is in financial market meltdowns. And as we saw even just last night, the herd can stop on a dime and reverse course 180 degrees overnight, from greed to fear, based on a single news item.

The initiating spark of hyperinflation (currency collapse) is the loss of confidence in a currency. This drives the fear of loss of purchasing power which drives people to quickly exchange currency for any economic good they can get their hands on. This drives the prices of economic goods up and empties store shelves, which causes more panic and fear in a vicious feedback loop.

The printing of wheelbarrows full of cash is the government's response to price hyperinflation (currency collapse), not its cause. This uncontrollable (knee-jerk) government response happens in some cases, but not all. Let me repeat: The massive printing that first comes to mind when anyone mentions hyperinflation is not the cause, it is an effect, in the common understanding of hyperinflation which is the collapse of a currency.


Here, the fear in question is the viability of the dollar's store of value function ($ debt). No printing needed, the lack of demand drives the collapse in value - from Big Gap:

First, the question. "Where will the money come from?" is a question of supply. Yet the answer to hyperinflation lies on the demand side of the equation. This is Rick Ackerman's big gap in understanding.

cont.

JR said...

cont.

"...But in the same way that the marketplace has no control over the supply side, the printer is powerless on the demand side. ANOTHER alluded to this years ago when he wrote:

Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"!

So it is the receiver of currency—not the giver—that determines its value. That's the power of demand. And what do you think happens to the printer when the demand side drops the rope? If he was pulling he falls on his butt. If he was releasing, he's now pushing on a limp string. And this is part of what confounds deflationists. They can only imagine hyperinflation happening while demand is pulling and the printer is releasing. They imagine "inflation-on-steroids," but that's not how hyper works.

The measure of any money's store of value is a continuum of time. It is directly linked to demand and velocity. Even the worst money (say, Zimbabwe dollars during the hyperinflation) works as a very temporary store of value. Perhaps you read stories about workers in Zimbabwe getting paid twice a day and then running out to spend it before coming back to finish the shift. This is an example of the briefest time period in which currency stores value.

The point is, this is the way collapsing money demand plays out in reality. It plays out as the collapsing of the store of value time continuum scale. And as the time in which a currency stores value becomes shorter and shorter, the currency circulates faster and faster...

You see, monetary supply and demand can act as exact substitutes for each other. A 50% rise in demand has the same effect as the 50% decline in supply. Or said another way, it takes a 100% increase in supply to counteract a 100% rise in demand. And that's exactly what we see happening today. A spiking demand for currency because of instability in some markets and the economy, as well as earthquakes and unrest in the Middle East, jacks up the price on the currency exchange and drops the price of other assets which is instantly met with quantitative printing (supply increases) to ease the pain, raise the price of assets, and recklessly counter that which is actually in the driver's seat today, demand.

Once again, during stable times, supply gently drives demand. During unstable times, demand drives (forces the hand of the printer who controls only the) supply. Did you figure it out yet? During stable times greed allows the printer of the currency to drive its value through supply controls. During unstable (or uncertain) times fear takes the wheel, leaving the printer at its mercy in the back seat.

So what are you afraid of? And what is everyone else afraid of? Could other people's fears ever affect (or change) yours? What are you more afraid of, running out of dollars or dollars becoming worthless? This is the problem with fear; it can turn on a dime without ANY notice..."

Casper said...

Hey M,

I think your statement of

"Secondly, they are wrong in their assertion that debt deleveraging creates demand for the said currency,"

needs a bit of clarification that might be useful.

Debt deleveraging actually increases demand for currency BUT only as a medium of exchange!, and the same time it decreases demand for the said currency as a Store of Value. I think that this can be seen quite well in current yield structure for american bonds. Time factor is less and less important as in "it doesn't matter much if you hold a 1y bond or a 10y bond - yields are more or less the same."

Of course we all know that time is of extreme importance when looking for a credible store of value.

Casper

JR said...

Couple more on FOFOA recognizing that bonds can't perform at today's prices, much less grow in purchasing power through a deleveraging. From above:

"Today's debt (the bond market) is imaginary capital in that it cannot perform in real terms; with "real terms" defined as economic goods and services (under current economic conditions) plus gold—and this part is important—at today's prices. It is all nominal debt, but the price of goods and services—as well as the price of gold—is what connects it to reality. And at today's prices of each, bonds are imaginary capital."

================================

From The Waterfall Effect on how deleveraging would break the dollar, which can't even perform in today's terms:

"While I view Robert Prechter as extremely bearish, I must say that I agree with him to a certain extent. The extent at which I do not agree with him is the steady state of the dollar. Prechter views the world through his Elliot Wave cycle theory, which is not unlike Martin Armstrong. But the problem is that the waves he measures are against the backdrop of a steady state dollar.

Like Prechter, I expect all aspects of the economy will continue downward to depths below that of the great depression. But during the great depression, we did not have Ben Bernanke and we did not have a purely symbolic currency as a measuring stick. We had a gold-backed dollar.

Think about this for a minute. The average retiree on Social Security receives about $1,100 per month, or $13,000 per year. This is a dollar denominated promise. If the crash from top to bottom is 90% or more as Prechter predicts, this would give each and every Social Security recipient the equivalent purchasing power of $130,000 per year when purchasing real estate, the stock market or even commodities. Basically everything.

And this will be true not only for Social Security, but for anyone on the receiving end of a dollar denominated promise, including all pensioners, anyone with a tenured job, like teachers and government workers, and including everyone in Congress. Virtually everyone with an income or cash savings will see their purchasing power rise ten-fold!

The problem with this view is that the real economy right now cannot even afford to deliver real economic goods at TODAY'S dollar purchasing power, let alone another 800% rise in purchasing power, with Ben printing new ones the whole way there.

So Bob and I both see a waterfall approaching, but how can we reconcile our seemingly opposite views on deflation?

Currency is the key!"


=================================

Its all about "real" not nominal - pretty sure FOFOA used "real terms" a bunch in his most recent for this purpose. Anyway, here is FOA to close:

"When the world begins to abandon a currency at the end of its reserve timeline, deflationary gains on debt instruments are an illusion of bookkeeping."

Cheers, J.R.

JR said...

Yay Casper!

Michael dV said...

@Barney
I read some of the referenced material on 'pogoprinciple'. I am suspicious of his use of his own verbage (ie Fascist State= USA and fiat= ex nihilo currency)...are you vouching for this guys work? Is he worth reading? How much does one need to read and how far back does one need to go to determine if he is a serious writer or just another long winded nutjob?
thanks

Barney said...

Hi Michael....No I am definately not vouching for the work of this self confessed 'marxist-in-recovery'. I was hoping to stir up some comment from fellow bloggers here to help broaden my own understanding of this subject matter. Interesting articles though if you have the time to just go back a page or 2.cheers.

Barney

Anonymous said...

JR,

I think your response to M could use some clarification.

Hyperinflation is the sort of inflation that you get when the velocity of money increases and the real value of money, i.e. its purchasing power, collapses.

Yes, it happens when confidence is lost and, as a consequence, the real value of the money in circulation drops. This explains why there seems to be a shortage of money in such a situation - there is just not enough nominal money you can use in the transactions in which you want to trade the usual quantity of real goods. Therefore, the only way of keeping commerce going is to accelerate the transactions. The velocity of money increases.

In the equation of exchange MV=PQ (M=money supply, V=velocity, P=price level, Q=real output) an increase in velocity coincides with an increase in the price level - given constant(!) money supply and economic output. But from this equation, you cannot see which one is the cause and which one the effect. Note that this works with constant (!) money supply.

Of course, the required increase in velocity causes a lot of friction, and this has often tempted the government or the CB to increase the money supply. This is even the correct response because the cause was a drop of the purchasing power, i.e. an increase in the price level. So you can compensate this either by increasing velocity (this is the only option the market initially has) or by increasing the money supply.

There is a second aspect though: In normal times, there is a relationship between short term interest rates and the part of the monetary base that is lying still and held as reserves of the commercial banks at the central bank. This in turn affects the velocity. Depending on the interest rate, there is a cash preference, i.e. a preference for holding bank reserves over owning bonds or loans. This relationship is described here:

http://www.hussman.net/wmc/wmc110124.htm
http://www.hussman.net/wmc/wmc110411.htm

The problem is that bloated reserves with near-zero interest rates are not stable. If the market interest rate increases, the part of base money held as reserves shrinks. The money starts moving.

This is the reason why

hyperinflation is the process of saving debt at all costs, even buying it outright for cash… because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn!

They have bailed out bad loans with freshly created base money. So far, this base money is sitting in bank reserves and is not circulating. But this situation is unstable.

If you read Hussman's articles, he explains that an increase of short term interest rates to only 0.5% would already send almost half of the bank reserves into circulation and cause a 40% increase in the price level.

So you need some 'printing' (aka creation of base money to bail out creditors) to get into a position in which the system gets unstable and hyperinflation is possible. But this is not the same as the 'printing' in response to an increase in velocity when the billion Zim-dollar notes are handed out.

Victor

JR said...

Victor,

So you need some 'printing' (aka creation of base money to bail out creditors) to get into a position in which the system gets unstable and hyperinflation is possible

No you don't, you only need the expansion of credit beyond the point at which it is supportable.

Certainly "printing"/expanding the money supply is done to influence this policy of credit expansion at the start, but banking can inflate itself without a supporting central authority.

There is no requirement for initial bailouts when "credibility deflation" starts to rear its head and the process of credit expansion starts to reverse.

The dollar would have collapsed long ago in a Icelandic style currency collapse/deflation/hyperinflation/delevergaging without bailouts.

The printing is what distinguishes the collapse scenario from the wheelbarrow scenario - both arise form a loss of confidence in the currency - the printing is the response that occurs "in some cases, but not all."

=================================

From Reply to Bron

"So let's pretend we've eliminated fractional reserve banking yet we still have gold loans. The big difference would be that the banks (or whomever) could only lend gold that was put on deposit for the expressed purpose of lending. And the note held by the depositor would be a time deposit, not a demand deposit. Demand deposits could not be lent. Does this sound like what you are imagining?

So the depositor could not spend that gold note as it is not a spendable currency, not a bearer bond redeemable on demand. Problem solved, right? Wrong. The depositor can no longer spend the gold he deposited, but the borrower can! And he will give it to someone in exchange for something, and that someone may deposit it with the expressed purpose of lending.

Now we will have two notes out on one piece of gold. The second borrower will now spend that piece of gold and soon we'll have three notes out on that same piece of gold. This leads to a "synthetic supply" of savings, granted they are time deposits, as well as an increased velocity of the underlying reserve (which suppresses its value just like volume expansion), all with 100% reserve banking.

Now these time deposit notes are more like Treasuries than base money, I'll agree with that. But at some point we always end up with a borrower who must default on the terms of his loan. And then those depositors will lose their savings."


...

"The use of money in any context, fiat, gold or seashells, has always entailed the use of borrowing and lending... And as long as economies function at a profit, debts are made and paid back without argument. However, when the eventual downturn arrives, some portions (perhaps a large portion) of the owed wealth (debt) cannot be returned.

It's here,,,,at this point in tribal life,,,,,,,that all of the context from above comes into play. The "reality" of life on this earth is this: ,,,,,,Some portion of society will use their influence or control of the leaders to make their debts easier to pay. In fact,,,,,it's times 2 for that number of government influencers ,,,, because even the ones that have debt owed to them will try to alleviate an impossible payback situation the ones that owe them face."


==================================

Money involves lending, its all good as long as it can be paid back, but the lending process eventually reaches it peak and the credit must deflate - there is eventually a "borrower who must default on the terms of his loan. And then those depositors will lose their savings." That's the hyperinflation/currency collapse.

The "tribal" response dictates how this inevitable loss of wealth unfolds and is allocated.

cont.

JR said...

cont.

So continuin on this fine linguistic/semantic distinction between currency collapse/hyperinflation and a running hyperinflation/Zimbabawe wheelbarrow style hyperinflation, here is some stuff on the printing that has occurred in the $s case - QE leading to the increase in excess reserves from a good FOFOA comment:

"The same goes for replacing existing credit money with base money, which is exactly what is happening today through QE2, among many other programs and guarantees. Base money and credit money are qualitatively different...

It is the base money that is hyperinflationary. Not the credit money...

Here is a good article about how QE2 is radically different than QE1 or anything else we've ever done since the Fed was created in 1913. And if you haven't read them yet, the links embedded in the article are just as important.

And here is the actual mechanism that allows base money to flow out of the "tethered" banking system, untethered, as explained by the Fed itself:

http://www.ny.frb.org/aboutthefed/fedpoint/fed01.html

"To meet the demands of their customers, banks get cash from Federal Reserve Banks. Most medium- and large-sized banks maintain reserve accounts at one of the 12 regional Federal Reserve Banks, and they pay for the cash they get from the Fed by having those accounts debited....

"When the public's demand for cash declines—after the holiday season, for example—banks find they have more cash than they need and they deposit the excess at the Fed. Because banks pay the Fed for cash by having their reserve accounts debited, the level of reserves in the nation's banking system drops when the public's demand for cash rises; similarly, the level rises again when the public's demand for cash subsides and banks ship cash back to the Fed."


Here's another common mistake: A high demand for cash is NOT a "high dollar demand." It is the opposite. It is a demand to untether one's self from the banking system..."


=================================

So lotsa semantics, but no need for printing to have a big devaluation/currency collapse/ hyperinflation, but you need printing for the "running hyperinflation" scenario.

The "money printing" is not necessary to a currencies' devaluation (like an Icelandic-style currency collapse/hyperinflation). Although "money printing" activities by a central authority like slamming "interest rates" or other means of promoting a policy of credit expansion are often involved in the start, if not the denouement of a big credit bubble that bursts.

with regard to the denouement of the credit bubble - its the the "tribal response" to this loss in confidence that occurs in some, not all cases, turns this process into the "running hyperinflation" Zimbabwe style wheelbarrow experience many often think of as the "hyperinflation."

The "tribal response" is essentially "the ample incentive for these politically connected Power Elite Giants to actually encourage the kind of printing that will take an Icelandic-style currency collapse into full-blown Zimbabwe-style wheelbarrow hyperinflation."

Cheers, J.R.

P.S. Sorry Victor, I have a very very strong distaste for Fisher, the quantity theory of money and mv=pq. I agree the formula doesn't really tell you much - the key is that V doesn't drive anything - V is the manifestation or result of demand for money. Demand for "money" drives the show -

"The point is, this is the way collapsing money demand plays out in reality. It plays out as the collapsing of the store of value time continuum scale. And as the time in which a currency stores value becomes shorter and shorter, the currency circulates faster and faster..."

Mike said...

Any comments/opinions on today's Fed announcement?

M said...

"The dollar would have collapsed long ago in a Icelandic style currency collapse/deflation/hyperinflation/delevergaging without bailouts."

Exactly.

I understand after reading what you just posted, that FOFOA was accounting for this all along. The only thing I would say is, again with all due respect, that in a few of his writings, he basically skips that part and goes straight into the printing part.

Anonymous said...

JR,

it seems that we do not agree on the recent history.

As far as I know, in 2008/9 the Icelandic Krona did not have an increase in velocity or a collapse of its domestic purchasing power. What happened was that the Krona collapsed in the FOREX market from about 90 ISK/euro to 180 ISK/euro (domestic market) or up to 280 ISK/euro (European market). This was a collapse in the foreign exchange market similar to what many developing countries experienced when international capital was withdrawn after an investment bubble. But as far as I know, there was no sudden drop in domestic purchasing power that would have resulted in an increased observed velocity and therefore nobody in Iceland was tempted or pressured to 'print'.

My vague understanding of the Icelandic economy is that they basically have to import everything other than geothermal energy and fish, and so the drop in the exchange rate caused a good deal of price increases. But their consumer price inflation peaked at about 18% annualized towards the end of 2008, and the annual average was never more than 14%. No hyperinflation in Iceland.

Something similar although less serious and a bit slower happened to the British pound. Again some imported inflation, but not yet hyper.

I agree that the same can happen to the US$ at any time, even without the 2007 bailouts and QE1/Lite/2 or OT2. But a drop in the FOREX market is not enough to get hyperinflation.

The market for eurodollars (aka US$ held at non-US banks) can indeed let the US$ drop relative to other currencies, leading to some imported price inflation, but I don't think it is sufficient to get HI: They [the eurodollars] were born in exile and will die in exile.

If you want to understand whether the US$ will hyperinflate or not, then you need to think about what makes velocity increase and what makes bank reserves move. I think that John Hussman's article gets very close to that. An increased monetary base with excessive bank reserves is the key risk factor.

FOA knew exactly what he was saying when he wrote

My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)

You see, he is not talking about an increase in velocity that forces the CB to print physical cash, but he is rather explaining the bailouts, i.e. buying bad loans with newly created base money.

If you wish to learn more about historical events of serious inflation, both hyper and not, I recommend

Peter Bernholz, Monetary Regimes and Inflation: History, Economic and Political Relationships, Elgar Publishing, 2006.

Victor

Anonymous said...

By the way, did you ever wonder why the Fed is doing these reverse repos? They have regular auctions to find out which interest rate they need to offer in order to turn bank reserves from demand deposits effectively into term deposits, thus preventing that money from moving.

This is their velocity detector. If they have to raise the interest they offer in order to capture the desired reverse repo volume, they know that the money wants to get moving. This is their red alert. In this case, they either have to dump a good part of their balance sheet into the market immediately, or they will experience a spike in velocity. I guess this is why Charles Plosser wanted to start shrinking the Fed balance sheet again.

It is funny that the ECB are doing something very similar. So they, too, are worried. The ECB calls this the 'sterilization' of their direct asset purchases, i.e. they say they want to immobilize one euro for every euro of bonds they have monetized. The key is again that they hold auctions, and they measure the interest rate they have to pay.

Victor

Piripi said...

Victor said:

”So when you compare existing stock with new supply, you should count only newly mined gold.“

Agreed.

When you asked ”Question for everyone: Who is selling all the gold?“, I interpreted this to mean physical gold flow to enable the continuing operations of the LBMA system, as per the latter part of your comment: ”Someone said that the Belgian CB had about half their gold on lease. Are the Europeans still propping up the London bullion market? Have the US meanwhile found some additional gold? Where? In Fort Knox or in Iraq?“.

I think the bulk of the gold being sold is paper rather than physical, and am interested in differentiating between the two in order to visualize current physical gold flow.

Possible scenario: Some entity is accumulating, so they have no interest in short term gold market failure. Another entity with an interest in the current gold market continuing to function is supplying. If we could identify the flow, we could perhaps see what is really going on.

I think we are on relatively safe ground to say that mining and scrap supply constitute physical gold flow, but all other figures are debatable.

2010 figures, as per GFMS:

Mine supply of ~2689 tonne


Scrap supply of ~1645 tonne


Total:                ~4334 tonne


Both these categories constitute physical flow to meet physical demand, regardless of where they came from. The fact that scrap is technically from existing stock does not alter the fact that in flowing it satisfied some demand for physical gold somewhere.

Also flowing physically is all physical gold stock that changed hands but does not constitute mining or scrap supply. This could be from the level of BIS earmarked (allocated) accounts for sovereign nations all the way to alluvial gold dust exchanged by a hungry prospector for a loaf of bread. This quantity is not only unknown, it is unknowable. The accumulators soaking up the weak hands' stock.

So not only is the largest category of physical gold flow completely opaque, but we then have many layers of presumption and dubious accounting practices to further take our eye off the ball.

There are several categories of gold flow which are not necessarily physical, but are regularly treated as if they were.

Into this category along with all obvious derivatives such as futures, options, forwards and unallocated gold I include all gold leased by CBs and all gold “sold” by CBs.

In both these type of transactions we must consider: did any physical gold flow? Did the ownership of any physical gold change, or the ownership of claims on gold? Were IMF sales for example physical sales or merely countries buying back gold pledged the the IMF?

If we don't know a transaction was physical, it seems unwise to assume that it was.

Victor said: ” Are the Europeans still propping up the London bullion market? Have the US meanwhile found some additional gold? Where? In Fort Knox or in Iraq? “
I take this question to infer that such new US supply could/would be used to prop up the LBMA, much like the London Gold Pool, and suggest as a possible answer current western scrap flow.

cont/

Piripi said...

/cont...

I would like to know where that physical scrap flow goes.

Weak hands all over the west are exchanging their old jewelry etc over the counter or through the mail... where is it going? Who is buying? Who owns cash4gold etc? Could any of this flow be going into the LBMA via whoever operates some of these buyers? Can we demonstrate that it cannot?

And how much of the flow that supports the London is just claims? Is the “European support” you reference physical?

A/FOA supplied a lot of contentious discourse on the monetary system, and the reason that we are here on this blog is that this discourse has proven remarkably consistent with subsequent unfolding events. This discourse alluded more than once that gold issuing from CBs to suport the functioning of the gold market was not physical but rather $IMFS claims. It was also stated that at some point the BIS would force these claims into real bids.

I interpret this as saying that the BIS will force real physical settlement at CB level, but the BB system will be hung out to dry- their claims will have to be consolidated (be massively devalued) to acquire any physical gold. There goes the liquidity of the $IMFS. What does the fine print of a CB/BB lease agreement say... is it reminiscent of GLD, where contracts can be settled in paper... and are denominated in dollars?

Does leased gold ever leave the vault of its owner?
I have seen no evidence, and thus cannot assume that it does.

DP said...

FOA: My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)

VtC: You see, he is not talking about an increase in velocity that forces the CB to print physical cash, but he is rather explaining the bailouts, i.e. buying bad loans with newly created base money.

Hi Victor,

1) Deflation: Widespread failing credit. Smaller M3/M4 broad money aggregates. Savings at the bank vanishing. Hoarding of physical cash. Bank runs. Cash under mattresses. CB physical note printing. Iced-up economy.

2) Bail-out QE/etc: CB reaction to credit failure. Swapping toxic loan securities for fresh base cash. No more money in M3/M4 broad aggregates - but certainly not less. No vanishing savings at banks. No cash hoarding. No bank runs. No cash under mattresses. No note printing. No iced-up economy.

3) Lighting the velocity fuse: Qualitative difference between that part of M3/M4 broad money that was credit, now converted to M1 base money on security failure. M1 base money can be spent immediately, M3/M4 credit money cannot because it's locked up in securities for term periods. Credit securities "money" could only have been spent after the underlying ran to term and was repaid with base money, or the security was sold to someone else for base money. It's now potentially Fresh'n'Wild.

4) Velocity takes off: M3/M4 take off if banks will lend. Prices will go up anyway, since a $1 spent twice is the same thing as two $1 being spent in the same time. The ice melts now in the heat of a growing fire. No cash under mattresses - it's changing hands faster and faster. Credit that you have to wait before you can spend it, will no longer be as acceptable to the sellers - they'll prefer cash they can turn around and spend immediately with someone else. Now the CB printing will be necessary, because people can't spend the notes fast enough. Electronic base money is no longer good enough, physical notes are demanded.

As you rightly say, we are at part 3 of the story, with the CBs frantically attempting to keep the excess reserves they created, locked up with them rather than being loaned out as more credit (multiplied) and/or taken out and spent (increasing velocity).

FOA wasn't explicitly telling us that this was all coming. But it is something we can easily infer from those words. It's just a matter of time.

It's also very interesting to observe the CBs are trying to convert credit to base but to keep it then locked up somehow, like the combusting credit was. While at the same time the politicians are trying to get the banks to take their excess reserves and loan them out. No wonder the euro architects wanted to put a firewall between national politics and monetary authority.

Cheers,

DP :-)

DP said...

How long will the commercial banks play along with the plan for the greater good, locking up all those lovely excess reserves at the CB, before their own greed becomes a higher priority? Forever? Well, maybe.

J said...

The U.S should make a two sided market at $20,000 per ounce

http://www.lbma.org.uk/assets/C11S2_Hepworth.pdf

page 12

Discussed at the LBMA conference the past couple of days

Casper said...

Hey VtC,

If I may add a few things regarding Iceland and it's exchange rate during 2008.

When the ISK (Iceland krona) dropped by 50% ag EUR in the first half of the year 2008, several nordic CBs (Denmark, Sweeden,..) went into currency swap agreements with the Icelandic CB in order to give Iceland access to euros. That only helped for a few months when the ISK dropped another 50% ag EUR as their banking system went bankrupt. As you mentioned in January 2008 the EUR/ISK rate was 80 and by end of 2008 the rate was 180/280.

It is my opinion that the main reason why the Icelandic CB didn't have to print the currency was due to those swap deals with other european CBs. The government didn't need to compete with the populace for hard (euros,dollars..) currency because of those swaps and people only experienced "modest" price increases since they were offered foreign currency to convert their kronas to.

And let's not forget.. Iceland is an important strategic landmass in the Atlantic Ocean.. who knows what has been traded under the table for the "stable" krona.

The problem for USA, Eurozone and other heavyweights is "who's going to offer currency swaps to them?".. and of course it has to be stronger..Store of value!...than euros, dollars,.. Right now we only hear of swaps between euro/dollars, pound/dollars,... all weak in Store of Value role.

Other than that I agree with your analysis regarding the banking reserves that are currently dormant in CB's vaults and their potential role in the coming (?) HI event.

Casper

Edwardo said...

Blondie wrote:

"I take this question to infer that such new US supply could/would be used to prop up the LBMA, much like the London Gold Pool, and suggest as a possible answer current western scrap flow."

He tilted his tin foil hat at a rakish angle before suggesting that perhaps all the cash4gold operations were/are a front for the monetary authorities.

I love how the report on revaluing gold was issued by an outfit called Gresham Investment Management.

Michael H said...

On hyperinflation, physical cash, and base money:

My interpretation of what FOFOA has written is that he expects hyperinflation to happen in terms of physical cash.

However, as he pointed out, electronic currency outnumbers physical currency right now, and physical currency is the 'reserve'. In other words, electronic currency (I'll call it 'base money' from now on) is a promise to pay physical currency.

What if this expectation of physical-cash-only-hyperinflation is fighting the last war? What if this time will be different, and the hyperinflation in the USA will happen in terms of base money?

I'll start by pulling out quotes from DP's 4 steps:

2) (Bailouts) ... No cash hoarding. No bank runs. No cash under mattresses. No note printing...
3) ... M1 base money can be spent immediately ...
4) ... Credit that you have to wait before you can spend it, will no longer be as acceptable to the sellers - they'll prefer cash they can turn around and spend immediately with someone else. ... Electronic base money is no longer good enough, physical notes are demanded."


The key is step 4. First DP says credit will not be good enough. Agreed, because credit has to clear. But why would electronic base money be undesirable? I could pay at the store via debit card, the electronic cash is immediately transferred into the store's account, and the storekeeper can then use it to pay employees, or order inventory online, etc. etc.

(Aside: unless I'm missing something about how debit cards work, and instead of immediately transferring the balance the accounts are only cleared daily.)

So then, can hyperinflation happen without moving the 'reserve' out from the FED, but rather just from increasing its velocity as it is transferred from one bank to another through the clearing mechanism?

Michael H said...

(hyperinflation, base money, physical cash, continued)

Rationale for hyperinflation in base money instead of physical cash:

Logistics of distribution: when the cash is needed, it will be easier to click a button and send base money than it will be to print and deliver physical cash. In fact, it may be impossible to print cash in the amounts required, even with added zeroes.

Logistics of spending: most spending in the US is done electronically already. It will be difficult to adjust to a large-volume cash economy. Where will the corner convenience store keep the bales of cash? Will the 'velocity' of robberies increase along with the velocity of cash?

Incentives to keep money in the system: There are at least two incentives to spend the money electronically instead of physically. First, money can be moved electronically much faster, so that in a hyperinflationary environment a wage earner is better able to dispose of his currency quickly. Second, some interest can be paid by banks (negative in real terms, of course) for any deposits, so that physical cash becomes unattractive. The first of these is far more important, IMO.

Further, if base money is the 'currency' and physical cash is the'reserve', when have we ever seen a hyperinflation in the reserve?

DP said...

All inter-bank transactions are settled at midnight AFAIK, although clearly the card transaction processor must immediately guarantee it will be cleared then. If you and the shopkeeper both happen to be with the same bank, I guess that may possibly be truly cleared instantly as an internal accounting entry(?). Is "you can spend it tomorrow" good enough for you? If yes, cards no problem.

In Zimbabwe the experience was, apparently and if I understood correctly, people would be paid in advance for their days's work, nip out to spend it quick, then come back and do the work. Credit in reverse. Very short SoV duration. Not even later today was good enough.

Let's see...

DP said...

So then, can hyperinflation happen without moving the 'reserve' out from the FED, but rather just from increasing its velocity as it is transferred from one bank to another through the clearing mechanism?

Yes. If electronic payments are still acceptable, the electronic base money changing hands can still pass through more goods in less time, just the same as for physical notes. In fact, the velocity of electronic base money increasing is probably step 4A, before the SoV duration is so short that demands for physical notes grow in step 4B.

Crack said...

Team Freegold-RPG Anthems
#32,768

http://www.youtube.com/watch?v=dNO6aR79PZ4

Anonymous said...

Blondie,

Does leased gold ever leave the vault of its owner?
I have seen no evidence, and thus cannot assume that it does.


Yes, it does.

First, when Drexel Burnham Lambert went bankrupt in 1990, Portugal lost a good part of their physical gold reserve. The gold was leased to Drexel, but technically the lease of gold involves the transfer of title and is rather a repurchase agreement and so does have counterparty risk. I don't know what Drexel had done with it - perhaps sold short - but I know the Portuguese did not recover any physical in Drexel's bankruptcy.

Since then, the Portuguese CB distinguishes "gold" from "gold receivables" on their balance sheet. Together with the SNB, they are the only ones who distinguish these in their annual reports, perhaps because of that painful experience.

Second, the FRBNY is presently the custodian for more than 6000 tonnes of gold that is owned by other CBs, mainly European. They publish quite a detailed inventory that states how much "gold owned by other CBs" is in their vault in Manhattan. On their website, you can go back only less than 10 years, but Dimitri Speck has the historical reports, too, and he has compared how the FRBNY inventory owned by other CBs changes compared to their officially announced gold sales. The result was that before 1999, there was substantially more gold withdrawn from the FRBNY vault than would be explained by the known official sales.

In fact, the quantity that is unaccounted for, is roughly compatible with the other estimates for the amount of gold on lease around that time. I think Veneroso said 14000 tonnes in early 1999 (that would be part paper and part physical). Speck found something over 6000 tonnes in missing physical.

Speck has written a book (in German?), but if you google, you should find some articles in English. Perhaps that estimate is described there.

Victor

Piripi said...

Victor,

Thank you. Leased gold has demonstrated counter-party risk.

The reason I ask is that FOA stated that CBs were not lending their gold, but rather their good name, to support the continued functioning of the London-based $IMFS gold market, and that this support would ultimately become the responsibility of the dollar. That was at least my interpretation of his words.

I see this as the leasing of CB gold to be sold into the system as dollar denominated claims, the physical never leaving the CB vault and the contract giving the CB ownership in the final analysis.

If CBs have continued to use the same contractual terms as Portugal did in 1990, then this could not be the case.

******

Edwardo,

The functioning of the gold market is opaque. I am merely suggesting feasible options which seem consistent with the apparent motives of those actors with the means.

The east wants to accumulate at low prices, so they want the market sustained as long as possible. The anglosphere wants the gold market sustained to allow the continued functioning of the $IMFS.

Thus, physical gold must flow west to east, in a quantity acceptable to both. I'm just looking for the flow. Victor has asked "Where is all the gold coming from?", and I'm suggesting it could be coming from weak hands. Is there evidence that this flow is going elsewhere? Being fungible, scrap gold could just be replacing gold stocks that are flowing east, but it amounts to the same thing. Viewed this way, scrap gold "doesn't count" as Victor said, and yet it does.

It's coming from somewhere.

Anonymous said...

Blondie,

Were IMF sales for example physical sales or merely countries buying back gold pledged the the IMF?

India is one of the main buyers of IMF gold that I remember. But India is not one of the countries that used to have a large share in the IMF capital. So I don't think it is just India taking their own capital out of the IMF again. No, they bought some gold that they did not own previously. Whether the gold was earmarked or sight, I don't know. Whether sight is fractionally reserved, I don't know either.

I would like to know where that physical scrap flow goes.

The GFMS numbers come from the big refiners. My understanding is that Cash4Gold and others just profit from the spread (they buy jewelry substantially below spot) and sell their gold to the refiners. Yes, this is physical supply. Weak hands selling. Question: Did the volume of scrap sales increase enough in order to account for the recent official buying? 600 tonnes per year more than a few years ago?

Is the “European support” you reference physical?

Why would a BB benefit from a lease by a CB? Their risk is a run on the bank, i.e. a run on their physical reserve. So what helps them is an increase in reserves.

Now you can set up a paper only deal. The CB swaps unallocated gold for US$ with a BB. The BB can count that as an asset, next to their outstanding bullion loans (unallocated) and their physical bullion in the vault.

Such a paper backing is completely analogous to a commercial bank holding a reserve at the CB. The reserve is credit money (unallocated) as opposed to cash in the vault. But it is a claim on the future delivery of actual cash should the run on the bank happen.

Similarly, if under pressure, the BB could phone up the CB and ask for allocation of their (so far unallocated) gold. At that point, a transfer of title would happen, and the CB would allocate specific bars to the BB. What used to be an account balance (unallocated) would change into a lease of allocated gold, i.e. a repurchase agreement: The BB gets physical gold now and owes the central bank gold in the future. The BB could request delivery and give it away to some of their customers who are angrily lining up in front of the bank.

The support of a BB though a CB by 'lending their good name', even if it is initially only a paper transaction, works only if allocation is possible. True, before 1997 many CBs apparently thought this was risk-free and only a 'lending of their good name', but around 1997-9 they found out the hard way that the BBs had run amok with these promises and that they had to deliver (reallocate the physical). As long as the CB does not distinguish between 'physical gold' and 'gold receivables' in their annual report, you cannot see when the physical is moved. You can only see when the swap is unwound. These were the official gold sales after the Washington Agreement. But the physical might have left earlier.

is it reminiscent of GLD, where contracts can be settled in paper

Can you make that more specific? Where does the GLD prospectus say that they can settle in cash?

Victor

Anonymous said...

DP,

How long will the commercial banks play along with the plan for the greater good, locking up all those lovely excess reserves at the CB

That is not decided by the commercial banks, but rather by their customers. As long as the customers are happy with their account balance and do not touch it, the reserve does not move.

But once the customers go shopping for real assets with their credit or debit cards, the reserve starts to move. Once they withdraw their money as cash, the commercial bank is forced to ask the CB for fresh printed cash.

It is at the discretion of the customer how long the reserve stays a reserve and whether it might become cash one day.

Casper,

several nordic CBs (Denmark, Sweeden,..) went into currency swap agreements with the Icelandic CB in order to give Iceland access to euros.

Sweden and Denmark are not euro countries. So which euros did they swap? Did their CBs swap a part of their euro reserves?

It is my opinion that the main reason why the Icelandic CB didn't have to print the currency was due to those swap deals with other european CBs.

That's a nice hypothesis. Basically, you are saying if you offer the people (and the government) an alternative hard currency, you can avoid a run on all tangible goods which would cause the drop in the real value of money.

So there are two types of inflations.

1) High inflation, even 20-50% annualized, but not hyper and no sudden increase in the observed velocity. (the market for the affected currency is always in equilibrium, but that equilibrium changes in time - the purchasing power decreases)

2) Hyperinflation in which the observed velocity increases rapidly. (the market for the affected currency gets out of equilibrium - it rather suddenly drops to a new lower real value, and the increase in velocity is the consequence of the new equilibrium after the crash)

Historically, there are plenty examples of both (see Bernholz' book). You are saying that type (1) happens when the savers have an alternative currency they can use as a store of value. This switch is one reason for the FOREX crash of the inflating currency, but there is no run on all tangible goods.

Type (2) in contrast happens when the savers have no alternative store of value and so are forced to buy any tangible goods they can get hold of, triggering the sudden collapse of the currency compared to anything tangible, not just compared to a better store of value.

I wonder whether you can confirm this pattern with the historical examples. Germany 1922/3 looks like a confirmation: Their government had to pay reparations after WW I in gold and may have even printed paper money in order to buy more gold.

If this idea is right, then we know what the ECB needs to do in order to avert HI of the euro: they need to make sure the average citizen can always buy gold (and is educated about this option).

So if the London bullion market freezes and there is a blackout period in which gold does not trade, the Euro is vulnerable. In this situation, the Europeans must establish a backup gold market, in euros, within a few weeks, perhaps even days.

Good luck.

Victor

Texan said...

With all the incredible deleveraging happening in every asset class, I am surprised y'all are still talking about HI.

Guys, cash has nowhere to go. Everything - everything - is overvalued due to leverage. So cash is locked up tight as a drum. And if anyone can get out of their "assets" without too big a loss, they are happy to hold cash because they are earning a positive return!

Everything is getting cheaper. The principal advantage gold has is no counter party risk/ universal acceptance.

And of course option value that TPTB decide to bailout 100% and inject unsterlized cash directly into spending somehow. Right now I think the CBs are in fact in major tightening mode. They are shrinking the system. I don't know if this was planned - I highly doubt it. But they have managed to spark a huge unwind.

That sea of red on cnbc and 2.7% long bond yields? Ominous. What's coming next is not HI. Doesn't mean HI can't be unleaded, but right now - cash is king.

FRNs, get you some.....

Texan said...

I meant to finish on my gold thought that gold has the advantage of no risk, but it's down aide is it has to "flow" through cash to be used. In times of huge demand for cash, like now, it will take a bit of a haircut.

Which is fine by me.

Robert LeRoy Parker said...

With all the incredible deleveraging happening in every asset class, I am surprised y'all are still talking about HI.

What is out of line with Fofoa's writing and general thesis?

costata said...

PAGE

Hi All,

Off topic in relation to the discussion about the flow of gold. I think the text highlighted in bold from this article provides a rationale for setting up the Pan Asian Gold Exchange (PAGE) as an allocated physical market in parallel to the paper gold markets already established in mainland China and Hong Kong.

While jewelry represents a large percentage of gold purchases in the country, Chinese can also purchase gold at their local bank. WGC formed a partnership with the Industrial and Commercial Bank of China (ICBC Bank), the largest bank by deposits in the world. They began offering a “Gold Accumulation Plan” that lets investors buy and accumulate small portions of gold over time. Similar to a bank account, people participating have access to the underlying gold or the cash value at any point. Since it was launched in December 2010 through this summer, the ICBC has an estimated 1.7 million accounts, with an accumulation of more than 12,000 kilograms of gold.

Small potatoes in the scheme of things but it demonstrates a need for the ICBC to be able to hedge their exposure in physical in real time without having to wait for a physical transfer. PAGE seems to fill that need.

FWIW I’m not ignoring the dimension of PAGE allowing international investors and speculators to gain exposure to Renminbi. This may be the most important feature of PAGE as commentators such as Martin Armstrong seem to be thinking.

Casper said...

Hey Victor,

"several nordic CBs (Denmark, Sweeden,..) went into currency swap agreements with the Icelandic CB in order to give Iceland access to euros.

Sweden and Denmark are not euro countries. So which euros did they swap? Did their CBs swap a part of their euro reserves?"

Your quite right regarding the Sweden and Denmark having their own currencies and not being a part of Eurozone. When you look at the EUR/SEK,EUR/NOK and EUR/DKK rates you'll see that in the last 10y they were moving in a rather tight band +- 10% which of course indicates that actions of european CBs are quite synchronised. That's especially evident in the case of EUR/DKK.

Anyway, the swap agreements were indeed between icelandic krona and euros even though the parties involved were not part of the Eurozone.

I should have been more clear on this but I was trying to make a point which you in your answer also point out and that is that we can have a period of a high inflation (rising prices) and no collapse of a local currency ag real goods as long as something else can be obtained as a credible long term store of value.

I agree with you regarding the need to make gold available to citizens to buy at any moment or the (E)CB risks HI. The question is, against what kind of asset should the value of euros, dollars,... fall so the citizens lose their confidence in a currency as a store of value?

I don't know if anybody here read an article on the "plan B" from the German CB, the Bundesbank, at the end of 80' as Western and Eastern Germany began the process of merging. The plan was to issue a new currency in case someone (Soviet Union at that time) tried to undermine the value of the DeutschMark by counterfeiting notes.

I think Germans are aware of the fact that the supply of physical gold is of most importance in order to prevent HI and maybe Mr. Weber and Mr. Stark, the heavyweights that left the ECB in the last 6 months, weren't leaving because of the bailouts but because of the game still being played and that is supporting the $IMF system and increasing the likelyhood of a catastrophic loss of confidence in the euro (at least in Germany) and risk starting a very risky political process.

Maybe they'd rather see the ECB to stop pretending and take the central role that you have described as a "european (backup) gold market" in order to ensure that gold is available at any time, any place.

This (motives for Weber and Stark leaving) is of course speculation on my part, I just tried to point out that they most likely still have the same goal in mind, but want to "stop beating around the bush" and "get to it". You know how Germans are, they like to be efficient.

Casper

JR said...

Hi Victor,

I see you have gotten tied up in form and missed the substance. I understand you believe the "right" definition of hyperinflation is a "running hyperinflation/wheelbarrow dump /the massive printathon. You say:

" But their consumer price inflation peaked at about 18% annualized towards the end of 2008, and the annual average was never more than 14%. No hyperinflation in Iceland."

==========================

As I tried to make clear, FOFOA sees this as a symptom of the hyperinflation, which is actually the loss in confidence in a currency. A quote from Big Gap in Understanding Weakens Deflationist Argument:

"The initiating spark of hyperinflation (currency collapse) is the loss of confidence in a currency. This drives the fear of loss of purchasing power which drives people to quickly exchange currency for any economic good they can get their hands on. This drives the prices of economic goods up and empties store shelves, which causes more panic and fear in a vicious feedback loop.

The printing of wheelbarrows full of cash is the government's response to price hyperinflation (currency collapse), not its cause. This uncontrollable (knee-jerk) government response happens in some cases, but not all. Let me repeat: The massive printing that first comes to mind when anyone mentions hyperinflation is not the cause, it is an effect, in the common understanding of hyperinflation which is the collapse of a currency."


==================================

As FOFOA has commented, don't get lost in the dogmatic semantics - from Dollar Repudiation

"Let's take a look at what happened in Iceland ten months ago. Practically overnight the Krona lost more than half of its purchasing power. Luckily the Krona was a small fish in a big pond and a number of bigger fish came to its rescue including Germany, the Netherlands, the UK, Norway, Sweden, Finland, Denmark, Poland, Russia and the IMF. These big fish put a bottom under the Krona waterfall, but for the local Icelandic population, the damage was already done.

Call it a currency collapse, a hyperinflation, a devaluation or a repudiation; call it whatever you want. But the cost of everything people use and need in Iceland doubled or tripled in one month. And at the same time, the things they counted on as a store of value, the banks, real estate and the local financial industry collapsed. Hit from both sides! A brutal double whammy! "


==================================

FOFOA's On "Hyperinflation"

"Currency Collapse=Hyperinflation

Currency collapse and hyperinflation are two sides of the same coin. When a country experiences hyperinflation like Weimar Germany or Zimbabwe, that experience is the collapsing of the currency. And likewise, when a country experiences a currency collapse like Mexico, Argentina or Iceland, a hyperinflation of prices in that currency is what is experienced by the people."


=================================

Indeed, news reports indicated bad news, like Iceland reports record 34 percent inflation or from The Island That Ran Out Of Money:

"During the financial crisis, only one Western country experienced a true collapse of its banking system: Iceland.

Things got so bad that the country actually ran out of foreign currency. Even today, years later, foreign money is still scarce, and the government controls how much anyone can get..."


cont.

JR said...

cont.

Victor, you comment:

"As far as I know, in 2008/9 the Icelandic Krona did not have an increase in velocity or a collapse of its domestic purchasing power. "

Icelandic Shoppers Splurge as Currency Woes Reduce Food Imports:

"After a four-year spending spree, Icelanders are flooding the supermarkets one last time, stocking up on food as the collapse of the banking system threatens to cut the island off from imports.

``We have had crazy days for a week now,'' said Johannes Smari Oluffsson, manager of the Bonus discount grocery store in Reykjavik's main shopping center. ``Sales have doubled.'.

Bonus, a nationwide chain, has stock at its warehouse for about two weeks. After that, the shelves will start emptying unless it can get access to foreign currency, the 22-year-old manager said, standing in a walk-in fridge filled with meat products, among the few goods on sale produced locally.

Iceland's foreign currency market has seized up after the three largest banks collapsed and the government abandoned an attempt to peg the exchange rate. Many banks won't trade the krona and suppliers from abroad are demanding payment in advance. The government has asked banks to prioritize foreign currency transactions for essentials such as food, drugs and oil.

The crisis is already hitting clothing retailers. A short walk from Bonus in the capital's Kringlan shopping center, Ragnhildur Anna Jonsdottir, 38, owner of the Next Plc clothing store, said she can't get any foreign currency to pay for incoming shipments and, even if she could, the exchange rate would be prohibitively high.

``We aren't getting new shipments in, as we normally do once a week,'' Jonsdottir said. ``This is the third week that we haven't had any shipments.'' ...

The central bank, or Sedlabanki, ditched its attempt to peg the krona to a basket of currencies on Oct. 9, after just two days, citing ``insufficient support'' in the market. Nordea Bank AB, the biggest Scandinavian lender, said the same day that the krona hadn't been traded on the spot market, while the last quoted price was 340 per euro, compared with 122 a month ago.

``There is absolutely no currency in the country today to import,'' said Andres Magnusson, chief executive officer of the Icelandic Federation of Trade and Services in Reykjavik. ``The only way we can solve this problem is to get the IMF into the country.'' "


cont.

JR said...

cont.

Enter the IMF - from The Island That Ran Out Of Money

"The problem the hedge fund guys had spotted was in fact, the joke that John Cleese commercial: Iceland is a very small country. It's the smallest in the world to have its own currency. And it had borrowed huge amounts of foreign currency.

Normally that wasn't a problem. Icelandic banks could always change their domestic currency, the krona, for dollars or euros on the world market. But now the world was worried. And no one wanted krona.

In a bigger country, banks might get some foreign currency from their own central bank. But Iceland's central bank also ran out of dollars and euros.

"The central bank used all it had in a desperate attempt to save one of the banks," the economist Gylfi Magnússon says. "But that only kept the bank afloat for another couple of days."

Even if you had gone around Iceland and collected every euro on the island, there wouldn't have been anywhere near enough money to pay off the debt...

Eventually, the International Monetary Fund had to step in and lend Iceland a ton of foreign currency. In 2012 Iceland will have to start paying that foreign currency back."


==================================

FOFOA commenting to "The Waterfall Effect"

"Again, I am not talking about normal inflation. I am looking at a confidence collapse in the currency under the worst economic (and credit market) conditions.

What made the Icelandic Krona drop so suddenly? It was almost like a waterfall! Was it a sudden credit market expansion? Or a sudden loss of confidence?

In Zimbabwe and Weimar Germany, once hyperinflation (currency confidence collapse) took hold the governments were forced to print high denomination notes, jumping from 100 dollar bills to million dollar bills to billion dollar bills. How much of that quadrillion dollar money supply was from credit expansion? And how much was pure base money printing?

The printing of trillion dollar base money (physical) notes swallowed the previous credit money supply whole. And the new base money supply entered the system through the monetization of government activity and government (public) debt. The same thing we are doing today. The high denomination notes were not the cause of hyperinflation, they were merely a late stage symptom in the death of a currency."


cont.

JR said...

cont.

Keep in mind, from Big Gap in Understanding Weakens Deflationist Argument

"The point is, this is the way collapsing money demand plays out in reality. It plays out as the collapsing of the store of value time continuum scale. And as the time in which a currency stores value becomes shorter and shorter, the currency circulates faster and faster..."

this is what drives the need to replace bank reserves, to "save debt" ala:

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

Hyperinflation is the loss in confidence in the currency:

"What made the Icelandic Krona drop so suddenly? It was almost like a waterfall! Was it a sudden credit market expansion? Or a sudden loss of confidence?"

Iceland owed foreign currency it couldn't print or find amongst its peoples. The US is different in this regard.

Do you see?

Cheers, J.R.

Texan said...

JR,

I see. I lived in Argentina: I know exactly what HI is. What you describe for Iceland is not HI. In fact, Argentina today is probably running a 30% real inflation rate (the government will only admit to about 10% of it). Even at 30%, it's still not HI.

In any case, the CBs are tightening. If you open your eyes you will see everything draining in value vs fiat, including gold. I don't know why they are doing this, or even if they are aware they are doing it, but it's happening. I suspect it's a result of all the fiscal austerity pushes.

Everyone wants cash, and they have no intention of spending it. I do not think this condition will hold for long, as the governments will have to do something to hold the system together, but if they are so deadlocked between
"savers" and "spenders", this may not happen any time soon.

DP said...

Daddy controls your breathing

Juliet Bravo? Enjoy the weekend.

Crack said...

DP,

http://www.youtube.com/watch?v=wXGuJO_7A1w

mr pinnion said...

No worries.This fall in gold maybe due to the temporary bull market ending, but....

http://www.youtube.com/watch?v=FuftVzVu5Zc

Regards
Ozzy

Jeff said...

I posed the question once before, what happens if Paulson starts liquidating GLD? Looks like we may find out; there are rumors swirling that someone big is liquidating metals postions.

Anonymous said...

Jeff,

I posed the question once before, what happens if Paulson starts liquidating GLD?

In order to understand this, one could take a look at the idea of the GLD puke indicator.

If the main selling pressure is in GLD, then GLD should lose inventory. If the selling pressure is in the market for physical gold (outside GLD), then GLD should gain inventory even though the price might be falling.

As of yesterday, GLD inventory was unchanged with small increases over the previous days. From this, I conclude that the selling pressure is in the physical part of the London market.

In spite of the price drop today, the GOFO rate is still in contango up to 1 month and roughly flat beyond. If the selling was in unallocated gold only, I guess, we should see the contango shrink as it did in 2008.

So, yes, it seems someone is selling a lot of physical gold these days.

Victor

Max De Niro said...

If someone is selling a lot of physical gold at the moment, then I wonder who is buying it?

gideon said...

To those of us technicians who were fully expecting an over 20% price drop, this was fully expected, and is no big deal. In case anyone cares to know(though with the moronic zealotry I see here I am doubtful) I anticipate a low between 1380 and 1440 before the beginning of the next massive upswing, which should be quite impressive. I am agnostic about freegold, but the minimum target I see for gold based on technicals is 10,000/oz. There is no technical reaosn why 50000 gold could not happen, though, and I have not excluded that possibility.

Neverfox said...

Anybody want to comment on this?

Also, any Freegold perspectives on this current crash in the paper price?

Neverfox said...

Sorry, I posted that before seeing that there were already comments discussing it.

Motley Fool said...

Hi gideon

I'm one of these self-confessed morons you speak of.

That must be why I missed the raging discussion about gold price.

I thought we addressed the topic value here. Silly me.

If you do wish to talk about price it may be a good idea to remember that "American fuck yeah!" isn't the only country in the world.

Sadly for me, it is now more expensive to buy physical gold after these price drops and forex changes.

TF

gideon said...

why do price and value have to be mutually exclusive? That is why I call it zealotry, b/c most people here seem to believe with religious zeal that someday soon the gold messiah will come, and it will all be magical and easy. If freegold is coming, then there will be people like the giants and bankers etc who are aware of it, and it will be reflected in the charts. I highly doubt freegold is just around the corner based on the charts, and I KNEW that a major correction was coming. I did NOT sell any physical, but the last time i bought was in 2008 near that low, and anyone who bought in the "gold can only go up" momo frenzy of the last several months is kind of a moron.

Anonymous said...

Neverfox,

Barsky-Summers say: The real price of gold today anti-correlates with the actual future real rate of return on long bonds.

Eddy Elfenbein says: The nominal price of gold today anti-correlates with the anticipated real rate of return on short bonds.

I am inclined to claim that Barsky-Summers are right and Eddy Elfenbein is wrong.

First, when he claims that OT2 should lower the price of gold, he assumes that nominal short-term interest rates would increase while inflation remains unchanged. But short-term interest rates have not changed at all over the previous couple of days:

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

Second, what is nice about Barsky-Summers is that there is a plausible allocation argument that supports the anti-correlation: Investors have a choice between long bonds or gold for their savings. When the long bond has a declining real rate of return, they switch to gold, and conversely.

Eddy Elfenbein's model does not have such an interpretation.

I wonder whether he has ever verified whether Barsky-Summers or his idea match the recent data better.

Victor

Motley Fool said...

Hey gideon

Ideally price and value should have a very small divergence. Unfortunately our economic system is so manipulated that there aren't much markets left, only manipulations.

The premise of FG is that one can only deny reality so long.

You are considering reasons for buying gold. Well and fine. I agree those who are chasing the run for a paper profit are morons. They will also be the first to sell, well right now I suppose. Haha.

I think most of us here don't try and buy at market tops. As best we can we either allocate large positions at local bottoms, or dollar cost average.

However. Since the market is so unstable, we cannot predict when it will finally fold. For that reason we advocate to newcomers to buy some regardless of the current price.

Why? We come full circle again to the difference between price and value.

Yes, in the short and medium term the advice may not be the most beneficial. We are looking at the longer term.

Most people who wait for a new low end up waiting a long long time, and buy at a much higher price than they could have.

As opposed to buying now. You think one could convince a newbie that now is the best time to buy after the last few days? Haha.

Stop and think for a moment my new friend.

TF

burningfiat said...

Dear Gideon,

The guys commenting on this blog have all bought gold at max. price of $1920 (probably at a lot lower average price like myself). If they believe FOFOA's writings, they probably haven't sold this correction.

If the technicals point to a minimum of $10000 (that's your assumption), aren't these guys going to be rich moronic zealots?

Is it wrong holding through this (possibly) 25% correction?
Are you arguing we should have sold the physical during the correction, while you concurrently argue that the gold-price will rise to minimum $10000?
Where's the sense in that, taking into account the risk of not being able to re-acquire the physical at the bottom a week or two from now?


Best regards,
Burningfiat

gideon said...

thank you for the replies. As i stated above, NO i have not sold any physical and do not intend to. I just think it is more prudent to be patient and let the price come to you than chase the bus. I have only accumulated several times this whole bull market, but all near ideal entry points, and all veyr large amounts. Since I think it is going much higher and do not intend to miss it I do not sell on the corrections, I just use the drops to accumulate. I think we do not need inspirational kum ba yas when gold goes up every 100 bucks, just like we don't need to be depressed when it goes down every 100 bucks. Rather, just be calm and methodical and do not get emotionally carried away. People should either dollar cost average or buy on big dips, but it seem here whenever gold is on the move up everyone is talking about chasing the bus and getting all excited like the messiah is coming. If the messiah does come, it will be at the end of wave 5, not this year or even next.

Motley Fool said...

Alright gideon

A last bit of advice then. Technical analysis will work until it doesn't anymore.

Be careful of being to stuck to your paradigms. (and I say this full well knowing you can point out my FG'ness. I can accept that :P )

TF

burningfiat said...

Gideon,

Thx, good reply...

If you understand FOFOA, you don't kumbaya $100 paper price gains. In fact you wait for paper price to reach ~zero.
FOFOA followers therefore don't mind $100 paper price drops. Also, my guess is most FOFOA readers doesn't care about wave 5.

/Burning

Winters said...

Gideon
and I KNEW that a major correction was coming

I'm not saying you didn't, but its a pity this wasn't documented before the correction. Or was it? You have been on blogger only since August 2011. Just sayin.

Anyway as like you, everyone here would be strong hands through this and looking on with amusement.

So are will you be buying in the 1600s or waiting for between 1380 and 1440?

Robert said...

burning fiat
you don't kumbaya $100 paper price gains. In fact you wait for paper price to reach ~zero.

I know that is what FOFOA has said, but I have also noticed that he opens a new discussion thread every time the paper price rises $100. Perhaps it should be the other way around, and there should be a new thread every time the paper price drops $100 -- like a countdown all the way to zero? That might help put us in the right frame of mind.^^

costata said...

MF,

A great big thank you for the reminder about exchange rates. Now my Price = Supply interpretation of the gold managers' targets will be expressed as:

Price = Supply x Weighted Avg Currency Exchange Rate

The weightings determined by gold demand in each regional currency and the change in the exchange rate of each of the major currencies against the US dollar.

Using a rough back of the envelope calculation this "drop" in price has had only a minimal effect on the "supply" of physical gold. So the gold managers have some latitude to harvest the paper gold speculators.

Motley Fool said...

Hi costata

I'm glad to remind you of something you already know. That is indeed the correct way to look at it.

The recent price action gave me another set of interesting thoughts.

USA says : Gold is worth_less

ROW says : We don't agree.

Previously, most of the time ( almost always and everyone) when USA said gold is now worth less, the rest of the world would blindly oblige their direction.

This time the forex markets violently shifted in counteraction, mostly.

Another 2 cents.

TF

burningfiat said...

Hi Robert,

Great suggestion. Let's all celebrate here at FOFOA's every time paper price goes down $100, and we are one step closer to real price discovery on physical gold :-)

/Burning

Piripi said...

Victor,

Thanks for your thoughtful response.

re: "reminiscent of GLD", I was referring to contractual gold obligations which have an "out" in the conditions whereby cash can settle rather than physical, and inferring that CB lease agreements with BBs may do similar, particularly in light of the Portuguese experience you referenced.

You say the contracts work only if allocation is possible, and that CB sales post WAG were just this option being exercised. These sales have ceased in recent years though, even as the role of gold begins to come more widely into focus (particularly post '08), just the time one would expect BBs to be receiving more requests for unallocated accounts to be allocated.

I understand all your points, and agree that they make perfect sense, but I guess my underlying point is this:

The gold market is opaque. Some assumptions are required in order for our model of the gold market to be congruent with other banking practices... yet this model appears inconsistent with behaviour I expect based upon my understanding of the value of gold.

Therefore, either:
1. gold is not of great value to the monetary system;
2. my expectations of CB behaviour are incorrect;
3. some of these aforementioned assumptions must be erroneous, and some function/s of the gold market must operate contrary to our expectations.

I'm pretty comfortable that #1 is not the case, you are making #3 look increasingly unlikely, so I'm going to have to revisit my thinking on #2.

Pete said...

Unless this has already been posted, this may be of interest to some here:

http://ftalphaville.ft.com/blog/2011/09/14/677021/why-gold-forward-rate-inversion-is-important/

:)

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