There is an elephant in the room. Jim Rickards has been making some bold predictions while on his book tour for Currency Wars. He says that in the case of a collapse of confidence in the dollar, the U.S. could confiscate the gold owned by foreign governments, Germany in particular, that is stored in NYC at the Fed. He says the U.S. could then use this gold to dictate a new international monetary system based on U.S. currency, just like last time.
Here are a couple of Jim's tweets on the subject:
@JamesGRickards Got a bid from #Germany for foreign rights to #CurrencyWars. Germans should read it. Ch. 11 tells why they'll never see their gold again
@JamesGRickards @FrankfurtFinanz Yes. This is described in Ch 5 and Ch 11 of #CurrencyWars. #Germany will never see its #gold again
We don't like to ignore elephants at FOFOA, so please discuss. Should those countries with gold stored at the Fed be worried? I just know this makes different people uncomfortable for different reasons. I posted some of my own thoughts here in response to Wandee who wrote, "I’m hoping Rickards is right per Blondie’s post above and the US/West can muster up 20ktons and figure out some kind of new currency alignment."
Also, Jim was interviewed by Eric King at KWN the other day. Here's the link. And here's a partial transcript (h/t Blondie):
“...I can see it happening, and it might even be a good thing in the sense that if we combined the official US gold of 8000 tonnes and I think 6000 tonnes that we could confiscate from the Europeans, Japanese and the IMF, and there’s another several thousand tonnes out at JFK airport in warehouses controlled by ScotiaBank and HSBC, its amazing how concentrated the gold is, its not in that many places, its really ten, you can count ten places that hold really the vast majority of all the official gold in the world, combine all that gold and the US could easily have 17,000 tonnes or upwards of 20,000 tonnes, which is you know 70% of all the official gold in the world. That’s enough to dictate the outcome of the international monetary system. It would be like, it would be a lot like Bretton Woods... [other nations] they might as well have stayed at home because the US dictated the outcome... We could do it again if we had that much gold, we could say hey, here’s the deal, here’s the new currency, its the new American dollar, backed by gold, all you other people have to peg to it and if you want your gold back, get to work, and, and try earning it and you know we’ll give you an IOU or something.
Again, this is an extreme scenario, but I think it is something that would be likely to happen in extreme distress. I mean, governments are not just going to throw up their hands, if we have some kind of collapse of confidence in the dollar the United States government is not going to curl up in a ball and cry, they’re going to use executive orders and executive power to dictate an outcome.
[comparing the US to Rome as the current world superpower]... if we converted the European gold for our own purposes, think of it as a 100% tax”
2000 Flushes: 20,000 tons you say?...
__________________________________________________________
Update:
Rickards on the euro! Here's Jim from this morning on CNBC Worldwide Exchange. He's great on the euro and gold, as long as he refrains from predicting a confiscation of custodial gold, a 90% tax on old gold and a new U.S.-led gold price fixing scheme.
FOA on currency war: We will see the beginnings of a currency war like no other in our time...
Several years ago, many gold bugs and gold advocates missed the path as the trail turned. Something I pointed out at the beginning of these "message" talks. As most of you will no doubt agree, almost all gold discussion still centers around "the dollar's war with gold". Truly, the evolution of this story will be how that war ended then and now the dollar's war with the Euro began! A very large part of that war strategy, employed by the ECB/BIS, was to let the dollar / IMF faction hang themselves by expanding and supporting the whole arena of this dollar paper gold market. Inflating the gold market place with so much "paper gold" that we would eventually have to bankrupt ourselves just to keep the dollar in the war game against the Euro.
Yes, the war now is between the Euro and the dollar! The Washington Agreement placed gold "on the road to high prices" as it signaled a phasing out of Euro support for our American gold values. How fast gold can, now, rise will gauge how much staying power the dollar has in all this. If there is any gold war now, it's to be in just how fast the dollar gold market can disintegrate into worthless IOUs! So, don't count on this destruction of our paper gold market to mark the real value and availability of physical gold; that ratio will split somewhere down the goldtrail. This action will scare most harden gold investors to death; especially the ones in leveraged gold stocks and lesser white metals!
The war between gold and the dollar has been over for a while now. The action, today, is between the dollar and the euro arena and this is what will break the price lock on gold. Leaving gold bugs with a lot of questions that ask why this: both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to! The casualty on this battlefield will be the world gold market as we know it. A market caught between how Western perception thinks gold's price should be "discovered" and at what price level trading in physical gold craters the entire paper structure. A structure of American based "paper gold".
We have been saying for some time that this will be "the" show to watch unfold; but only if your holdings allow you to stay still in your seat as it happens (smile).
They shifted their war on gold to become a war on the Euro,,,, only too late. Now, knowing that the Euro is a fact, we must have a super gold price if the dollar is to stay in the game! The question becomes one of supporting a cheap paper price for the sole function of keeping the market and all its bullion players alive. With the war on gold over, they need to turn their tanks around to face the real enemy but cannot.
FOA (10/3/01; 10:21:26MT - usagold.com msg#110)
Now that the Euro block is passing a point where the Euro currency is viable; this same past dollar support that built American's illusion wealth will now fall away. In its place we will see the beginnings of a currency war like no other in our time.
387 comments:
«Oldest ‹Older 201 – 387 of 387Regarding Russian gold reserves along the lines of Costata's comment from Moneyness:
Russia’s bullion reserves rose 19.5 tons to 871.1 tons in October according to the International Monetary Fund - News link
For Indenture - Chavez says first shipment of gold being brought back to Venezuela from overseas
CARACAS, Venezuela — Venezuelan President Hugo Chavez says a shipment of gold is being flown to Caracas as the government withdraws its gold reserves from U.S. and European banks.
Chavez said in a televised speech that the first shipment of gold is arriving on a flight Friday. He says the gold was previously held in Britain.
It would be interesting to look at books - GLD, BoE, etc. about movements.
Hi JR,
Thanks for the update. One of the things that interests me about the surplus Russian gold production is the direction of any flow from Russia.
Russia produces around 10 bbl/day of oil, consumes 3 bbl/day and exports 7 bbl/day. If their surplus gold was sold to customers who also purchased oil then gold and oil flowed in the same direction.
Now wouldn't that pose some interesting questions for long time students of the A/FOA archives?
BTW Does anyone have any figures on Russia's current level of gold production?
Any snippets about new mine developments would also be appreciated. It would also be helpful to be able to put some accurate figures on how much of the Russian production is purchased by citizens.
Hi Costata-
According to this 2009 Grendon International Research publication based on statistics provided by the Gokhran of Russia, a state institution under the Russian Ministry of Finance, between 2003 - 2008 Russia was producing around 160 tonnes per year +/- 10 tonnes (pg. 12).
While in 2003 gold exports were as high as 128 tonnes, in 2007 exports shrank to 42 tonnes and fell further to a mere 17 tonnes in 2008 (pg. 14).
I think to get the full picture of outflows though we would also need to know how much gold Russia is buying in the LBMA and the extent to which businesses are acting surreptitiously on Moscow's behalf to acquire gold OTC, data we will never have access to.
Would you agree?
Hi Aaron,
Thanks for the link. My gut feeling is that Russia is only buying domestically produced gold.
The last figure I saw for Russian gold mine production projected over 180 m/t for 2010.
So at a run rate of 100 m/t per year in reserve increases the Russian CB can comfortably source their requirements locally.
Kamchatka is apparently the "hot spot" for new gold mine development in Russia's far east. The transcript below gives a strong sense of where the Russians are heading in their modernisation and development plans.
It's worth noting too the geography. China's far West adjoins a huge slab of Russia's far East.
http://premier.gov.ru/eng/events/news/16035/
Hello Costata.
"Russia produces around 10 bbl/day of oil, consumes 3 bbl/day and exports 7 bbl/day. If their surplus gold was sold to customers who also purchased oil then gold and oil flowed in the same direction.
Now wouldn't that pose some interesting questions for long time students of the A/FOA archives?"
I have considered this in the past while reading comments of A/FOA with respect to oil and gold flowing in the same direction, though not specifically regarding Russia. My question at the time was whether or not gold and oil could flow in the same direction for a short period of time in a country/economy that produced both gold and oil. My conclusion was that oil and gold could in fact flow in the same direction in the short-term. If a country borrowed massive amounts of foreign capital in order to build/upgrade the capital stock/infrastructure needed to produce, refine and distribute its gold, oil and other resources there may in fact be a short term need for the foreign capital required to service the principal and interest on the debt that was incurred to purchase the capital goods and infrastructure required for these improvements. Once this debt was fully repaid there would not be any need for this level of foreign currency and at that point gold and oil would no longer flow in the same direction.
Failed Bond Auctions In Europe
It’s interesting to read the interpretations, in the mainstream media, of the failure of that bond auction by Germany this week. Apparently there was no demand for one-third of the bonds at the offered rate of 1.98 per cent. One piece I read basically said that the market “told” the German government that 1.98 per cent was too low. It wasn’t sufficient to cover inflation and/or any risk premium sought by the market for German government debt.
Okay, that’s what did happen. What did not happen?
There’s a Federal Reserve Inkjet (FRI™) cartridge for the first correct answer. (Insert dramatic pause.)
That’s right the ECB did not buy those unsold German bonds. Nary a one. I’m not suggesting that the ECB won’t lend a hand. Here’s one proposal that is apparently under discussion:
The European Central Bank is looking at extending the term of loans it offers banks to 2 or even 3 years to try to prevent the euro zone crisis precipitating a credit crunch that chokes the bloc's economy, people familiar with the matter say.
…… As the sovereign debt crisis has worsened, the ECB has been coming under increasing pressure to intervene on a larger scale by buying state bonds but is reluctant to make such a commitment.
It does, however, have the freedom to lend banks trillions of euros and could use this firepower to indirectly support governments trying to issue debt.
Wouldn’t all this “printing” be inflationary? No, provided the ECB sterilizes the Euro they issue. And this is a far cry from the ECB buying sovereign bonds at auctions. Even if the ECB lends to banks, with EMU member bonds as collateral, the banks are still on the hook for any losses on the bonds. So the heat would still be on the banks to shore up their capital and reserves to cover any losses.
At the same time Mr. Bond Market is allowed to deliver the bad news to the politicians “Get your budgets under control, get rid of your deficits, cut spending.”
Now let’s turn our attention to the other side of the Atlantic. No failed bond auctions for Uncle Sam. The Fed just buys up any shortfall. Even if he wanted to Mr. Bond Market can’t deliver any bad news about interest rates, inflation or risk premiums to Congress.
The USD is looking sprightly too, nudging 80 on the index. So I guess we chalk up another victory for Uncle Sam over Team Euro in the currency war.
HMO,
Thanks for your thoughts on the gold-oil flow issue. Your scenario is sound IMO.
I also think that the budget deficits Russia had when the price of oil plummeted (and the record drought) a couple of years ago would justify exporting gold to help to offset a trade imbalance. So that could account for the direction of the flow as well.
But neither of these explanations is completely satisfactory to me given Russia's FX reserve position. Why use gold if you can use FX? This has a political flavour to me.
Costata,
In case it's not a typo, Russian daily oil production is in the millions of barrels per day, not billions.
Edwardo,
LOL thanks for the correction.
Cheers
Some Speculations About Russia
Part 1/4
A while back I raised the issue of Russia cutting back on the rate of their gold reserve accumulation. Wendy jumped in with a comment about Russia becoming a member of the World Trade Organization (WTO). That was news to me. Many thanks Wendy. I said I would offer a few speculations about Russia absent any concrete evidence to explain the situation. So here they are.
The WTO is an interesting animal. My understanding is that if any one member objects to your membership you cannot join. According to this report Russia has been trying to join the WTO since 1993. Apparently Georgia was blocking the Russian application until recently. Suddenly they dropped their objection and now Russia is slated to join the WTO in December. Bam! Just like China back in 2001. Blocked for over a decade and then suddenly they are in the “Club”.
Only one country on this planet has the clout to line up all of the WTO members behind their policy toward an applicant – America. Let’s face it the USA determines who joins the WTO and who does not.
After China joined the WTO in 2001 their purchases of US debt increased dramatically over the years up to 2009. As FOFOA suggested in a recent post this has the look of a quid pro quo about it. China got to join the WTO and the USA got huge demand for the paper it was issuing.
But Russia has been reducing their holdings of USG paper according to reports I have read. What gives? What is the Quid pro quo here?
Continued/
/Continued
Part 2/4
Take a look at the statistics on Russia in the CIA World Factbook. Russia is growing again. They also have a solid surplus of energy (oil+gas) for export and no demographic trends like the ME oil producers that demands increased domestic consumption of oil – crimping the supply available for export.
In terms of natural resources and agricultural production potential Russia is the greatest single geographic prize on the planet after the American continent. Africa has huge natural resources too but that benighted land is still heavily fragmented politically and economically and it has a huge domestic population. The Latin and South American states have great potential too but mixed success in developing their potential.
It would also appear that now Putin and his colleagues have the energy wealth firmly under state control Russia is open for business. Here is a piece talking about the privatization program that Russia is trying to implement.
From an economic, demographic and geographic perspective Russia is a good fit with Germany and some of the other members of the EMU.
Continued/
/Continued
Part 3/4
Now let’s look at Russia from the perspective of energy supply to Europe. I recall reading a comment on an earlier thread which mentioned that fight between Russia and Ukraine over gas a few years back. From what I have read Russia did not simply “turn off the tap” to flex its political muscles in Europe.
All of the former USSR satellite states were told that they would have to move toward market pricing for Russian energy supplies after the break up of the Soviet Union. (Prior to the break up they received heavily subsidized prices.) As a transit conduit for Russian gas to Europe I imagine that Ukraine thought it had a strong position in the negotiations over the price of gas for local consumption. So perhaps Russia simply ran out of options.
A retired Indian diplomat by the name of M K Bhadrakumar has written extensively for the Asian Times Online about political and economic affairs. This is his brief bio from ATO:
Ambassador M K Bhadrakumar was a career diplomat in the Indian Foreign Service. His assignments included the Soviet Union, South Korea, Sri Lanka, Germany, Afghanistan, Pakistan, Uzbekistan, Kuwait and Turkey.
In several articles over the years MKB has outlined the energy strategy that Putin adopted. Apparently Putin’s strategy emphasized that customers were equally as important as suppliers in a trading relationship. Now I can imagine that some people are firing up the keyboard right now to point out the political implications of Russia being the dominant energy supplier to Europe, the history of conflict and so on.
So let’s step back and consider that if you leave the American continent out of the calculation. Over ninety per cent of the worlds oil reserves are controlled by state owned companies. Russia needs to sell oil and gas. That is her biggest export earner by a huge margin. So perhaps Europe was collateral damage in the Russia-Ukraine spat and Russia was given a spanking from low oil prices. So let’s call it one-all and head to the EU Clubhouse for a Stella Artois or two.
Continued/
/Continued
Part 4/4
Now let’s talk about currencies. The Russian ruble has a history of being an unsafe currency. Efforts to make it fully convertible appear to be progressing. As a bi-lateral trading currency it could have some success beyond China. But the prospects of the ruble gaining acceptance as a reserve currency seem, how shall I say, unlikely. And it’s even more difficult to imagine the ruble being used as a trade currency by third parties.
Long time readers know that many at this blog are confident that the Euro will thrive in the years ahead, the so-called Euro crisis notwithstanding. Being a member of the EMU and adopting the Euro as its currency would solve a lot of problems for Russia. This may have some tricky political implications but I doubt Russian citizens would be mourning the passing of the ruble.
Returning to the issue of Russia’s gold reserve accumulation. Gold production in Russia is increasing. So there is no domestic brake on their gold reserve accumulation. Doing some rough back-of-the-envelope numbers Russia has enough (or soon will have enough) gold and FX reserves to join the EMU.
So here is the summary of my “speculations”:
1. Russia is going to join the EMU in the years ahead.
2. Russia is slated to be the growth market of the future for the EU. Hence the WTO membership. (Remember what happened to China’s growth in the years after they joined Club WTO.)
3. The Russian government used the gold production surplus it “created” to repair its budget position – damaged low oil prices, the credit squeeze and the drought. (But the destination for that gold surplus remains a mystery.)
Gas Deal With Belarus Gives Control of Pipeline to Russia
"The Russian government agreed on Friday to offer Belarus loans and a discounted price on natural gas worth more than $14 billion, tying Belarus, Russia’s small, authoritarian neighbor, into an even tighter union with Moscow.
Metro Twitter Logo.
The loans and discounts represent an economic lifeline to Belarus’s president, Aleksandr G. Lukashenko, helping his government to subsidize basic food items and imported goods to offset inflation and tamp down social unrest. In exchange, Belarus sold full control of its natural gas pipeline to Europe to Gazprom, the Russian energy giant.
The agreement, like so many Russia has struck with its neighbors, hinged on energy pricing policies, long a tool of choice in Moscow’s foreign policy with other former Soviet states.
Gazprom already owned a 50 percent stake in the pipeline, called Yamal-Europe, which carries about 20 percent of Russia’s gas to Western markets. Most of the rest travels through pipelines crossing Ukraine, which remain outside Gazprom’s control.
Since the breakup of the Soviet Union, Gazprom has worked to regain control of the web of pipelines that are integral to its business and Russia’s geopolitical positioning in Eastern Europe. Gazprom’s control of Yamal-Europe from Siberia to the Polish border will “ease our relations with Belarus for years to come,” Prime Minister Vladimir V. Putin said in comments reported by the Interfax news agency.
Full ownership will “allow us to provide secure transit through Belarus for our energy to customers in Western Europe,” Mr. Putin said."
costata,
concerning the German bond auction this week, it is first instructive to read what Zero-Hedge writes about this.
The procedure of the auction was explained to me as follows. In most countries, the government decides about the volume and them uses an auction in order to discover the price. Not so in Germany. There, some official from the ministry of finance decides a price and then people can purchase the bonds at that price or not. The German CB regularly takes the difference for a few days and then sells them into the market.
Zero-Hedge have a diagram of the amount taken by the German CB. In some sense, this chart just shows how well the ministry of finance official guesses the market price if the additional supply is taken into account.
By the way, I cannot even tell how it would look like if some foreign CB (SNB, PBoC, ...) would by German government bonds using the German CB as an agent. This might even look identical.
Victor
costata,
Russia is going to join the EMU in the years ahead.
I remember the previous German chancellor (Schroder) made friends with Putin and is now involved in the natural gas pipeline projects in the Baltic Sea (getting a line directly from Russia into Germany without crossing any third country), kind of avoiding all the issues of the Nabucco oil pipeline and all its competitors.
Yes, I'd give it a couple of plausibility points. But then this would be a reason for the US to block a Russian WTO membership. So why did the US give in?
Victor
Hi JR,
Thanks for the link. So Belarus signs up right after the Nord Stream Pipeline is "inaugurated" (on November 8th, 2011).
http://www.nord-stream.com/press-info/press-releases/nord-stream-pipeline-inaugurated-major-milestone-for-european-energy-security-388/
Hi VTC,
Thanks for the colour on the German bond auction system.
In relation to Russia and the WTO you wrote:
But then this would be a reason for the US to block a Russian WTO membership. So why did the US give in?
I don't think the US gave in. Nothing could force them to allow Russia into the WTO against their will. Either the US administration got something in return or interests that the administration is beholding to wanted this to happen.
I would argue it is the latter. The uber-wealthy and the multi-national corporations "severed their ties to the Nation state" a long time ago. I think we need to keep this in mind when we ponder these developments.
Did I tell you the background to China's entry to the WTO? The curious continuity of actions by US administrations since China was first granted Most Favoured Nation status? (That was in 1978 if memory serves me.)
Pursuing my confirmation bias, I found the charts on pages 29-31 of Ben Davies' presentation very instructive. Will they be able to turn this around?
Victor
Time Magazine Covers
On one hand Rickards advocates some sort of gold standard; now he is talking about some kind of SDR standard:
When asked about how the world will transition to SDR’s, Rickards responded, “...You’ll see big companies like Caterpillar and others that have global operations start to issue bonds in SDR’s. They’ll be underwritten by Goldman Sachs and others and you will see Goldman Sachs, Morgan Stanley and Credit Suisse and others start to make markets in SDR bonds. You will start to see a repo market so you can leverage it up.
This will all happen little by little, but the blueprint has already been laid. You know we’ve done a lot of interviews on King World News, Eric. Let’s plan one for a year from now and mark my words, a year from now the SDR market will have taken significant strides toward becoming a market with a full range of maturities of investable assets and basically the new reserve currency of the world.
http://tinyurl.com/8aye9sa
What's the frequency, Rickards?
costata:
http://silverbearcafe.com/private/11.10/putin.html
:o)
btw:
The pound did not join the Second European Exchange Rate Mechanism (ERM II) after the Euro was created. Denmark and the UK have opt-outs from entry to the Euro. Technically, every other EU nation must eventually sign up.
Vtc
I’ve only recently found your blog, which is excellent – I’ve been looking for precisely such an exposition for ages. Do you have any plans for your part 2 on the Washington agreement?
You wrote in Synthetic supply of gold?:
“Apart from entering a high risk naked short position, the only way of creating synthetic supply is the lending of unallocated gold while we hold a physical gold reserve only for a fraction of the amount that we lend. This is completely analogous to the creation of US$ in the commercial banking system.”
I have been going through the A/FOA/FOFOA archives again, and it appears that the ‘paper’ manipulation of the gold markets is an absolutely central tenet of the Freegold theory, or at least the physical manifestation of the strategy of the players involved that derives from the underlying trajectory. You posit that long term manipulation of the futures markets is not possible, but the gold for oil deal was said to be facilitated through these markets.
Firstly, does this affect your view of the validity of the Freegold theory?
Secondly, which I suppose depends on your answer to “firstly”, do you believe that the necessary grand conspiracy to manipulate the gold and oil markets to sustain the flow of cheap gold to oil could have been carried out with only unallocated fractionally reserved gold and is this consistent with Another’s story? Do you think it would have been possible to keep such a conspiracy under wraps for so many decades, given the number of players involved in such operations?
Thirdly, if you accept the future gold for future oil story (by futures or fractional reserve unallocated), what do you think is happening with that dynamic now?
You appear to have a good working knowledge of the markets on which these deals were supposed to have been done and I have precisely zero, other than what I have read of others’ writings, so I would be interested in your perspective.
I have followed the conversation (that you linked in the article) on Forum 1500, but it didn’t seem to come to a resolution.
Max
Hi mortymer,
Thanks for the link. I recall reading an article about those remarks by Putin.
I did not think it would come to anything because I assumed that the Americans would block Russia from moving down this pathway.
Actions like the missile "shield" in Poland, the war with Georgia and the destabilization in Central Asia persuaded me that America would maintain a policy toward Russia of containment. A kind of Cold War Lite.
This is why I think allowing Russia to join the WTO is a watershed.
Costata: I find significant the fact that the thought has been exercised on public.
Max De Niro,
Grand conspiracy?
Cheap oil alone was a strong incentive for co-operation. How about styling this as a "co-operate in your own best interests policy" rather than a conspiracy?
FOFOA comment
"most "gold suppression" analysts fail to make the distinction between: 1. a suppressed gold market and 2. managed gold price movements. One is automatic and the other is controlled or manipulated.
The paper gold market automatically suppresses the price of gold by some multiple, perhaps 50. Meanwhile, the banks mess with short term technical fluctuations for profit. Most analysts think #2 causes #1. But the way I look at it, the CBs helped create #1 and then allowed the investment banks to do #2 (perhaps a decade later) for profit. The two are becoming less and less compatible (an explosive combination) as the dollar nears its end.
I think using a term like "the paper price suppression scheme" combines and confuses two very different factors.
New liquidity can only be created through gold as long as real physical gold is willing to bid for dollars somewhere in the world. This is why the dollar must depreciate against gold, to coax fresh gold "stock" into bidding for dollars! (ANOTHER taught us that gold prices dollars, and then dollars price everything else.)
In the past, the CBs supported this process with guarantees of their own gold (to bid for dollars). But today they are less willing to do so. Only unencumbered physical gold can be fractionalized, and only as long as people are willing to buy golden tickets in lieu of the real thing.
If you lease me an ounce of physical gold, I can safely sell 10 golden tickets knowing that only 10% will come for delivery. And most of the time, I can get my hands on more ounces from the private sector so I never have to come ask you for that physical ounce. (You leased it to me, but you held it for safe keeping) At some point you will stop leasing to me, I won't be able to get more ounces from the private sector, and more than 10% of my golden tickets will demand delivery.
At that point I'll come back to you for the physical and you'll just print up some euros to pay off my golden tickets rather than giving out physical ounces. Why? Because golden tickets NEVER WERE worth real ounces. It was all just an illusion of liquidity. Real liquidity is and always has been "that which you cannot print", "that which is tradable outside your zone", "that which is hard, not easy, to get"."
Freegold Foundations
"Yes, the paper markets by their very nature, and only because gold has the highest stock to flow ratio, automatically act in harmony to suppress the price of the actual product. And yes, they do provide a means for the banks to occasionally control the price of paper gold in an effort to manage where their fractional reserves of the real thing actually go.
But the actual physical portion of the paper markets is tiny compared to global gold. COMEX does not project its price discovery globally because it is so powerful. That price is accepted, not projected, because the Bullion Banks choose to use it in their fractional reserve gold banking. The paper markets are markets for claims on gold held by the BBs, not for gold itself.
To put it another way, if the Bullion Banks and their fractional reserve gold banking is a dog, then the COMEX (or "the paper markets") is its tail, not its heart. And the tail doesn't wag the dog. Paper markets will be the price discovery mechanism for gold as long as fractional reserve gold banking exists.
[...]
There may be a very high price to be paid in the future for the high liquidity of paper claims on gold held by the Bullion Banks today."
mortymer,
Agreed it is significant, but many ideas are floated in public to test the reaction. That doesn't mean they will ever become reality, or even that they are intended to become reality.
Cheers
"Soft Supply, Hard Demand" from The Call of the Century
"When we think about supply and demand, it is helpful to think of an ancient barter world, modern paper trading tends to muck it up a bit. So think about a supply of chickens at a Medieval fair. Let's say there are 10 chickens cooped up in a booth, with several buyers bidding for the chickens with their various goods. The first bidder take two chickens for the price of two bushels of apples. He hands over his apples and walks away with the two chickens.
Now, the rest of the bidders are faced with the hard reality that there are only 8 chickens left where once there were 10. This is called "hard trading" and the bidders are able to form "hard opinions" about the real supply and demand in front of them.
Next let's imagine that the first bidder only had to put up 5 apples as margin and then wait until the end of the fair to decide what he wanted to do with his purchase. How would this affect the rest of the bidding? Now the other bidders must make value assessments based on "soft opinions" relying on conjecture like "that first bidder rarely takes delivery of his chickens, he's just in it for the quick apple." This is soft trading.
Soft trading tends to draw in a lot of bidders (traders) who are willing to put down a margin requirement in the hope of making a small profit at the end of the fair. The seller of the chickens may have 30 different buyers for his 10 chickens, each putting down 5 apples (or whatever their good is). At the end of the day, 5 buyers will go home with two chickens each, 10 buyers will receive their 5 apples back plus 3 more apples in profit, 15 buyers will lose their 5 apples, and the seller will end up with 10 bushels plus an extra 45 apples while the "price" of chickens actually falls! This is because the seller, who had only 10 chickens to sell, flooded the market with 60 "paper chickens" driving the price down and at the same time making himself an extra profit.
Why More Buying means Lower Prices! (in paper markets)
In the leveraged market of paper gold, the more buyers that show up, the lower the price will go. Here is how it works. Let us say that we want to play on the front lines of gold price discovery; the futures market. We believe fundamentally that the price of gold must rise, so we become buyers of future gold. But let's say that we only have $5,000 to play with. So we pay our $5,000 margin to gain control of a $100,000 contract for 100 ounces of gold. If gold goes up $50/ounce while we hold this contract for future delivery, we will make $50 x our 100 ounces, or $5,000. A $50 rise in gold only represents a 5% increase, but our profit was 100%! We doubled our $5,000 turning it into $10,000!
Here's the problem. We don't have enough money to pay $95,000 more for the physical gold. And the bullion banks KNOW this. They know that there is a 90% probability that we will not take delivery. So when we placed our bid for 100 ounces of gold, they simply issued a brand new paper contract, not backed by real gold! This is pure paper gold inflation. And the more contracts there are, the lower the value of each contract. The same way supplying more dollars makes the value of each dollar fall. It really is the same thing!
This is how a million new paper gold buyers, or ETF subscribers can actually make the price of gold FALL! All the fresh demand is met immediately with fresh supply, inflation in the paper gold market. This increases the supply that is visible to new bidders, lowering the value of each unit."
@Max: http://www.materialsmanagement.net/modern_mkt_manipulation.htm
@Costata just a small sign of the direction of Russia capital:
1+1
http://www.gold-eagle.com/gold_digest/baron1013.html (keyword: Wiktor Bielski)
->
http://www.emergingmarkets.me/2009/03/vtb-capital-appoints-wiktor-bielski-as-global-head-of-commodities-research/
=? :o)
Hello Max,
Don't confuse me with the Goldbugs who are obsessively chasing down a big conspiracy. That's not my thesis at all. As ANOTHER explained it, most of what they call a conspiracy was simply "good business" at the time. It was hell on wheels to the paper traders trying to churn a paper profit because they believed the price of gold should be rising and their "leveraged" plays should be exploding, but it was a gift to PGAs like FOA and the oil producers who could accumulate more and more real gold at better prices.
ANOTHER (THOUGHTS!):
"The BIS and other various governments that developed this trade ( notice I didn't use conspiracy as it was good business, as the world gained a lot ) , thought that the paper gold forward market would have allowed the gold industry to expand production some five times over! Don't ask where they got this, as they are the same people that bring us government finance and such. But, without a major increase in gold supply, the paper created by this "gold control operation" will either be paid by, 1. new supply. 2. the central banks. 3. rollover existing. 4. cash? 5. or total default! As the Asians started buying up everything last year ( 97 ) , number 5 and 5 started looking like the answer! When the CBs started selling into this black hole of demand, the discussion of #5 started in their rooms also."
Regarding synthetic supply, it is the same as credit money—"our money"—being a synthetic supply of base money. Same thing! Only there's no Fed that can create "gold base" with the click of a mouse. That doesn't mean the BBs are net short paper gold any more than the banks are net short dollars. But you can still have a run on the reserves, and without a lender of last resort, hello Freegold! You can also have a lightning-fast and unexpected exponential rise in the "leverage factor" or "reserve ratio" of these BBs without them being net short:
"What we have here is an explosion in the bullion banks' physical leverage factor, not through an increase in lending this time (the lending is actually declining), but through customer withdrawal of reserves, with no physical backstop. Even a bank with a conservative leverage factor can experience a bank-busting, system-crashing run. Public confidence is the only thing that stands in the way. This is how a classic bank run runs." Link
A BB has X amount of ounce-denominated liabilities offset by Y physical reserves plus Z amount of ounce-denominated claims on others. So X=Y+Z. If the holders of X run on Y, that leaves only Z offsetting the remaining X holders. That’s a big bank holiday and Freegold party!
Cont…
2/3
BB ounce-denominated liabilities (paper gold) are apparently being used as a currency trade. It was this revelation that immediately preceded the appearance of ANOTHER. Here are a few comments by other people prior to ANOTHER's first post:
"It is relevant to notice gold's average trading size per transaction, which was 29,140 ounces -- nearly one tonne per trade (32,150 oz. equivalent to a tonne). This is approximately $10 million per trade. This suggests (at least to me) the trades are non-Central Bank transactions - and more probable commercial operations related to CURRENCY TRADING. Interestingly, the average trading volume for ALL INTERNATIONAL CURRENCIES IS ABOUT $1.2 TRILLION PER DAY.
Viewing gold as a commodity may be mistaken, however. The LMBA revelations show that gold is a global currency of some substance and liquidity. So what affects the fundamentals of a currency? Usually Central Bank monetary policy. However, gold does not have a CB.
Remember, these huge volumes on the LBMA are NOT from hoarders.... these are the numbers of merchants using gold as a CURRENCY." Link
When ANOTHER wrote the following he was referring to the above (the full Red Baron series is linked in my sidebar):
Date: Sun Nov 02 1997 11:38
ANOTHER (THOUGHTS!) ID#60253:
REIFY:
Check the "gold eagle site" under Red Barron ( LBMA ) .
Read everything and rethink your thoughts.
That was 1997. As we now know, those were just the clearing numbers. The BBs don't publish an M1 or M2 equivalent for "gold credit money." They only publish the average daily clearing volume, and now, with this document, they released the total Loco London daily turnover which appears to be about ten times the clearing volume. That's not the total stock of paper gold, but the flow. That's all synthetic supply! And TONNES of it!
What size stock does that huge flow of thousands of tonnes per day imply? I don't know. How much physical do they have in reserve behind it (i.e., what is their de facto reserve ratio)? I don't know. Where did all those BB liabilities come from (i.e., what are the claims offsetting them)? I don't know. But you have to admit that a futures market (speaking of COMEX now, not the LBMA) is, by definition, a synthetic supply. If someone who could have bought 5 ounces of physical gold now buys control over 100 ounces of "future" gold (as in, not yet physically available), wouldn't you call that a synthetic supply as opposed to a physical supply?
And once you discover that most of those futures contracts are cash settled, you will come to understand that the "future" gold can just stay in the ground or wherever it was lying still. So it always was a synthetic supply from inception to settlement. The commoditization of gold in the '70s along with the vibrant commodities futures markets and forward sales that grew out of the '70s and '80s freed up the physical to flow where physical was still valued. Is that a big conspiracy? Or is it just the way things worked out?
Cont…
3/3
Perhaps this is your grand conspiracy:
Date: Tue Oct 07 1997 22:37
ANOTHER (THOUGHTS!) ID#60253:
Why did LBMA go public?
Ever notice how many important middle eastern people keep a residence in London. It's not because of the climate. The most powerful banks in the world today are the ones that trade oil and gold. It is in the "city" that the deals are done by people who understand "value"! Westerners should be happy that they do because the free flow of oil and gold has allowed this economic expansion to continue this past few years.
Understand that oil is still traded for a certain number of US$ but after the deal is done a certain amount of gold is also purchased "with the future flow of oil as collateral".
But is that a big conspiracy operation needing to be kept under wraps? Or just good business? The way you characterized the story in your question to Victor was, in my humble opinion, a gross misrepresentation of this blog and the A/FOA archives:
"…grand conspiracy to manipulate the gold and oil markets to sustain the flow of cheap gold to oil could have been carried out with only unallocated fractionally reserved gold and is this consistent with Another’s story? Do you think it would have been possible to keep such a conspiracy under wraps for so many decades, given the number of players involved in such operations?"
Sincerely,
FOFOA
Max,
Do you have any plans for your part 2 on the Washington agreement?
Yes, one day I will write it - there is actually something interesting in the data that happened over the weekend of May 19, 2001, that has never shown up here. Over that weekend, the net position of the swap dealers that sit between the LBMA and the COMEX has turned around 1800 degrees and has ever stayed this way ever since.
You posit that long term manipulation of the futures markets is not possible, but the gold for oil deal was said to be facilitated through these markets.
You have to distinguish two things. First, in order to inflate the supply, you need credit gold (aka unallocated or paper gold). Then you can buy spot or future, but that alone does not create more supply (unless the seller of the future is naked - as long as they are hedged, the price pressure is unchanged). So the gold price was kept down by the volume of the credit gold. The Saudis bought the future because it was known from the outset that they eventually wanted the physical gold which would only become available in the future.
FOFOA just refused to call it manipulation. Well, in some sense this term has been claimed by the goldbugs most of whom do not understand how the LBMA operates. But in another sense the term 'manipulation' was justified because it allowed the Saudis to get their gold cheaper than would have been possible in a physical-only market.
This is independent of how much the mines would eventually produce. Even if the original idea that they could increase the mining output by a factor five, would have proved realistic, the mere presence of the unallocated in the market would have lowered the price.
Finally, yes, all this is perfectly consistent with the story of Another/FOA. Once exception is perhaps that FOA explained the gold leases as if the physical had never been moved. This was not the full truth. As we now know from Dimitri Speck and the FRBNY statistics, a few thousand tonnes of physical have indeed been moved when the gold was leased (about a week ago, I gave some numbers which I don't have available right now).
what do you think is happening with that dynamic now?
I also wrote something on this. I think the survival of the LBMA was only possible because after 2001, either somebody made a lot of physical gold available to the market, or some trusted entity (=CB) is naked short forward gold to the tune of a few thousand tonnes which allows the BBs to operate with a tiny reserve. I nevertheless think they must have made some physical available at peak times such as fall/winter 2008/9, probably this September/October.
Victor
Some people think that the gold for oil deals started with the arrival of Robert Rubin and Lawrence Summers at the Treasury Dept. This is consistent with the observation by Dimitri Speck
http://www.geheime-goldpolitik.de/english/
that the price patterns at the LBMA change around August 1993.
If we follow Another, then people in Hong Kong had figured this out by late 1996 and started buying, and Another started writing in fall 1997. So the arrangement remained a secret for about 3-4 years. In addition, we note that the financial press have systematically avoided this topic as have well-known goldbug leaders such as Jim Sinclair, Jim Rickards, James Turk, Ben Davies, all of whom are certainly familiar with the topic and probably even read this right now.
Victor
Question for everyone: When did Barrick Gold start buying all the other mines and when did they expand their hedge book?
Victor
Max,
some of the discussion about the present position of the LBMA BBs and the gold leasing was here:
http://fofoa.blogspot.com/2011/10/october-open-forum.html?showComment=1317618652242#c6192603376442588811
http://fofoa.blogspot.com/2011/10/october-open-forum.html?showComment=1317625075748#c7403994870257699060
Victor
Thanks a lot guys.
I won't be making a proper response yet, as I have waaaaay too much to go over amongst all of that.
But just on the subject of conspiracy as I used the term. I think that the word conspiracy has become a very loaded term nowadays, especially when referring to gold.
There is so much craziness out there on the interweb about... well, we all know about the truly bonkers stuff. I don't want to lump what I have described here in with the NWO/extermination of humanity quagmire that infects the minds of many.
I used the term because what is being described by Another is a distortion of markets for reasons that were undeclared. Now, this may have been good business, it may have been to support the dollar and provide a working monetary system in the absense of anything else that could facilitate international trade or whatever. I'm not sure of the reasons for it yet, but I consider covert actions to achieve an undisclosed aim for the benefit of the players involved (control for the state money printers) to be a conspiracy.
The reason I use that term is that conspiracies require collusion between a small group of players to gain benefit over a larger group. These sorts actions tend to get exposed and don't last very long. This game seems to have gone on for a very long time without becoming public knowledge, which suggests either that it wasn't a "conspiracy" or that it wasn't happening. I suppose it is also possible that it went undiscovered, but that seems less likely. Perhaps I might have used a different word, but I'm not quite sure what that would have been, perhaps "collusion"?
I just wanted to make that distinction and clarify my current understanding (pre-reading of all the info presented in the last few comments), and to make sure you all knew that I wasn't accusing anyone of thinking the world was run by lizard men and that their aim was to turn us into slaves or food or... something.
Now, I look forward to delving into the tasty morsels that have been kindly offered up for my Sunday morning breakfast.
Thanks.
Max De Niro,
Since "conspiracy" is such a loaded term why not simply drop it?
Manipulation, collusion and so on work just as well to describe some of the things we discuss.
Or you could use another term such as:
"official government policy"
Hello Max,
I'm with Costata on the use of the term "conspiracy". But rest assured that we are all here [with nothing better to do than] to help you either debunk or confirm this massive conspiracy in your own mind. ;)
Max: "The reason I use that term is that conspiracies require collusion between a small group of players to gain benefit over a larger group."
Wait! First you pretend to defuse the "loaded term" then you immediately thereafter employ it in battle? So who was the small group that gained benefit over the larger group? Was it those darn Saudis that paid $500/oz for gold that was only exchangeable for $280 when they finally received it?
Yes, I'm sure many people have conspired with their trading partners and/or financial advisors hoping for personal gain too. Both sides, that is. Seems like maybe this particular "conspiracy" was between a small group of players to gain benefit *for* a larger group rather than over it. Don't we have a term other than "conspiracy" for such altruistic, benevolent, charitable, noble humanitarian acts?
And now, ten years later, you, Max, would have the opportunity to profit from understanding the recent past, if only someone had spoken up. But alas, as you say…
"These sorts actions tend to get exposed and don't last very long."
Hmm…
Foreword
Then, in October of 1997 at the internet's only gold discussion forum of the day (hosted by Kitco), a series of remarkable postings began appearing under the pseudonym "ANOTHER", offering plausible answers to those questions. What followed in a seemingly incongruous stream of thought over many months was, in the fullness of time, seen to blend into a logical whole by many astute readers following the complete text.
Damn! Too bad the New York Times didn't pick up on that whole ANOTHER thing, huh?
"This game seems to have gone on for a very long time without becoming public knowledge, which suggests either that it wasn't a "conspiracy" or that it wasn't happening."
ORLY? So say Max!
Sincerely,
FOFOA
Vtc,
Thanks for those explanations.
Are you still active in the comment section over on your blog?
Max
Costata, FOFOA,
I have just been reading through your comments and some of the links that you posted and my thoughts have changed somewhat. I came back here now in order to delete my hasty last comment, but it appears that I was beaten to the punch. I'll leave it as a reminder to myself not to jump to conclusions.
My original comment was to Vtc, as I had found his blog and he seemed to present information which conflicted with my understanding of how the paper gold game was played. I was hoping to get a reply from him that might give me a jumping off point from which to explore these topics, which he has done, thank you Victor, and so have many others, thank you also.
FOFOA, you said that I had misrepresented this blog and A/FOA. This is not an easy topic and my understanding develops in waves. Perhaps I’m just a bit dense, but it’s taken quite a long time to build up the picture of what is going on, so I think that misrepresentation comes out of misunderstanding. For every one of the commenters here who have developed a good grasp of the topic, I would wager that there are many multiples of that who have not and either leave, or continue reading but not commenting, with a skewed perspective compared with what is presented or intended.
“But rest assured that we are all here [with nothing better to do than] to help you either debunk or confirm this massive conspiracy in your own mind. ;)”
Please feel free to ignore me if you think that I’m only turning up to waste peoples’ time, I’ve seen plenty of people turn up with their own pet theories and rightly ignored. If I deserve the same fate, then so be it, I’ll just have to walk the trail alone. I’m not playing some intellectual game here, not attempting to promote an ideology over any other, I’m trying to work out WTF I should do in this perilous world.
I don’t think that this blog and commenters need to prove themselves against debunkers. I am here to make an honest effort to learn. I don’t grasp every facet of this huge topic immediately (this is not anywhere near my field of expertise) and so I make mistakes. This is why I asked you, FOFOA, if you would do a piece for those who are not familiar with what is going on in the world – I am not able to properly articulate it yet. I don’t demand or expect help (even if I do ask for it) from others, but I do appreciate and accept it thankfully when it is graciously given.
I’ll shut up now and stick to all of that illuminating reading for which I am thankful indeed to those who posted it.
Thanks.
Max
Max,
"Please feel free to ignore me if you think that I’m only turning up to waste peoples’ time… "
Allow me to remove my tongue from my cheek before I speak… Okay, I wouldn't be responding to you if I thought you were wasting anyone's time. If that is not obvious, I apologize.
"I am here to make an honest effort to learn."
I know you are, and that's why I'm engaging you. You'll have to forgive me if I get a little sarcastic at times. I don't engage as often as I used to in the comments because it became far too distracting and time-consuming as the numbers grew.
"I’ll shut up now and stick to all of that illuminating reading…"
Touché!
Sincerely,
FOFOA
When I say that I appreciate this blog, I do so not just in words, but in digital ones and zeros too.
My donations were made under another alias (which described too much about me for my liking, so I ditched it). FOFOA, we had a conversation about environmental activism, and you recommended a Michael Crichton book, State of Fear.
I say this not to justify that I should somehow deserve something in return, it is a donate button afterall, not a buy button. The posts here are worth far more than I am able to give. I say it merely to show that I do truly appreciate this blog. The depth, context and perspective given here makes the rest of the financial press look like school-magasine journalists.
I wish I could donate more, but I am at the polar opposite end of the giant scale.
Thanks Max!
Boy, it's going to take some digging to figure out who you were in a previous alias, but I do remember the conversation. That was a while ago. You should definitely get Pirate Latitudes! Good Christmas gift! That book took me away in new ways.
Merry Christmas!
FOFOA
Victor,
here you go:
http://www.barrick.com/Theme/Barrick/files/docs_presentations/DetailedLookAtHedging.pdf
'Nobody is buying gold for $345/oz'
from slide 5. lulz.
Trustee may default on gold loan repayment to central bank (slide 16)
Lots of nice charts too.
VTC asks,
"Question for everyone: When did Barrick Gold start buying all the other mines and when did they expand their hedge book?"
Fekete's likely to have
the answer as he is quite knowledgeable on the doings of Barrick.
FOFOA,
For what it's worth, I like Blondie's recommenation to you about how to build the article. To me, in reading your articles, what also proved critical, was (i) the necessity of saving in something outside of the currency and currency-deriviative assets and (ii) the fact that precisely because gold was not useful for any other purpose, it alone was supremely useful for the infinite expansion in "value" relative to the currency and derivatives of value without causing price distortion and harming others, as occurs, for example, when people pur their investments into commodities in for speculative purposes and food prices soar. At the same time, saving in an asset outside of the currency is the best way to keep a brake upon the excesses of fractional reserve banking and credit expansion, and also limit government excesses. (In a relative way, not absolutely of course.) Thus, saving in gold has a profound moral component.
(BTW, your articles often remind me of Number 11 from the Tao Te Ching: "Thirty spokes share the wheel's hub;/It is the center hole that makes it useful./Shape clay into a vessel;/It is the space within that makes it useful./Cut doors and windows for a room;/It is the holes which make it useful./Therefore profit comes from what is there; Usefulness from what is not there.")
Anyway, the FOFOA dilemma, or the necessity of saving in an asset that is outside (or not a derivative) of the currency, based on the underlying nature of the currency base to expand to the point of collapse after exceeding all sustainable proportion to the physical realm, and the depressing desire of people to create and heap deriviative upon derivative of value to game the system, sucker others into parting with their wealth and to preserve the status quo for the "elites," which I think is more and more obvious to people now, are key points to communicate. At least, they proved very illuminating to me.
Best of luck, I eagerly anticipate your "white paper." If anyone can do it, you can!
"FOA: It's no accident of nature that our world monetary structure embraced derivative expansion as it has over the last ten or twelve years. I think we can say that this modern creation of risk management began around 1988 or so. ( It's funny, but I remember living in San Diego and reading a paper about a gold company called Barrick that just started only a few years earlier?)"
link
Its neat how the graphs on pages 7, 10 and 11 of the Barrick hedge presentation Jeff linked start up at about this time too.
http://stratrisks.com/geostrat/2601
(quote)when you add up spending on police, state security, armed militias, as well as courts and jails, China invested $83.5 billion in domestic security in 2010, surpassing their reported military budget of $81.2 billion. According to the report China’s domestic security budget is going up, scheduled to grow faster than military spending in the years to come.(unquote)
Wendy -- like your idea about a simple formula for describing gold/dollar/gasoline prices. But you would have to convert those liters to gallons for US audiences :-)
Jeff,
I was able to get some people at my workplace interested in expressing the concept of medium of exchange versus store of value which is essentially the same as what you said about saving outside of the currency. People "get" this because they have seen the value of their savings diminish over time.
Your other statement "At the same time, saving in an asset outside of the currency is the best way to keep a brake upon the excesses of fractional reserve banking and credit expansion, and also limit government excesses" is also complelling especially in light of a previous poster's link to proposed legislation to allow derivatives to be covered under FDIC guarantees. Just add some details about credit expansion the "toxic assets" and any doubters will have their doubts reduced greatly.
Regarding the way to explain things – I've had moderate success with a short speech I've given at our Toastmasters meeting. It went as follows:
1) I defined wealth, currency and money (thought process) in the way all could relate to (including examples);
2) then I talked (via rhetorical questions) about the dangers of failing banks/govts to the economy – and thus to other people's savings. Then I reminded the definition of wealth and made conclusion that since other entities' bankruptcy is threatening savings within the system, it can't be wealth. (you don't really own the savings then). Plus talked about the entanglement of debt, savings, currency into one unholy mess.
3) in the end I outlined three steps to get wealthy: educate yourself about this topic (my 5-7 talk ain't gonna cut it), produce more than you consume, amass wealth with the leftover production (value).
Finished with "your wealth" quote by Another.
The jury's still out if it was effective… but I did win best speaker ribbon that night (fwiw) plus I got a few inquiries what should be the ideal thing to save in (for shrimps).
Maybe extending this format a bit would help driving the points home?
TOKYO, Nov 28 (Reuters) -
The European Central Bank's refusal to engage in large-scale purchases of the region's sovereign debt will eventually be rewarded as this will preserve price stability and protect the value of the euro over the long term, governing council member Christian Noyer said on Monday.
It is up to European governments to provide a lasting backstop for liquidity, Noyer said, as a two-year-old sovereign debt crisis now threatens Germany and France, Europe's two largest economies.
"I believe that virtue will eventually be rewarded," Noyer said in a speech.
"In the next decade, markets and lenders will trust those currencies that, whatever the circumstances, are managed with one overriding priority: preserving price stability and the intrinsic value of the currency unit."
Speaking of the following:
"The European Central Bank's refusal to engage in large-scale purchases of the region's sovereign debt will eventually be rewarded..."
In the great (unacknowledged) who will blink first contest that is going on between the ECB and the $IMF faction, score another one for the ECB as the rumor is that the $IMF is about to plunk down roughly
600 billion or so to quell Italian sovereign debt woes.
Hello Victor,
You wrote: "there is actually something interesting in the data that happened over the weekend of May 19, 2001, that has never shown up here. Over that weekend, the net position of the swap dealers that sit between the LBMA and the COMEX has turned around 1800 degrees and has ever stayed this way ever since."
I thought I might be able to add a little context to your comment!
It is interesting that the price of gold spiked 5% on Friday, May 18. That's a huge up day for gold. That would be like an $85 up day today. What else happened that week? Well, Tuesday, May 15 was the BOE's 12th "Brown's Bottom" gold auction, but the first one with a new, smaller amount being auctioned off.
For the previous 11 auctions, they sold 25 tonnes six times a year or every other month. Then on March 7, 2001 (two days before March 9), the BOE surprisingly announcing a reduction to 20 tonnes for the final six auctions beginning May 15, 2001 and ending March 5, 2002.
This may not seem like a big deal, but it was at the time. May 15 was the first reduced-size 20 tonne auction and by Friday there was speculation in the media that the BOE might further reduce the size or eliminate the auctions altogether:
Market Update
Briefing.com
May 18, 2001
3:00PM: One hour remaining to trade and the indices continue to look listless. The June contract on gold has truly taken off at this point bidding up $12.50 (4.6%) intraday to $286.50. This morning, Briefing.com noted that the Bank of England had reduced the size of its gold auction to 20 tonnes this Tuesday from 25 tonnes at the prior 11 auctions. There is speculation now that the BOE might reduce or eliminate the sale of its reserves altogether. Gold-related equities are spiking on price action in the commodity with the XAU is posting a 5.6% intraday gain.
Of course the BOE did not reduce the size of the auctions below 20 tonnes and they continued the rest of the planned auctions ending on March 5, 2002, less than a month after this started:
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
So Victor, how do you interpret the shift in the data that you mentioned?
Sincerely,
FOFOA
FOFOA & all:
Long time lurker, first time poster. Like others, I am trying to understand all of this, but I am the epitome of J6P, who made the unfortunate decision back n 2008 to question what he had been told for 40 years. My world hasn't been the same since :( On a positive note, I converted 1/3 of my assets to physical gold that I own in my hot little hands back then too, so maybe I'm not as dumb as I think I am. Hard to tell sometimes.
Anyhoo, I have read rickards book, and speaking completely as a layman who is trying his best to understand things,I would like to state a few things, and ask some questions of all:
1. I thought his historical analysis was very good. If it is not, can someone point me to where it is wrong.I particularly liked his CWI, CWII groupings & his analogy of the $ being a rope. I think Roubini misses the point he was making in regards to gold, but maybe I am missing it. I don't know.
2. At the end, he posits three possible scenarios:
G20 acting through the IMF trying to paper over everything via SDR's
A new gold standard (I think) structured back the way it was during the classical gold period.
CHAOS
He advocates for the 2nd one, but my reading is he thinks it will be the 1st one, followed by CHAOS. ANd then maybe it will revert to the 2nd one. I would be curious to hear others opinions.
3. I guess I get confused easily because sometimes I hear (on king worlds news for example) him speak, and I read FOFOA's posts & I hear lots of similarities, but then some major differences. Like I I don't hear rickards use freegold, but I think that his end result would be sort of free goldish ( as long as the govt doesn't do the confiscation. ) I also get the impression that he thinks (and our history backs him up) that the fed govt will take whatever action it deems necessary to keep the IMF$ going. Am i Just completely dark on what is being said here?
4. Is this
http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income.html
An example of the $ dump on the front lawn?
Thanks for any comments/advice
Milamber
@ Costata
Moscow, October 18, 2011 – A new study prepared by Kinross Gold Corporation suggests that a
series of relatively modest regulatory reforms could help the Russian Federation realize its potential to
attract $1.6 billion annually in mineral exploration investment.
The comprehensive study on fostering foreign investment in mineral exploration and development in
Russia was presented by Kinross President and CEO Tye Burt to Prime Minister Vladimir Putin at the
Annual Plenary meeting of the Foreign Investment Advisory Council (FIAC) on October 17. Kinross is a
Canadian-based gold mining company with operations in Russia’s Far East.
“Global competition to attract foreign investment in exploration and mining is fierce. Russia has the unparalleled opportunity to significant increase domestic
exploration and mining investment, as well as the potential to become a world centre for mining
finance.”
Sergei Guriev, economist and Rector of the New Economic School, commented: “According to the
paper, if Russia creates conditions for mining investments similar to those in Canada, mining
investments in Russia could potentially increase six-fold.Valery Braiko, chairman of the Gold Industrialists' Union, said: “We welcome Kinross Gold’s
recommendations. We have long been saying that improvements are needed to the business climate in
the mining industry and fully support any legislative move to increase the strategic deposit threshold to
250 tons from the current 50.”
FOFOA,
concerning Friday, May 18, 2001, I have this message sent by Bill Murphey (GATA) on Monday, May 14, 2001:
Our intelligence sources have informed us that Fed Chairman Alan Greenspan has given the bullion banks until the end of May to clear up their hedging and outstanding gold derivative positions. Evidentially this process has been going on for some time. Further, British Prime Minister Tony Blair will try to make available, at the upcoming British gold auction, additiona
gold that will go to banks designated by Greenspan. We were also told that AngloGold will sell forward a designated amount of gold to banks also specified by Greenspan. Our source for this intelligence has been very accurate in the past. They also said they thought that gold would break out over $275 an ounce by Friday.
source: http://groups.yahoo.com/group/gata/message/769
If I combine this with your information, then perhaps the 5 tonnes missing from the auction were earmarked to go to specific banks as a bailout. In any case, here is the price action on May 18, 2001 from kitco (click in order to see the chart):
http://www.kitco.com/hist_charts/gold/24_hours/2001/au05182001.gif
There were rumours that 3 parties, one from the US, one Arab and one in Hong Kong wanted to squeeze the BBs on that Friday, starting at 12:30 and then on through the Asian trade before opening of London on the following Monday (easy to see on the chart). The rumour said that buying was through Refco and Moore Capital.
Then, with the Commitment of Traders Report (COT) on Tuesday, May 22, 2001, the position of the 'Large Commercial' dealers changed from neutral on average to short 20% the open interest, and this change has been permanent and still persists today. Similarly, according to the CFTC Bank Participation Report, the share of the four largest banks in the COMEX open interest increases from 20% to 30%, and this change has been permanent until early 2008 when it increases to about 50%.
According to the reported rumours, the short parties being squeezed were Goldman Sachs and Chase Manhattan (now part of JP Morgan).
I have no idea how to interpret these data. One possibility (for which I have no further evidence to support it) is that somebody credible (a CB?) sold a huge amount of forward gold to some BBs at that time. What we see in the COMEX data is part of the arbitrage that spreads out this short forward position into the general market.
Victor
Further, the price increase over that weekend was 9% ($273 to $298) which would be an increase by just over $150 today.
Finally, something else. The Telegraph reports that Myron Scholes had the following idea even before I had it:
Nobel economist Myron Scholes first floated the idea over lunch at a Riksbank forum in August. "I wonder whether Bernanke might not say that `we believe in a harmonized world, that the Europeans are our friends, and we know that the ECB can't print money to buy bonds because the Germans won't let them. And since the ECB will soon run out of money, we will step in and start buying European government bonds for them'. It is something to think about," he said.
This is not as eccentric as it sounds. The Fed’s Ben Bernanke touched on the theme in a speech in November 2002 – “Deflation: making sure it doesn't happen here” – now viewed as his policy `road map' in extremis.
"The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations," he said.
Berkeley’s Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. “The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash,” he said.
The entire article is worth reading.
Victor
M,
Pure gold. Thanks. Do you have a link to a report, post or MSM article, on this?
Cheers
PS. There are some interesting parallels emerging with China here. When I have the time to check a few details I will post another comment on these "Russia Speculations" if anyone is interested.
Thanks Victor,
"Monday, May 14, 2001: Our intelligence sources have informed us that Fed Chairman Alan Greenspan has given the bullion banks until the end of May to clear up their hedging and outstanding gold derivative positions."
I wonder what was discussed at this meeting one week earlier…
Sunday May 6 5:55 PM ET
BASEL, Switzerland (Reuters) - U.S. Federal Reserve Board Chairman Alan Greenspan and European Central Bank President Wim Duisenberg will both take part in a meeting of central bankers on Monday at the Bank for International Settlements in Switzerland.
Greenspan and Duisenberg attended a dinner on Sunday along with Bank of England Governor Sir Edward George and other members of the Group of 10 central bankers.
As he left the dinner, Greenspan was asked by reporters whether he was there to urge the ECB to cut interest rates. He replied only: "I am here because I am a member of this group."
Duisenberg, who left the dinner a few minutes after Greenspan, declined to say what had been discussed during the evening.
The chairmen of the central banks of the Group of 10 countries meet periodically at the Bank for International Settlements in Basel, Switzerland, to discuss the world economic situation.
Sincerely,
FOFOA
Fofoa & others, pls, link to sources, yes, its possible to search based on content but link helps, there are others who could see/find more :o) Thanks.
(working on new timeline, your support appreciated)
mortymer,
source for the rumours I mentioned is Dimitri Speck. Unfortunately, his book is in German, and so you need someone who reads German in order to understand the subtleties. The charts are very good though even if no German speaker is around. Some, but not all of them are here:
http://www.geheime-goldpolitik.de/english/
Victor
Hi Victor,
I'm struggling to wrap my head around something. You wrote:
"…the net position of the swap dealers that sit between the LBMA and the COMEX has turned around 1800 degrees…"
Is "swap dealers" just a fancy term for commercial traders or dealers (i.e., mostly the bullion banks) in the futures lexicon?
The piece you linked with a rough description of Dimitri Speck's book had this to say:
"Fig. 62: Gold and Net Positioning of the Commercial Traders
The structure of the futures market has changed exactly since the start of the third phase. According to the statistics of the US regulatory bodies the “commercial traders“ are clearly and permanently positioned on the short side. The figure below shows the positioning of the „commercial traders“ on the futures markets:" [Click for Speck's Chart]
Then, in your last comment, regarding the above you wrote:
"Then, with the Commitment of Traders Report (COT) on Tuesday, May 22, 2001, the position of the 'Large Commercial' dealers changed from neutral on average to short 20% the open interest, and this change has been permanent and still persists today. Similarly, according to the CFTC Bank Participation Report, the share of the four largest banks in the COMEX open interest increases from 20% to 30%, and this change has been permanent until early 2008 when it increases to about 50%.
According to the reported rumours, the short parties being squeezed were Goldman Sachs and Chase Manhattan (now part of JP Morgan)."
Sounds like a short squeeze on GS and JPM! But here's the part I'm struggling with. It also sounds like GS and JPM went real short starting right then, when the gold price took off, and then their short position got even more and more concentrated as the gold price went up and up. What kind of a short squeeze is that? I thought the GATA thesis was that a concentrated short position on the COMEX was sign of manipulation. Yet it seems to have begun right when the bull market began.
Could the real squeeze have been happening in a different market? Perhaps a physical OTC market rather than the paper futures market? Was there an offsetting "concentrated long position" somewhere else? And if so, is it still ongoing (since, as you say, " this change has been permanent and still persists today ")? Any thoughts? (I'm feeling a little lost like Max De Niro here) ;)
Sincerely,
FOFOA
VTC: Ich versthehe, Dankschen.
@all: your posts are being assimilated :o) Keep them going!
BTW: off topic but VERY interesting reading:
Rundheersing Bheenick: Whither Africa? – Or how the African continent is facing up to the challenge of the global financial crisis
Speech Mr Rundheersing Bheenick, Governor, Bank of Mauritius, at an international meeting of Rotarians, the “Rotary Institute Zone 20A”, Balaclava, 4 November 2011
http://www.bis.org/review/r111109f.pdf?frames=0
WooHoo!
"...The scheme started in 1996 and by July 2011, that is a full 15 years later, of the 40 countries eligible for the HIPC Initiative, only 32 had reached the so-called “completion point”. Twenty-six of these countries are African. If all 40 potentially eligible countries reach completion point, total debt relief provided by the World Bank and all participating creditors is estimated to reach around US$142 billion. As HIPC critics contend, it was a case of too little, too late, for too few countries.
Contrast this with the case of Greece. In May 2010, the IMF approved a €30 billion three-year loan for Greece as part of a joint European Union-IMF €110 billion financing package to help the country ride out its debt crisis with about €5.5 billion immediately available. A haircut of 20 per cent was agreed without much ado, and raised with little difficulty to 50 per cent within weeks. And there will probably be still more support forthcoming for Greece, if only out of enlightened self-interest to forestall any contagion to the other vulnerable Eurozone economies. This differential treatment becomes still more glaring when we take into account the population affected: just over 11 million for Greece, as against 462 million for the African HIPC’s. One cannot escape the conclusion that the donor community had been pulling its punches with HIPC and could have done far more for the countries concerned.
Well done Greece: hard cheese Africa! So, there should be more reliance on self-help in the future. Over the past decades, the financial sector in Africa has slowly begun to realize its potential to mobilize domestic resources and finance African growth. Across the continent, there are numerous examples of finance firmly serving as a catalyst to transform African economies. It is increasingly providing capital and credit to new businesses, or supporting the expansion of productive capacity in established firms. Cheap and rapid transfer channels for remittances dot the continent..."
Spurred by the commentary above, I'm thinking that there was a lot more truth to this cover than was immediately apparent, and that it may have far more significance in the future than it does today.
Exactly whose world it is referring to is not explicitly stated, leaving readers with the assumption it is the whole world, which may not be entirely accurate.
Note that their task was qualified on the cover as being both ongoing and ultimately futile.
Blondie:
"...So far, the U.S. has dodged these bullets, but the danger to its economy is far from over..."
http://www.time.com/time/magazine/article/0,9171,19522,00.html
One more note: Note the date 15-2-1999
The increasing levels of shorts on the COMEX are surely about creating liquidity, no? That is the name of this game right?
So, perhaps the BBs have offsetting postions OTC on the LBMA, that are fractionally reserved. They are playing fast and loose, hoping to scrape together physical when needed, perhaps from ETFs or some other source.
Has there been serious evidence of stress in delivering physical since this 180 and increasing short position? If so, do these times correlate to announcements of large sales?
FOA from Gold, the Ultimate Wealth Consoldator:
"The gold represented the last asset for the expansion of the world money supply. It's lent because they can fractionalise it just like a fiat currency. One ounce sold creates only one ounce of liquidity. One ounce lent, can create 90 ounces of paper gold and the dollar liquidity that provides. When they do actually sell it, most of it goes to other CBs. A "fact" supported by the WGC that no one wants to factor, because it destroys their argument about the CBs supplying physical to fill the deficit. Check it out, 300 tones or so over ten years is the net out reduction of gold reserves."
Perhaps there is no need to find physical, as the CBs are backstopping the fractional reserve with their guarantees.
It could also lend creed to the idea of gold miners being a terrible investment. Perhaps these assets will be sold off to settle the CB promises.
This might mean lots of gold shipments flying around the world when the matrix gets switched off.
There could be other ways to settle up in kind also. The US have considerable military capability. They could become a huge mercernary army.
The UK could offer.... errrm, well the UK could be given to the largest creditors then.
FOFOA said:
I handpicked some more quotes from FOA that many of you have already read. But perhaps they will have a deeper meaning today, given a new perspective on moneyness. These are all from his last month of regular posting in 2001. And, clearly, dollar price inflation was on his mind that month.
People like to say that A/FOA got it wrong, because the timing didn't seem to play out exactly as they inferred it would. But I would like to proffer another view. Perhaps FOA was unaware of the lengths to which the PBOC was prepared to go in supporting the dollar and the US trade deficit over the next decade.
China was admitted into the World Trade Organization on December 11, 2001, one month after these posts. And it wasn't until 2002, after FOA stopped posting, that China really began to ramp up its trade with the US and to purchase US bonds in size. From '99 to '01 China's Treasury holdings were flat at around $50B, but from 2002 they began a parabolic rise that has now ended and is once again flat.
So if China has backed off from supporting the dollar today, in the same way that the European CBs had backed off right when FOA wrote these posts, well then perhaps they are more relevant today than the day they were written. So with that thought in mind, enjoy!
Question:
Do you think that Russia joining the WTO could have the same affect?
It has been implied that a deal was struck between US and China that entrance to the WTO would be predicated upon buying UST, which happened. Russia has been trying to gain entrance to the WTO and it has also been implied that the USG is the player calling the shots in the WTO. So if Russia is now gaining entrance to the WTO, the implication is that a deal was struck with USG. Does anyone doubt the tenacity of USG to keep the dollar afloat?
FOFOA comment to Gold: The Ultimate Wealth Consolidator
"New liquidity can only be created through gold as long as real physical gold is willing to bid for dollars somewhere in the world. This is why the dollar must depreciate against gold, to coax fresh gold "stock" into bidding for dollars! (ANOTHER taught us that gold prices dollars, and then dollars price everything else.)
In the past, the CBs supported this process with guarantees of their own gold (to bid for dollars). But today they are less willing to do so. Only unencumbered physical gold can be fractionalized, and only as long as people are willing to buy golden tickets in lieu of the real thing."
=================================
Freegold Foundations
"In fact, the banking system never really stopped "banking" with all that gold, even though Nixon demonetized it. While gold was currency, deposits of gold generally went into unallocated accounts just like your deposits of physical dollars do today. Putting gold in an allocated account in the past would be akin to putting cash in a safety deposit box today. Sure, it happens, but it is not common because it has a cost associated with it.
And what is it that banks do with unallocated accounts? They make loans to generate income for the bank, and they use fractional reserve accounting to juggle the deposits and (hopefully) keep everyone happy. And in the rare situation where they come up short on reserves, the Central Bank stands ready to backstop their fractional reserves with a loan of extra reserves."
cont.
cont. from "Freegold Foundation"
"Even today, a few of the biggest banks still have bullion departments where they can take deposits in physical gold. These banks are what we now call the Bullion Banks. This bullion banking practice seems very foreign to us shrimps with a little gold in the family safe. But yes, just like the billions of ounces that existed during the gold standard era, this practice of bullion banking still exists.
And today the bullion banks still operate with fractionally reserved unallocated gold. Some reports put the remaining amount of unallocated gold being juggled within the banking system at about half a billion ounces, or 15,000 tonnes. But so far, this is apparently enough to support the meager delivery demands on the spot gold trade as well as the allocation needs of the bullion bank-operated ETFs. (More on this in a moment.)
Things have changed in the last decade. The Bullion Banks no longer have the same income-producing uses for this unallocated gold on deposit that they did in the 80s and 90s. Back then they lent it out to hedge funds and mining operations. For mines, a gold loan made great sense because it carried a lower interest rate than a dollar loan and could be paid back with just what they pulled out of the ground. For hedge funds, it also made sense with the low gold interest rate. Funds would just sell the gold into the market for cash and buy it back later, called the gold carry trade. But today, with the rising price of gold, gold loans no longer make sense for anyone. And in 1999 the WAG ended the CB backstop for this Bullion Bank lending practice.
So guess what income-producing activity the banks found to do with some of this unallocated gold today? As the mutually reinforcing factors of rising prices and termination of mine company hedging and waning carry trade activities in the wake of the 1999 CBGA left bullion banks with their full store of unallocated gold deposits but a shrinking base of usual customers for their gold lending services, the ETF mechanism provided the ideal means to relatively safely put these deposits back into play. By delivering them into an allocated account with the ETF in exchange for ETF shares that could be lent or sold for cash, these same Bullion Banks found a new path to dollars that could then be used to churn an income.
I don't think the issue is whether or not the gold in the ETFs actually exists, but rather, how many claims exist on that gold and who (of the claimants) has an actual pathway to take possession of it?"
cont.
cont.
The View: A Classic Bank Run
The thing was, the incoming flow from the mines was not exploding as hoped and expected. And the overall flow from the mines combined with the Western gold bugs puking up their private stashes was nothing compared to the sheer volume of the "oil" wealth in line around the corner. At the current price there was literally unlimited demand at the "outgoing" window and a limited supply coming in. This is what Another meant when he wrote that the oil states had already (almost inadvertently) cornered the gold market by 1997.
ANOTHER: "People wondered how the physical gold market could be "cornered" when its currency price wasn't rising and no shortages were showing up? The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold flowing during a time that trading would have locked up."
This is important! Important enough that it was in Another's very first post. And this blogger (at least) believes Another was most probably a European CB insider, so as to give his words significant weight.
What he's saying here is that when the CBs lent gold to the BBs, it was in a banking backstop or lender of last resort capacity, not unlike when the Fed created trillions to backstop the frozen interbank lending market in 2008 or when it swapped billions with the ECB in 2009 as a Eurodollar backstop. All the BBs ever got from the CBs was paper, "CB certificates." Think of it in commercial banking terms. These "CB certificates" would have been analogous to "reserves held at the Fed." Reserves held at the Fed fill a void of cash in the vault for the banks, just like these high powered certificates acted like physical reserves to the BBs.
cont.
cont. from "The View: A Classic Bank Run"
ANOTHER: "This whole game was not lost on some very large buyers WHO WANTED GOLD BUT DIDN'T WANT ITS MOVEMENT TO BE SEEN! Why not move a little closer to the action by offering cash directly to the broker/bank ( to be lent out ) in return for a future gold note that was indirectly backed by the CBs. That "paper gold" was just like gold in the bank. The CBs liked it because no one had to move gold and it took BIG buying power off the market that would have gunned the price!"
But then, like I said, something happened:
ANOTHER: "The Asians are the problem, by buying up bullion worldwide and thru South Africa they created a default situation on all the paper, for the oil / gold trade! …Asia put an end to a sweet deal for the West! From the early 90s it was working very well. But now: The problem with gold physical supply is very real indeed! … The oil "understanding" was broken by the Asians. More gold has been sold than can ever be covered! This market is not the same as the past. … The great mistake by the BIS was in underestimating the Asians.
"Some big traders said they would buy it all below $365+/- and they did. That's what forced LBMA to go on a spree of paper selling! Now, it's a mess. … Instead, the BIS set up a plan where gold would be slowly brought down to production price. To do this required some oil states to take the long side of much leased/forward gold deals even as they "bid for physical under a falling market". Using a small amount of in ground oil as backing they could hold huge positions without being visible. For a long time they were the only ones holding much of this paper. Then, the Asians began to compete on the physical side." (See this post for more detail on the oil for gold trade.)
Now the real picture is starting to emerge. "Oil," lined up at the "outgoing" gold window, had the physical flow already cornered because of oil's indispensable value to the West. Then the Asians showed up at the window. Well, not completely. They were also taking supply right out of South Africa so it never made it into the Western paper liability system, the BB reserves. This caused the BB reserves (think cash on hand in a bank) to shrink.
The CBs stepped in to backstop this run on the BB's reserves with their "CB certificates." (A backstop prevents price from running away, the same way Bernanke's 2009 currency swap calmed the rising dollar.) Additionally, they convinced "oil" to take "repayment contracts" removed from the asset side of the BBs' balance sheets in lieu of actual physical reserves. These contractual assets were (now) as good as gold in the hand because they were backed by the BB's reserves which were (now) backstopped by CB gold, still sitting in the CB vaults.
[...]
It is important to start thinking of these gold operators as the banks that they are, because then you can start to see the significance of the CBs publicly announcing, through the twice-renewed CBGA, that they are no longer going to be the lender of last resort to this system. Quote: "The signatories to this agreement have agreed not to expand their gold leasings…" You cannot be a backstop without expanding!
Furthermore, you will be able to see how the very act of commercial banking (which is lending) automatically creates a ginormous synthetic supply of whatever the system's reserves are. Think credit money versus cash, or even M3 versus M0 once you throw in a few derivatives. The LBMA today clears 18,000,000 ounces, or 560 tonnes of paper gold liabilities every single day. That's down from its peak of 1,359 tonnes in December, 1997 when Another started writing. That's each and every day! It's all right here."
I better go and read up to find out what the good lord says about Jesus and the Devil (did you see what I did there - who's who?) getting together and trying to pwn the world as one.
Well looka that! The Devil rolls over and Jesus wins again. Hurray!
Nickelsaver and mortymer,
does Russia have enough trade surplus in dollars in order to fund the US trade deficit, and perhaps even the US budget deficit which is now twice as big?
FOFOA,
I just looked up that the 1-month forward (GOFO) was in backwardation from May 8 to May 11, 2001, i.e. one week earlier. It was not in response to the May 18 weekend price action.
Some thoughts on the role of the COMEX data. The size of COMEX is less than 10% of LBMA, and so COMEX is not where the real action is. But since COMEX positions are linked to LBMA by arbitrage (otherwise some other BB might get a free lunch), COMEX nevertheless reveals something about the position at the LBMA.
How can you get a persistent short position by the 'large commercial' category?
1) Some BBs used a combination of spot and COMEX in order to borrow gold from the general market for a fixed period, i.e. they bought in the spot market and sold the future. Since COMEX has physical settlement and the BB cannot be sure whether they will be asked for delivery, this makes sense only if the BB bought physical in the spot market and sold the COMEX future and thereby created a physical gold for dollars swap.
2) Somebody external sold a lot of forward gold to some BBs. The BBs don't want any net exposure, and so they start selling forwards to everyone else they can get hold of. Part of this involves selling the COMEX futures. Since these may involve delivery, the entire operation would be high risk unless the BBs are confident that they can get the forward allocated if necessary.
This is where you can get the net short position from. Now the question is why would someone do it. I can only speculate.
In case 1) some BB would have bought a lot of physical when the position was opened, i.e. between May 15 and May 22 (successive COT reporting days). The price of gold rose between May 15 and May 18 from $267 to $274 and then on May 18 and May 21 to $298.
If this was the case, it might have been the BBs that drove the prices higher over the week. Then, how would you try to squeeze the BBs? Starting to buy unallocated at 12:30 on Friday you might hope to drive the spot price higher over the weekend, but then why wouldn't the BBs just go short and wait it out. You could have phoned in and ask for allocation on Monday 9am London time the earliest, but then the biggest price spike was already over.
No, if you wanted to squeeze the BBs you would have bought unallocated over the previous days and then phoned in on Friday and asked for allocation. Then the BBs would have no choice other than drive the price higher until they find some sellers of physical. They finally found the bulk of them on Monday, 11:20 New York time.
2) Different story. Some BBs are under pressure to come up with enough allocated (perhaps because you are trying to squeeze them). How can a CB help the BBs? The CB could forward-sell a lot of gold (the forward is just a commitment to sell unallocated, but then if you trust them ...) This means the BB does not have to come up with physical gold and give it away for good, but it is enough if they can borrow some for a certain period and use the promise from the CB after that period. Much easier. They can perhaps even run down their own physical inventory, hoping they can get allocation from the CB in case there are more allocation requests in the future.
Outside the LBMA, however, you do not see all these movements. The only thing you see is that there is a new forward sale position that is partly arbitraged over to the COMEX. This net position, however, was not the point. The point was that it allows the BBs to better manage their physical reserve.
Again, as I said, just guessing.
Victor
The goldbugs see the COMEX short position and think the BBs are naked short in order to suppress the price. Against a rising market price that increased more than fivefold? Not likely. What the goldbugs fail to explain is why the net short position appeared during that week.
Victor
MaxDeNiro:
"There could be other ways to settle up in kind also. The US have considerable military capability. They could become a huge mercernary army."
...The United States sold more than $80 billion in military hardware between 1951-2006 to the Saudi military... On October 20, 2010, U.S. State Department notified Congress of its intention to make the biggest arms sale in American history - an estimated $60.5 billion purchase by the Kingdom of Saudi Arabia. The package represents a considerable improvement in the offensive capability of the Saudi armed forces. The U.S. was keen to point out that the arms transfer would increase "interoperability" with U.S. forces. In the 1990-1991 Gulf War, having U.S.-trained Saudi forces, along with military installations built to U.S. specifications, allowed the American armed forces to deploy in a comfortable and familiar battle environment. This new deal would increase these capabilities, as an advanced American military infrastructure is about to be built. The US government is also in talks with Saudi Arabia about the potential sale of advanced naval and missile-defense upgrades worth up to tens of billions of dollars.
The UK has also been a major supplier of military equipment to Saudi Arabia since 1965. Since 1985, the UK has supplied military aircraft - notably the Tornado and Eurofighter Typhoon combat aircraft - and other equipment as part of the long-term Al-Yamamah arms deal estimated to have been worth £43 billion by 2006 and thought to be worth a further £40billion.
http://en.wikipedia.org/wiki/Armed_Forces_of_Saudi_Arabia
The President Obama European Council President Herman Van Rompuy, and European Commission President José Manuel Barroso
http://www.telegraph.co.uk/finance/debt-crisis-live/8919644/Debt-crisis-live.html
19.45 And from Mr Van Rompuy himself via Twitter:
Twitter @euHvR Europe&US remain partners of 1st & last resort. Our "entente cordiale" was a mainstay in the past&will remain so in the future.
There is this interesting part in the Asian Crisis wiki article:
"Another possible cause of the sudden risk shock may also be attributable to the handover of Hong Kong sovereignty on 1 July 1997. During the 1990s, hot money flew into the Southeast Asia region but investors were often ignorant of the actual fundamentals or risk profiles of the respective economies. The uncertainty regarding the future of Hong Kong led investors to shrink even further away from Asia, exacerbating economic conditions in the area (subsequently leading to the depreciation of the Thai baht on 2 July 1997)"
http://en.wikipedia.org/wiki/Asian_crisis
...reminds me of activities of Big trader :o)
@ Costata
The report about Russia was on reauters and a few Russian sites.
http://www.reuters.com/article/2011/10/18/idUKL5E7LI3V020111018
I swear I read something about Russia having money in Kinross too,a while ago but i cant find it. I own a fair amount of that stock.(its an underperformer)
Vladimir Putin and the rise of the petro-ruble
By Mike Whitney, 05/22/06
“The ruble must become a more widespread means of international transactions,” Putin said. “To this end, we need to open a stock exchange in Russia to trade in oil, gas, and other goods to be paid for in rubles."
The United States must protect its dollar-monopoly in the oil trade or it will lose the advantage of being the world’s “reserve currency”. As the reserve currency, the US can maintain its towering $8.4 trillion national debt and $800 billion trade deficit without fear of soaring interest rates or hyper-inflation. Trillions of greenbacks are constantly circulating in oil transactions just as hundreds of billions are stockpiled in foreign banks. In effect, the Federal Reserve is issuing bad checks with every dollar printed on the assumption that they will never reach the bank for collection. So far, they’ve been right, and as the price of oil continues to skyrocket, the Fed just keeps cheerily printing more worthless paper sending it to the 4 corners of the earth. Regrettably, if Russia or Iran goes ahead with their conversion plan, then the bad checks will flood back to their source and precipitate a meltdown.
http://www.norges-bank.no/en/about/published/press-releases/2004/2004-01-28t09-11-39fgenhtml/
Norges Bank has sold 16 tonnes of gold bars in January and is planning to sell the remainder of the Central Bank's holdings of gold bars at a later time. Excluded from the sale are seven gold bars that have been used for exhibition purposes and a large number of gold coins that were transported to England when Norway was attacked in 1940. Norges Bank and the University of Oslo are discussing whether the gold coins can be put on public exhibition.
The background to the sale is that gold only accounted for just over one per cent of the Bank's international reserves, and thus contributed little towards diversifying the risk associated with the reserves. The return on gold has historically been low.
Revenues from the sale have amounted to about NOK 1½ billion, which has been invested as part of Norges Bank's foreign exchange reserves.
At end-2003, Norges Bank's gold reserves consisted of about 37 tonnes of gold, made up of 3½ tonnes of coins and 33½ tonnes of gold bars.
Gold Coin Future Contract of Tir 1391 Kick off Hitting New Record 2011.11.27
Gold Coin Future Contract of Tir 1391 Kick off Hitting New Record
http://www.ime.co.ir/DesktopModules/Fan.Modules.News_En/NewsDetail.aspx?tabID=0&ItemID=57&mid=3284
http://www.ime.co.ir/NewsEnRSS.XML
Official Offer of the Russian Crude Oil on the Kish International Trading Floor
* The President Urges Launch of Petroleum Exchange
* For the first time and to finalize the last phases of the Oil Bourse
Here is the links to above topics:
http://www.ime.co.ir/site/346/DesktopDefault.aspx?PageID=346
Russia:
15 November, 2007
First oil bourse to make fuel market transparent
Saint Petersburg's Stock Exchange has been chosen as the first Russian bourse for oil products. It's due to begin trading in the first quarter of next year.
Russia's Economics Ministry chose the SPX because of its experience in commodities and readiness to invest more than $US 10 million of its own money in the project.
Deputy Economic Development Minister Kirill Androsov says the state will now buy at least 15% of the fuel it needs through the St Petersburg bourse.
http://rt.com/business/news/first-oil-bourse-to-make-fuel-market-transparent/
Looking at FOFOA's Twitter feed on the right I noticed the BIS recently published a speech given by Vítor Constâncio on November 23 entitled, "The future of the international monetary system"
Here are the last two paragraphs:
"Another question is whether the new IMS would be steady in nature or whether a new hegemon would emerge possibly to accomplish the “hegemonic stability theory” promoted by Kindleberger (Kindleberger, 1970). The answer will, again, depend predominantly on policymakers. It remains to be seen whether the currency competitors of such a multi-polar world will be of relatively close weight, both in economic and financial terms, but also with respect to the political and governance factors discussed before when considering the preconditions for a currency to become a major international currency. "
"As regards the necessary changes to international cooperation, we will need to see a greater awareness among global partners about their interlinkages and the ensuing responsibilities to ensure the stability of the whole system. I am convinced that, without a minimum spirit of multilateralism and a minimum degree of cooperation, no future IMS will remain stable for long. It is to be hoped that countries, especially those with systemic relevance, understand that it is in their best self-interest to consider externalities and cooperate. But such “enlightenment” alone will not be sufficient to ensure stability. If the IMS as such does not deliver the right incentives, the international community will have to eventually agree on enhanced adjustment mechanisms, e.g. in order to foster the traction of policy recommendations. It is to be hoped that we do not need another global crisis to instil the necessary incentives."
Apologies if anyone (mortymer) already posted this and I missed it. ;-)
--Aaron
I probably should have been a bit more clear for our visitors on why I chose to bold those two specific items.
"especially those with systemic relevance"
That's the United States.
"enhanced adjustment mechanisms"
That's using gold to balance trade.
Hello milamber,
You wrote: "2. At the end, he posits three possible scenarios:"
He actually posits four scenarios which he calls the Four Horsemen of the Dollar Apocalypse. You left out the one he calls Multiple Reserve Currencies.
"I read FOFOA's posts & I hear lots of similarities, but then some major differences."
If I were to make subtle changes I could adapt his Four Horsemen to my view, and the catch would be that Freegold is a part of all of them.
I think the key difference between our views can be found in his SDR section. In it he explains how SDRs "do satisfy the traditional definition of money in many respects." He goes on to run through the three functions; store of value, medium of exchange and unit of account.
If you read my post The Return to Honest Money you'll find a slightly different view. First note my "FOFOA's dilemma":
When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma.
There are a lot of posts here that lead to the distillation of FOFOA's dilemma. You might start with my older Gold Is Money series and most recently, Moneyness. Also, The Debtors and the Savers.
In The Return to Honest Money you'll also find agreement with this view that "money" is not best defined as three functions from none other than Ludwid von Mises in his book, Human Action:
"Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange. This is its only function. All the other functions which people ascribe to money are merely particular aspects of its primary and sole function, that of a medium of exchange."
Mises goes on to describe what he calls "primary" and "secondary" media of exchange. Today's monetary system promotes the use of bonds in the role Mises calls the "secondary medium of exchange" which is really just a description of the long term store of value monetary function. The problem is that bonds don't float in value against the primary, the currency itself in which they are denominated. And because of this flaw, they fail to store value when the currency collapses.
Cont…
2/2
A true bifurcated monetary system would promote a certain good as a reserve asset in that "secondary" function, the store of value role that, by its very nature, floats in value against the primary medium of exchange, the currency. And it would promote the one good picked by the free market as the focal point winner. Here is Mises again from my post talking about how a good gains extra value from being the focal point winner in this role:
"Consequently there emerges a specific demand for such goods on the part of people eager to keep them in order to reduce the costs of cash holding. The prices of these goods are partly determined by this specific demand; they would be lower in its absence. These goods are secondary media of exchange, as it were, and their exchange value is the resultant of two kinds of demand: the demand related to their services as secondary media of exchange, and the demand related to the other services they render."
The reason gold wins this "focal point contest" as I call it, is because it has the least "other services demand" with which hoarding as a store of value would conflict and stress the economy. But that doesn't mean we want gold as our primary medium of exchange as in a gold standard. It is only ideal as the secondary, as I say in my post:
"The question is one of degree, and this is how, through market forces, we end up with "two monies." Being the focal store of value does not make something the best medium of exchange, and vice versa."
You write: "He advocates for the 2nd one…"
That's another difference. I'm not here advocating for a particular system. As complicated as this all sounds, all I'm trying to do is describe the tsunami that I see rolling in. And describing it requires this complex discussion about how and why the gold market and the gold function is changing in response to the flaw that is collapsing the current system (FOFOA's dilemma). Once you understand that, you'll see how it doesn't matter what they concoct in the other two monetary roles, we're still heading toward physical gold as the monetary store of value, which can be visualized most clearly on the ECB's financial statements.
I hope this helps you understand the difference between my view and the many people advocating a new gold standard or some other concoction. At least I gave you a few posts to get you started.
Sincerely,
FOFOA
M,
Thanks for the info.
mortymer,
Thanks for the additional Russia links.
VTC,
Don't these moves make it "look" all the more odd that the US Administration is supporting Russia's elevation to the WTO?
mortymer,
let's split the question about Russia in two parts. First, what is possible given the numbers alone.
According to Wikipedia, Russia has a trade surplus of $140bn per year. Even if all of this were in dollars, this would not suffice to cover any significant part of the US deficit of $500bn+ not their budget deficit of $1500bn+. So, even if they agreed to help the US, this wouldn't fly.
Second, who are their biggest trade partners:
Exports: Netherlands, Italy, Germany, China, Turkey, Ukraine.
Imports: Germany, China, Ukraine, Italy, US.
That makes it quite obvious where they belong from an economic point of view.
Yes, as I said, why would the US support them in the WTO at all?
Victor
@costata, could it be just that behind Russia entry is a push from Europe? Rise of its political power? What do those latest sane improvements, trade rules conditions, etc. mean?
Looks similar/(in reverse) to me like when USSR was withdrowing from Afghanistan and East Europe, loosing political power and then the collaps in 1991...
@costata: Don't these moves make it "look" all the more odd that the US Administration is supporting Russia's elevation to the WTO?
Wouldn't it be funny, if it turned out the US agree to let Russia play the WTO game, not in return for the Russian's rolling over and actively supporting the dollar, like the Europeans or the Chinese... but for agreeing for now NOT to break the whole system by simply draining all the gold out of the Western market? Kinda like the devil letting Jesus win a fight, because he's the only idiot betting on that outcome. The devil is destined to win in the end anyway - it's inevitable.
http://www.zerohedge.com/news/ron-paul-explains-his-plan-monetary-freedom-and-returning-gold-standard
I found this very encouraging, this is Ron Paul talking about a floating exchange rate between gold and the dollar.
I was always afraid RP was thinking in the old paradigm of a fixed exchange rate when he would mention a return to the gold standard, but apparently he got FOFOA's letter - hehe
"Ron Paul: If there was a fixed exchange rate, sure, we would never pay our bills off with gold. We would pay it off with paper because it drives the good money out of circulation. But if you want a checking account and you want to deal with gold, you put your money in, you could buy and sell in gold and save in gold, so it would be parallel rather than having a fixed exchange rate between the two.
P.S. "Ron Paul: If you tried to fix the exchange rate it would not work."
(RP interview on Fox Business - H/T @matrixsentry)
Date: Sat Oct 25 1997 17:16
ANOTHER (THOUGHTS!) ID#60253:
JTF, ZARDOZ, MOREGOLD, :
" One question, where do you get your information from ???"
MoreGold,
A lot of my "Thoughts" are of record, just not public record. My thoughts are made free for all to read now because, as of the beginning of 97 the "cat is out of the bag". You may have read that on the Gold Eagle Site. Much of what was written about the "Big Traders" will play out in time. Thou those writings were extremely hard to relay it is written that "time will prove all things"! I will allow time to prove my Thoughts.
Victor-
"According to Wikipedia, Russia has a trade surplus of $140bn per year. Even if all of this were in dollars, this would not suffice to cover any significant part of the US deficit of $500bn+ not their budget deficit of $1500bn+. So, even if they agreed to help the US, this wouldn't fly."
Eh? Would nt those numbers get a lot bigger after they joined the WTO?
What did the numbers in China look like before they joined?
Regards
Ozzy
Ozzy,
Did you know Russia has dumped half its treasuries in the past year, from 176 billion to 94 billion?
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
What do you make of this?
Cheers, J.R.
Maybe now they ve got what they want, they ll hit the buy button.Simples.
And maybe they won t.
But cross uncle sam at your peril.Just ask Col. Gaddaf...Oh no, he s dead, you can t.:(
After all, who de have thought China would have become the megga big treasury buying monster it did?
Certainly not A/FOA.And they were pretty smart guys by all accounts.
Regards
Ozzy
Mr.Pinnion,
Don't you think, however, that the days of "Uncle Sam's" military supremacy are coming to an end? Where will the money come from to finance the machine when the currency fails? Who will sell us oil to make the fuel for those machines?
@mortymer
did you see this re japan/us
http://mdn.mainichi.jp/mdnnews/news/20111128p2g00m0dm006000c.html
Also be interste din your thoughts on the yen and japan as a pillar of the $imf (SDR basket amnd moving into trade deficit). yen was afterall the leveraging vehicle for worldwide risk assets now it is essentially being left to strengthen itself to the point of starvation. Seems like th US is foreclosing on Japan via the strategy and the free trade (agsinst party loyalists) push to pry open the ag market is both timely, opoprtunistic or perhaps something more. Yen seems to get lost in the shuffle of Europe...
http://www.washingtonpost.com/world/japan-will-take-part-in-trade-talks-pm-noda-says/2011/11/11/gIQANw63BN_story.html
the japan push doevtails with the freance story yesterday regarding GMO...
http://www.google.com/hostednews/afp/article/ALeqM5jqAqK0uhvkwkOaUAn8PdPI4YBHUA?docId=CNG.b3f711e12539c6d91997e2a387ffbd8c.791
http://www.naturalnews.com/030828_GMOs_Wikileaks.html
@Victory
@JR
I too saw Ron Paul's commentary regarding gold as a competitor to the dollar. I see some good things there but I continue to be discouraged with his use of term "gold standard". It really turns people off who know what a gold standard is and why it will not work. Also, he plays into the hands of the debt as money crowd and gives them ammo to discredit gold.
I had a twitter discussion with DP and agree 100% that RP is unnecessarily complicating the issue with ancillary issues such as Fed audits and his misuse of inflammatory terminology. KISS.
He needs to focus on the fact that gold is emerging as a focal point. He needs to be speaking in terms of something that is happening and not as something that "has to be done." He needs to discredit the concept of gold standard and the use of that terminology.
Focus on floating price determined by market. Focus on gold used exclusively as reserve asset on CB balance sheet and for individual savings. Focus on gold as competitor to paper for storage of value.
Are you bored?
http://www.gold-eagle.com/research.html
http://www.gold-eagle.com/gold_digest/history_gold.html
THE EXTREME DIFFICULT TASK OF PREDICTING GOLD PRICES
Baron von Rothschild, creator of one of the most famous financial dynasties of modern times, was once heard to have said that: "He only knows of two men who really understand the true value of gold - an obscure clerk in the basement vault of the Banque de Paris, and one of the directors of the Bank of England. Unfortunately, they disagree!"
vronsky :o)
I hear what your saying ,me old FOFOArino.I do think there coming to an end.Knowing how many days , is above my pay grade.(come to think of it, road sweepings above my friggin pay grade!).
If a bloke with an oil well has a gun to his head, he ll sell oil at whatever price that will stop his head from aquiring an extra hole.
Who will fill the void when the US army goes away?I think a lot of countries are thinking its better the great satan you know.
THe US is getting busy around Syria and Iran i see.Maybe taking out the opposition while it still can? who knows.
FWIW i think the US is going to have it bad , soon.Was just throwing out a few what ifs.
Regards
Ozzy
Regards
Ozzy
@S
Well Japan and Russia are technically still in war since they did not sign the WWII peace treaty and the Kuril island issues are far to being solved. Following the heating up of the dispute in early 2011, President Dmitry Medvedev ordered significant reinforcements to the Russian defences on the Kuril Islands in February 2011.
Those two countries belong to the two opposite camps. Japan has other more important issues ongoing among the biggest is the rise of the old rival China and weakening of their ally.
2007
September: Japan's Nippon Oil has agreed to buy Iranian oil using yen
December: Iran stops accepting U.S. dollars for oil.
Japan has different structure. In Japan, BoJ emergency lending must be approved by the Prime Minister and the Minister of Finance.
I would put those negotiations into the box "The power shift".
From your first link I note the date - in November 2011 there were MANY international high level meeting all around the world. Result? I do not know.
IMF? You can read more here.
http://anotherfreegoldblog.blogspot.com/2011/11/rh-hiroshi-hashimoto-img-gold-sales.html
http://anotherfreegoldblog.blogspot.com/2011/11/ryutaro-hashimoto-luncheon-slip.html
I also think Another made it quite clear about Japan. Read archives.
Hi Matrixsentry,
I of course agree. But I look at it differently I suppose. For me, its just neat to see the constant evolution toward the end game. Paul, like many others, continue to arc his orbit closer and closer to FOFOA. Its not so much how far away he is that interests me, but rather the direction in which his views are evolving, baby steps as they may be.
==================================
Remember this:
"Getting to Hard Money
As I have mentioned, Ron Paul's honest money ideas have evolved since these early days. In fact, in many ways he is quite a bit closer to Freegold today than he was in the early 80s. He is still stuck to the idea of a fixed price for gold, but he seems to have evolved from a one-time government price-fixing to more of a market-based "decision" on how high the price of gold should be fixed. He still wants to denationalize the US gold hoard and get it into circulation, but he seems to have evolved to more of a Hayekian competition of privatized currency, which begs the question of how to denationalize the gold.
Basically, it seems that over the last 30 years he has evolved his ideas from strictly "end the Fed and institute a new gold standard" as described by Rothbard above, to a more measured approach of "allow a competing currency to circulate which will (presumably) win the day and weaken the Fed and lead to its end."
[...]
To skirt the obvious problems in dealing with these issues head-on, some of the hard money camp has subtly retreated even further, now asking for a mere "commodity standard." Here is Ron Paul again:
News Anchor: And just one more thing which is that when you talk about the right course, if I am not mistaken, you want to go back to the gold standard? Is that the right way to run monetary policy, in your opinion?
Ron Paul: No, but I’d like to go forward to a commodity standard. There were a lot of flaws in the old gold standard because there was bimetallism and a fixed price between gold and silver.
[…]
I really like the idea of allowing the market to determine what backs the currency, make sure there are no-fraud laws, and really look into the matter whether or not we should have fractional reserve banking.
Reminds me of the old saying, "what a tangled web we weave…" You see, it's kind of like playing Whack-a-Mole when you resist the nature of the beast."
=================================
RP's more recent comments since the stuff quoted in Return to Honest Money" shoe more evolution - from talking about "backing" and "commodity standards" to talking instead about a "parallel exchange rate" between gold and currency - this is is sexy.
And the recognition that all the debt can't be paid off if we fix the price, aka gold's gotta be revalued much higher vis-a-vie currency to solve this problem, that's sexy sexy sexy.
================================
FOA was once like RP too, and IMO his change is evidence that others can evolve too:
"FOA: My typical hard money shared long held belief, back then, was always:
----"Gold is the only official money of the world and will return to these roots one day"-------- and -----" some worldwide financial dislocation will drive all governments back to this position"-----!!!!
It wasn't going to happen, no matter what, short of nuclear war. r. All we had to do was look around and see how people the world over were attached to using fiat currencies. The economic system itself was morphing into new ground as world trade learned to function very efficiently with fiat digital settlement. And that's something the 70s crowd said could never happen. That was how many years ago?
Dipping in past for pearls:
http://www.gold-eagle.com/editorials_99/madhok081999.html
Matrixsentry,
Its sorta like another said:
"Everyone knows where we have been. Let's see where we are going!"
I enjoy watching others make this evolution, from where we have been to where we are going!
Dig n.II
"I KNEW I SHOULD HAVE BOUGHT GOLD"
http://www.gold-eagle.com/gold_digest_08/vronsky021610.html
Kuwait... This was first strange to me that Kuwait will lease its gold.
http://www.gold-eagle.com/gold_digest_99/vronsky102399.html
This is strange, isnt it?
Well, no:
"...When Central Banks (mostly the European, at first) began to lease / lend gold, they were beginning what was to become "the master plan". The creation of a broad, liquid paper gold market that would ulltementally undermine the dollar, in time..."
http://www.usagold.com/cpmforum/archives/819995/default.html
(FOA (5/8/99; 20:16:12MDT - Msg ID:5772))
from The Telegraph....
"Meanwhile, the ECB admitted it had failed to attract enough deposits from European banks to balance out the sovereign bonds it has recently bought. As part of its strategy called "sterilisation" the bank said it had asked European banks for €203bn of deposits for a week but had only attracted €193bn. Although small, the €9bn shortfall was a rare failure."
more from the Telegraph....
"Raoul Ruparel, of the respected think-tank Open Europe, said: "The fact banks seem to be hesitant to commit to even one-week ECB deposits highlights just how uncertain the situation has become – banks are keen to hold on to any liquidity given that the situation is now so serious it can change from day to day."
The failure has also led to questions over the bank's ability to buy bonds without being allowed to print
money. Germany is staunchly opposed to such quantitative easing but maybe forced to capitulate – or insist on less ECB intervention in the bond markets – if the central bank is unable "sterilise".
JR,
Of course you are right, I will take a gradual and evolving approach to Freegold over the alternative any day. I voted for the man as a write in last tome and it looks like I will be doing so again this time. He has an uncanny way of saying what nobody wants to hear but everybody should hear.
Cheers and Merry Christmas!
Mortymer,
Another said that Japan was/is with the US and will down with the US......
@matrixsentry, I agree with 100% with your points, well said. Im a fan of RP for a lot of other reasons aside from his monetary/fiscal policy views, to generalize I think he's the closest thing ideologically to our founding fathers that we've seen in many decades. He can deliver the kind of change the populace desperately sought when they elected Obama(myself included, fool me once). That being said I was just realieved he wasn't planning on putting us back on a classical gold standard because that would have been a major flaw in his agenda for me.
Unfortunately RP is not always the most eloquent speaker in general - he has a tendency to throw a lot out there, jumping around from place to place, without proper explanation for the laymen (voting populace). I'm not sure how clear he is in is own mind as to the path to freegold but I'll take the parallel mediums of exchange as a step in the right direction (sadly though he also said he wanted to monerize gold/silver but we don't want the govy in any way shape or form trying to dictate the value of our wealth reserve nonpareil.) What we really need is FOFOA and Rickards on his economic advisory team. While we're at it putting Kyle Bass at Treasury and Bill Black in charge of the CFTC and SEC
-V
mortymer,
Kuwait. This was one month after the Washington Agreement, and so the US-UK group probably needed any ounce of physical they could get hold of. Perhaps the Kuwaities still owed the US a favour for 1990/1.
Concerning the ECB sterilization, this could be an indication of increasing velocity.
Victor
Victor,
Would you please expand your ideas regarding Kuwait? I've never heard of the possible implications.
I am Revisiting Gordon Brown Bottom, anyone want to join in and help out in data collection?
http://revisiting-gordon-brown-bottom.blogspot.com/2011/11/browns-bottom-by-pgas-unofficial-story.html
The purpose is to sort Another writings into world events he speaks about and putting there documents and people.
Banks “Broken” Business Model
This is an excellent, short post that makes the point that the business model of banks is broken. The writer focuses on the structure of executive compensation but, in my opinion, he is correct on all points.
His analysis of the problems created by the incentives is particularly astute. Highly recommended reading.
Cheers
What I am interested in is some list of the gold sales, around 1990 - now.
If you have some, just mail me or put in into comments at:
http://revisiting-gordon-brown-bottom.blogspot.com
OIL
Keeping Iraq's Oil In the Ground
Did the U.S. invade Iraq to tap its oil reserves or to make sure they stayed under the sand?
"...Big Oil, whether in European or Arab-OPEC dress, has done its damned best to keep Iraq's oil buried deep in the ground to keep prices high in the air. Iraq has 74 known fields and only 15 in production; 526 known "structures" (oil-speak for "pools of oil"), only 125 drilled..."
http://anotherfreegoldblog.blogspot.com/2011/11/oil-keeping-iraqs-oil-in-ground.html
[Mrt: Personally I think this article is a bombshell and would expose finally for ALL TO SEE what Another was writing about (concerning Oil). I hope you enjoyed my links, I hope they were good for you, they made you think. Since this is growing a bit over my head I am wandering what to do about it. Any ideas?]
Of course I will later add those links to the timeline :o)
Thanks for that Mortymer.
I had been mulling over the peak oil thing and been wondering why more hadn't been done to prepare for it.
Perhaps, whilst peak oil may be a real phenomenon, a deliberate cut back in production could be exacerbating the perceived size of it to peak oil guys.
The peak oil guys say that we should have been doing something way back, when the oil started to peak which was... 1970.
1970 (or thereabouts) is a very interesting year isn't it.
FOFOA - you wrote "we're still heading toward physical gold as the monetary store of value, which can be visualized most clearly on the ECB's financial statements." a few posts above. But when I look at the ECB statement, line 1 of the assets is "Gold and gold receivables". The Background Information provided by the ECB states "The item gold and gold receivables forms part of the foreign reserves of the Eurosystem. It consists of physical gold and non-physical gold in the form of gold deposit accounts." My understanding of a gold deposit account is basically an account at a bullion bank, like HSBC and others. I haven't been able to find a breakdown of how much of this line item is physical gold, and how much of it is potentially paper. Has anyone else been able to find a breakdown of this asset?
Dr. Ocotagon,
"My understanding of a gold deposit account is basically an account at a bullion bank, like HSBC and others."
Not for CB gold. Think BIS and storage with other CBs, like the theme of this discussion thread: German gold in the USA that Rickards thinks will be confiscated.
Go Go South Korea
"Physical gold is different than modern currency. At the CB level, it rarely gets moved. This was a big reason for the creation of the BIS in the first place. If you think about the purpose of the BIS as a clearing system or gold broker for interbank sales, it makes perfect sense that most of the gold deposited with the BIS would be sight or unallocated.
The purpose is so that CBs can transfer gold around the world without having to physically ship it. Avoiding the cost and risk of physically shipping a heavy metal is an important service provided by the BIS. And it does this mostly in unallocated form. When the BIS physically moves gold, the risk is shared, i.e. the risk is on the BIS.
The BIS is owned by its customers, the CBs. They set it up and subscribed to it (bought in) so it could provide services like this. The BIS's own gold is still owned by the CBs because they own a proportional share of the BIS.
Say you want to give me a hundred dollars. You go into your bank and deposit a hundred dollar bill. Then you fund your Paypal account and send me $100. Then I send that $100 from my Paypal to my bank and I can walk in and take out that $100 bill. You’ve just sent me a $100 bill but no one actually physically shipped it across the ocean. It was an unallocated deposit in one location and an unallocated withdrawal in another. This is what the BIS does with gold.
Out of practical necessity, privacy and security, most BIS gold activities are with unallocated gold. The main difference between the BIS and private bullion banks being that BIS sight accounts are fully reserved. Being "reserves" is the very definition of CB gold. "
FRB Press Release
"For release at 8:00 a.m. EST
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.
These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.
As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013.
Federal Reserve Actions
The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.
U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses."
Money Talk Continued
"[...]
Conclusions: The USDX is a rather poor metric by which to judge the dollar, even in the short term. As long as there is a demand for base dollars, like there is in a panic or a crisis, the Fed has total control over whether it wants to let that demand bid the dollars on the open market, or provide them itself. And the Fed cares more about the financial system than the value of the dollar, so it will surely provide any liquidity that is needed.
The next crisis, if it is mainly in the US financial system, will likely not spike the dollar because the Fed has total control and flexibility within its own system. If it is spread throughout the world it may spike as foreign banks bid up dollars on the exchange, but the Fed is now more experienced than it was a year ago and will likely put a lid on it very quickly."
JR,
Aren't these swaps inflationary? I.e., to keep a lid on the dollar demand and at the same time provide the liquidity required, do they not have to print dollars?
From "The Federal Reserve's Foreign Exchange Swap Lines," as posted in:
http://www.zerohedge.com/news/foreign-currency-liquidity-swaps-aka-global-bail-out-plan-b-faqs
"The Federal Reserve was thus in a unique position to mitigate pressures in dollar funding markets. Initially, the Fed funded the dollar swap lines by reducing its holdings of Treasury securities,particularly Treasury bills. Later, as the swap lines and other liquidity facilities expanded in size, the Fed increased its liabilities commensurately, taking on the proceeds from the sale of a special series of Treasury bills and boosting incentives for depository institutions to hold reserves at the Fed. No other institution was in a position to undertake these efforts in support of dollar funding markets."
Someone want to take a shot at putting that statement into layman's language?
The Federal Reserve was thus in a unique position to mitigate pressures in dollar funding markets.
Only the Fed has any significant degree of control over the dollar supply.
Initially, the Fed funded the dollar swap lines by reducing its holdings of Treasury securities,particularly Treasury bills.
At first they managed to avoid printing more dollars to finance the swaps with other CBs.
Later, as the swap lines and other liquidity facilities expanded in size, the Fed increased its liabilities commensurately
Eventually the swap requirements blew right past what could be achieved through just selling securities. Printing fills the void.
, taking on the proceeds from the sale of a special series of Treasury bills
The Fed can't JUST print dollars, they need an offsetting asset. Handy that the USG likes to borrow money huh?
and boosting incentives for depository institutions to hold reserves at the Fed.
Since there are now many more dollars in the system, let's try to get the banks to keep a lid on velocity.
No other institution was in a position to undertake these efforts in support of dollar funding markets.
Only the Fed has any significant degree of control over the dollar supply.
(At your service.)
Regarding this morning's announcement by a select number of high powered CBs, it seems to me that- even though the ECB is a part of this coordinated action- that it is the result, in no small part, of the ECB's unwillingness to act as the lender of last resort to the same extent that The Fed routinely does. In the great ongoing global monetary regime (change) game the Fed has, again, blinked first.
did a big european bank almost fail last night?
European banks, especially French banks, rely heavily on funding in the wholesale money markets. Given the actions of the world’s largest central banks last night, it raises the question of whether a major bank was having difficulty funding its immediate liquidity needs.
http://tinyurl.com/7uns39c
on swap lines:
FOFOA: Remember back in 2009 the Fed swapped $500 billion with foreign CBs? That was for this same purpose. Those Eurodollars need to be serviced with Realdollars from time to time. But that $500 billion swap line has now been withdrawn. Today it is $0 which you can see on the Fed's balance sheet. Without that access to Realdollars from the Fed, Eurodollar players must bid up Realdollars on the exchanges, which the Fed doesn't like.
Now, in my humble opinion, you need to look at these operations in the proper perspective. And in my view, they are not creating new money or new dollars. What they are doing is changing the very nature of our money...
Eurodollars are just like the "bank credit money" we use inside the US. It is nothing but bank credit, backed by an asset that is a claim on someone else to provide Realdollars to the bank. But slowly and surely, we are replacing that backing, those "claims on someone else" with actual Realdollars. This can be seen in the expanding Fed balance sheet…
The Fed has not created more money, it has simply changed the nature of existing money. Remember, FOA said that "...hyperinflation is the process of saving debt at all costs, even buying it outright for cash...
During hyperinflation the entire money supply becomes "Realdollars" rather than bank credit backed by debt assets. So that is how I view all these "excess reserves held at the Fed", QEx and Swap lines etc.., as a step toward dollar hyperinflation.
Dr Octagon,
my colleague says the German CB made a statement a few weeks ago that all of their gold is direct ownership of physical gold, in particular that none of it is on lease at the moment.
The German CB did not make any statement about where the gold is held in custody.
Also, somebody here figured out a few months ago that the Belgian CB had about half of their gold on lease, i.e. half their 'gold' is only 'gold receivables' or a gold forward.
Victor
JR,
At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar
and Jeff,
it raises the question of whether a major bank was having difficulty funding its immediate liquidity needs.
Seems the problem was with US$ not with euros:
ECB 2 - FED 0
Expansion of the US$ supply is in progress - euros not needed right now. It becomes obvious that all these dollars held abroad are becoming a serious problem for the Fed - lots of volatility here.
Victor
It makes sense, Jeff, and I can't help but wonder what the critical threshold is such that when it is passed the relatively orderly dollar hyper-inflation ceases to be orderly.
It seems that this swap line expansion fits into the second topic of this blog – hyperinflation, by QE – qualitative easing.
Does it also have anything to do with the primary topic, Freegold, in that we have been taught that gold prices dollars, not the other way around.
Can we gain a different perspective by considering the fact that all liquidity is derived from gold (as I've seen mentioned in many FOFOA posts), and hence learn something about the state of the appetite for physical gold to bid on dollars?
From Gold:The Ultimate Wealth Consolidator
There is one type of liquidity that is of absolute importance. And that is "international liquidity". It is the kind of liquidity that lubricates the cross-border flow of real, essential goods like heating oil, food and medicine. It is the very existence of this imperative for sufficient international liquidity that puts the greatest strain on a fiat currency system at the very end of its timeline while it desperately tries to push out "unlimited liquidity", but fails to do more than push on a string.
Alexandre Lamfalussy: “It is therefore right to say that over the last ten years and in particular since 1963-64, we have witnessed a gradual decline in the role of gold as a means of reserve and its complete disappearance as a source of new international liquidity. At the same time, the mechanics of the gold-exchange standard have ceased to function: the creation of reserves by the spontaneous holding of dollars or Sterling has come to a halt and has been replaced by the creation of negotiated reserves.”
I would like to draw your attention to the almost interchangeable way Lamfalussy used the terms "international liquidity" and "reserves". It seems that gold's share (percentage) of total reserves has something to do with that most important type of liquidity, "international liquidity". That's because, when properly defined, they are ONE AND THE SAME!
Thanks JR and Victor for the gold deposit account clarifications.
http://paul.house.gov/index.php?option=com_content&view=article&id=1931:statement-on-the-feds-continued-euro-bailout&catid=16:speeches&Itemid=1
Thanks DP for the translation.
Yep, inflationary, as I thought.
Fofoa: "They will always sacrifice the currency (in a vain attempt)to save the system, never the system to save the currency."
Edwardo,
IMO the 'relative orderlyness' disappears when fear takes over, aka demand abates. Demand for currency falling equals velocity up, which is why Victor and others often comment on velocity. Its all about demand for currency, the printer is simply reacting to this:
Money Talk Continued
16) So as long as there is more demand for dollars than supply, the Fed can control the price of the dollar on the USDX by its own willingness to lend dollars at zero interest with toxic assets or foreign currency as collateral. This costs the Fed nothing, except currency risk and bad PR at blogs like mine. But where the Fed loses control is when there is more supply than demand. And that is what is coming because of this very inflationary policy of providing dollars to save the system at any cost.
=================================
Big Gap in Understanding Weakens Deflationist Argument
"When the economy is struggling, unemployment high, home prices falling, people are afraid to spend their money. This drives up the demand for money, slows the velocity of money, raises the value of money and lowers the prices of things and assets. Likewise, when the financial markets are crashing, the demand for cash skyrockets while plunging assets bid frantically for dollars. Both of these demand-driven events act just like a large deflation in the money supply as they drive up the value of money and lower the prices of other things.
When this happens, the money printer tries to counter demand by increasing supply. But today, clearly, demand is in the driver's seat, not supply. That's because in 2008 we moved from the stable and predictable into the unstable and uncertain.
Now I want you to think about this for a moment. Because everything I've been describing so far sounds like deflation. And I have hardly mentioned prices, or the difference between credit money and physical cash, or the difference between luxury items and necessities, or any of the other myriad things that confuse and complicate the issue. And that's because I'm trying to focus your attention on this one concept. That the printer is no longer in control of the value of currency through the supply side. Instead, the marketplace is now controlling it from the demand side. And so far that has meant mild deflation.
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."
Here is a link to Jeff's cite to FOFOA's comments on swap lines from above. In addition to this discussion, there is also good discussion of swap lines in FOFOA's post Money Talk Continued:
"This is why it is called a "swap" instead of Quantitative Easing. They are swapping freshly printed currencies instead of assets for currencies. All base money! The same as cash. TWICE as potentially inflationary as QE on a global scale because two sides are now exposed to currency risk. […]
"And now that the European problem has been cleared, the foreign CB can cancel that portion of the two-way swap agreement with the Fed. And no physical dollars need cross the ocean. And that portion of the currency risk is eliminated…"
================================
Max,
Check out the comment Jeff references above:
"So now that we have this picture in our minds, what do you think the process of replacing "claims on someone else for Realdollars" with actual Realdollars (on the assets side of bank balance sheets) does to the value of the dollar? It lowers it. This is why the Fed is expanding its balance sheet. To keep dollars cheap. And you do that by slowly changing the very nature of the money supply, from credit money to base money. This is happening. It is not more money being created, it is money being fundamentally altered to keep it cheap.
So what does this process have to do with the BIS swapping its own "claims on entities within the US for Realdollars" for gold from Eurodollar players (those banks with liabilities for Realdollars)? Well, first of all, all that gold is no longer having to bid for Realdollars on the open market. Remember, last July I wrote: "the dollar NEEDS voluntary bids from private physical gold to survive." So the BIS is now providing needed Realdollars for gold by swap, not bid.
Second, you now have US banks that owe Realdollars to dollar account holders in Europe. Meanwhile, the Fed is still expanding its balance sheet changing the very nature of the money supply from credit to monetary base. So while we have no new money being created, we now have a direct line of liability leading from European account holders back to the Fed and its base money creations. And if/when the dollar finally collapses, you'll be able to get your gold back from the BIS for really cheap dollars."
How does this :
"This is why it is called a "swap" instead of Quantitative Easing. They are swapping freshly printed currencies instead of assets for currencies. All base money! The same as cash. TWICE as potentially inflationary as QE on a global scale because two sides are now exposed to currency risk."
Jive with the last line in this:
How the Swap Lines Worked
The swaps involved two transactions. At initiation, when a foreign central bank drew on its swap line, it sold a specified quantity of its currency to the Fed in exchange for dollars at the prevailing market exchange rate. At the same time, the Fed and the foreign central bank entered into an agreement that obligated the foreign central bank to buy back its currency at a future date at the same exchange rate. Because the exchange rate for the second transaction was set at the time of the first, there was no exchange rate risk associated with the swaps.
If the Fed is printing dollars to do the exchange, it would be inflationary only until the dollars were bought back, correct?
JMan,
"
If the Fed is printing dollars to do the exchange, it would be inflationary only until the dollars were bought back, correct"
Think more in terms of changing the nature of money, form credit to base. From Money Talk Continued:
"13) When the Fed makes these international currency swaps, it doesn't send pallets of hundred dollar bills on a plane. It simply makes a contract with the foreign CB and a book entry. The contract is a two-way promise to later provide pallets of physical cash if anything goes wrong and cash is needed.
[...]
14) Base money is either physical cash or a liability (IOU) that traces directly back to the Fed, which includes reserves held at the Fed. In other words, it is physical cash, or the promise of physical cash from he who can print physical cash. The Fed is willing to issue these promises willy nilly but hopes it doesn't actually end up having to do the printing.
[...]
16) So as long as there is more demand for dollars than supply, the Fed can control the price of the dollar on the USDX by its own willingness to lend dollars at zero interest with toxic assets or foreign currency as collateral. This costs the Fed nothing, except currency risk and bad PR at blogs like mine. But where the Fed loses control is when there is more supply than demand. And that is what is coming because of this very inflationary policy of providing dollars to save the system at any cost.
17) The problem is with the assets that are being swapped around for dollars, whether with the Fed or with the foreign CB's. These assets are becoming less and less liquid because they are not valued correctly. If they were valued correctly, the banks would be insolvent and have to file bankruptcy. They wouldn't even have enough assets to settle their debts by swapping with the CB's. This is why the assets need to remain marked to myth. But this makes the assets only sellable to the CB's. The open market doesn't want them. So the clearing mechanism that is needed to reverse the flow of supposedly temporary base money into the system is breaking down. The Fed tells us with a straight face that it can reverse everything it has done so far. But that is only the case if the free, open market is willing to take up all the slack the Fed put out there by private investors buying toxic assets at marked to model prices.
[..]
Ultimately the Fed will be contractually obligated to print actual bills and supply them to the banks and CB's that hold the contract for them. And this is what devalues the dollar."
and from the above comment linked by Jeff:
"A Eurodollar is "bank credit" denominated in dollars, but existing outside of the Federal Reserve System, primarily in Europe. And when I use the term "bank credit" that really means it is a commercial bank liability for a dollar. In banking circles, a liability is when someone has a claim on you, and an asset is when you have a claim on someone else.
In Central Banking, a foreign currency reserve is an asset, a claim you hold, denominated in that foreign currency, on some entity outside of your zone (presumably in the zone of that currency). In Europe, these CB reserves are Realdollars, not Eurodollars.
[...]
Tyler ends with this excellent observation: "if and when there is a surge in dollar needs out of Europe, the Fed will have two choices: QE(x) and FX liquidity swaps."
Now, in my humble opinion, you need to look at these operations in the proper perspective. And in my view, they are not creating new money or new dollars. What they are doing is changing the very nature of our money
[...]
Eurodollars are just like the "bank credit money" we use inside the US. It is nothing but bank credit, backed by an asset that is a claim on someone else to provide Realdollars to the bank. But slowly and surely, we are replacing that backing, those "claims on someone else" with actual Realdollars. This can be seen in the expanding Fed balance sheet…
[...]
The Fed has not created more money, it has simply changed the nature of existing money. Remember, FOA said 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!"
During hyperinflation the entire money supply becomes "Realdollars" rather than bank credit backed by debt assets. So that is how I view all these "excess reserves held at the Fed", QEx and Swap lines etc.., as a step toward dollar hyperinflation. "
Thanks for the response, JR. What I am really wondering, and I realize that it's likely to be imponderable, is what will be the the event, or series of events that trigger fear taking over/abatement of demand.
Yes Victor,
"Seems the problem was with US$ not with euros:
ECB 2 - FED 0
Expansion of the US$ supply is in progress - euros not needed right now. It becomes obvious that all these dollars held abroad are becoming a serious problem for the Fed - lots of volatility here."
================================
Here is a WSJ article on this theme
"...it is encouraging—at least from a European perspective—to see the Federal Reserve still prepared to intervene on Europe's behalf in any quantity at all, let alone the unlimited volumes in prospect. As has been documented elsewhere, Europe's banks have lost billions in dollar funding from U.S. markets, where patience with European dithering and obfuscation has finally snapped. And despite the attempts to present the action as a multilateral, multi-vectored mutual-support mechanism, it is clear that the only support offered here is that of dollars to Europe, and chiefly to the euro zone.
[...]
Given European banks' extensive exposures across the Atlantic, and given the political pressure on them to deleverage anywhere but in their domestic market, the temptation for the banks to liquidate in the U.S. and let the American economy take the strain is huge.
Cheaper access to dollars from the Fed (via the ECB) for euro-zone banks will give them greater incentive to roll over existing liabilities rather than merely shrinking their balance sheets at the current breakneck pace. Anything the Fed can do to stop or slow the process of deleveraging in the short term will support the U.S. economy. This is enlightened self-interest rather than altruism.
For the past year, the swap facility has been priced at a prohibitively expensive 1% over the rate for overnight index swaps, the benchmark interbank rate, in order to discourage moral hazard. One of the most striking implications of the latest action is that it suggests the Fed is now persuaded that the U.S. economy has more to lose from doing nothing than from accepting that moral hazard. This, in turn, suggests the euro debt crisis has not only reached the core of the euro zone, but is reaching the core of the world's largest national economy, too. It's one thing for the International Monetary Fund and the Organization for Economic Cooperation and Development to warn, quite another when the Fed actually does something about it.
[...]
On the bright side, this is not terra incognita. We were here in 2008 and the system coped, ultimately, with enormous stresses. The ECB's lending through foreign-currency swaps swelled temporarily by the equivalent of €200 billion ($269 billion) in the wake of Lehman Brothers Inc.'s collapse, preventing a catastrophic domino effect. But if the best we can say is that we're getting better at handling near-death experiences, that is a melancholy consolation."
==============================
That last bit reminds me of this FOFOA from Money Talk Continued:
"Last year the Fed had a lot of practice doing this fast. I am sure the contractual transaction with the foreign CB's took several hours and included recording video teleconferences in which the agreements were legally bound. But now that they have experience doing this in a crisis, next time it will probably be almost instantaneous."
Edwardo,
Yes, its crazy to think about all the possibilities, they seem endless. It could be any number of things. Its kinda also a moving dynamic because there are forces trying to maintain the status quo, so their response is an uncertain part of the calculus as well. But what I can't see anything that veers us towards any other path.
================================
That said, the trade deficit is a key idea to keep in mind, particularly the idea of the sparking effect of a little inflation on the dollar's purchasing power and the USG/FED's response thereto.
From Moneyness:
"So what's the danger in a little inflation?
If the dollar sinks, like they (the USG/Fed) want, sure, our exportable goods will become relatively cheaper abroad (even though their price here won't drop) and their (our trading partners’) exportable goods will become more expensive here. This will appear as good old-fashioned price inflation, since we’ll now have to outbid our own trading partners just to keep our own production, and pay more for theirs. And while the domestic private sector has already crashed its lifestyle somewhat, the currency issuer has increased its "lifestyle" to compensate.
The bottom line is that the USG cannot crash its own lifestyle. And when the dollar starts to "sink", that pile of pennies in the video above will be insufficient (not enough money). Luckily, that pile of pennies represents the budget of the currency issuer himself. So he’ll just increase it, to defend his lifestyle, while scratching his head at why the trade deficit has nominally widened rather than narrowing as he thought it would when he trashed the dollar.
One of the strongest arguments that the USD will not hyperinflate like Weimar or Zimbabwe is that the USG's debt is not denominated in a foreign currency. If it were, this would be a different kind of hyperinflationary feedback loop we were facing. If all the USG debt was in a foreign currency and the dollar started falling on the foreign exchange market, that debt service would lead to hyperinflation. But that is not the case. So it’s not the FX market (monetary plane) that is the big danger to the dollar.
The dollar is the global reserve currency, so it is the physical plane that is the biggest threat to the dollar in the same way the FX market was a threat to the Weimar Mark. And it is not the nominal debt service that is the threat like it was in the Weimar Republic, but it is the structural (physical plane) trade deficit. To the USG, that is the same threat as nominal debt service denominated in a foreign (hard) currency was to Weimar Germany.
As the German Mark fell, there was "not enough money" to pay the debt. And with a little inflation, there is "not enough money" to buy our necessities from abroad. "
OK with that oil link I was wrong, I did the search at work and posted in haste without rechecking the source and validity.
It just fit nicely in the part where I was just reposting into the timeline Another quotes about seventies so I assumed (wrongly) that the mentioned article had something more in it plus it had name and a congress which should be verifiable and easy to check. Well, wrong assumption. I should check the author first as I often do.
I was now searching to verify about this:
"In 1974, a U.S. politician broke the omerta over the suppression of Iraq's oil production. It was during the Arab oil embargo that Senator Edmund Muskie revealed a secret intelligence report of "fantastic" reserves of oil in Iraq undeveloped because U.S. oil companies refused to add pipeline capacity."
This is the only info I got about that (Muskin oil reserves, not much about Iraq):
974 2nd Session, 93rd Congress
Energy resources on public lands: inventory (see bill S. 2782), 26
26; January 21, 1974; Muskie is added as a cosponsor to S. 2782, a Nelson (D- Wisconsin) bill, to establish a National Energy Information System, authorizing the Department of the Interior to undertake an inventory of U.S. energy resources on public lands and private reserves. One of the elements of the energy crisis was at the time felt to be the lack of reliable information on reserves; during the debate over the Alaska pipeline, for instance, reserve estimates ranging from 10 billion to 24 billion barrels were used.
http://abacus.bates.edu/Library/aboutladd/departments/special/ajcr/1974/1974%20Explain.shtml#32531-74
+
1148-1151; January 29, 1974; As the debate on recommitting the conference report on S. 2589, the Energy Emergency Act continues, issues of information are aired (at this time, oil companies were reluctant to share with government agencies the quantities of their known reserves), issues of the windfall profits tax and a provision to perhaps roll back prices in some cases are discussed (public opinion at this time was certain that the oil companies were making enormous profits on oil because the price of a barrel rose from under $3 at the beginning of 1973 and was already over $5 a barrel by the time of this debate. It reached over $10 a barrel several months later.), and the claims by some environmental organizations that pollution standards were being abandoned in the face of the energy crisis. Muskie disputed this claim and sought to dispel the argument that environmental standards were being weakened for no reason.
http://abacus.bates.edu/Library/aboutladd/departments/special/ajcr/1974/1974%20Explain.shtml#32531-74
abacus.bates is a reliable source.
If the Germans want their gold, they can go to the New York Fed and get the warehouse receipts for their paper gold. Since the Germans want to keep up the front they actually have a claim on physical gold, they will keep quiet about the matter.
If the USA had any physical gold, we would have participated in the Washington Agreement(s), from 1999 - 2009. But there was little Portugal and Spain, carrying the load right into insolvency.
If the USA actually had physical gold, Ron Paul and GATA would be invited in to see the actual serial numbers.
+ from 1978 about the US policy in Arabia:
---
"...We want foremost to avoid the serious consequences of confrontation and the tragedies of war.
We want Arab recognition of, and normal economic and commercial intercourse with, Israel.
We want to be sure that Saudi Arabia has the capacity to defend its borders from increasing Soviet pressures — not only the influence of the Russians in Iraq and Syria — not only the existence of Cuban soldiers in South Yemen — but also the pressure which the Soviets are exerting on the Horn of Africa. Saudi Arabia has reason to be concerned and we have reason to share her concern.
We want to prevent the reassertion of Soviet influence in Egypt's peace efforts. We want President Sadat to succeed in his peace efforts. We want to encourage the Egyptian Government to focus on its country's ailing economy and on the unmet needs of its creative, but fast-growing, population.
We want to insure the uninterrupted flow of Arabian oil to ourselves, Japan, and our NATO allies.
We want to secure Saudi Arabia's cooperation in restraining the rise of oil prices.
We want our private citizens to participate in the Egyptian and Saudi modernization planning and project implementation.
We want to strengthen American financial interests in exporting civilian goods and services to oil-rich Arab countries.
We want, in turn, not to weaken Arab financial interests in America.
Since 1973, the Saudi Kingdom has pursued an increasingly important regional and international role. This obviously stems from its central position regarding oil. It also reflects a more assertive use of its economic power.
Saudi Arabia contains the largest known reserves of oil in the world. This presently amounts to at least one-quarter of the world's known oil reserves. Further exploration will almost certainly reveal additional reserves.
The Saudis' ability to expand production rapidly provides them the ability to prevent a price rise by artificial manipulation of supply shortages. This threat has kept OPEC members from following a completely cartel-like policy of extracting the highest possible price on the lowest volume of production.
On oil prices, the Saudis have helped to hold the line on prices since 1974. At the last OPEC meeting in December, the Saudis supported a price freeze throughout 1978. This has meant a decline in the real price of oil in the past 2 years..."
http://abacus.bates.edu/muskie-archives/ajcr/1978/Mideast%20Airplane%20Sales.shtml
---
Neither did I find much about Kennedy and Re-line agreement claim thought the red-line agreement seems real.
I do not know much about oil in the first so it sounded interesting about those numbers of oil drills and structures but also vcould not confirm anywhere that number.
Apologies for inconvenience.
WSJ:
“...it is encouraging—at least from a European perspective—to see the Federal Reserve still prepared to intervene on Europe's behalf ...“
They are intervening on behalf of the system, the $IMFS, not on anyone else’s behalf, pledging to swap European claims on USDs for claims on the Fed for USD if required.
That they are intervening on behalf of Europe is an illusion, because Europe have a contingency system already operating: the eurosystem. The eurosystem can operate without the $IMFS, but the Fed cannot.
Of course the WSJ is not going to present that perspective.
Essentially the Fed have but two possible avenues: "...if and when there is a surge in dollar needs out of Europe, the Fed will have two choices: QE(x) and FX liquidity swaps."
Simply put:
1. Quantitative Easing or
2. Qualitative Easing
Both of these are strategies to keep the game going, not to win it.
Because they are defending the $IMFS, the Fed will always blink first, as it is they who are existentially threatened.
Forget keeping score, because this is a game that the Fed loses whenever the game ends. The score doesn't determine the "winner", just whether or not the game is still in play.
Front lawn dump is the final innings.
As the German Mark fell, there was "not enough money" to pay the debt. And with a little inflation, there is "not enough money" to buy our necessities from abroad. "
The Guardian (6-Oct-2011): Sir Mervyn King said Britain was suffering from an 1930s-style shortage of money.
Well, there'll never be any shortage of Pounds at Merv's gaff for very long.
Yes Blondie, indeed the sneaky WSJ article shares some of that vew:
"Given European banks' extensive exposures across the Atlantic, and given the political pressure on them to deleverage anywhere but in their domestic market, the temptation for the banks to liquidate in the U.S. and let the American economy take the strain is huge.
Cheaper access to dollars from the Fed (via the ECB) for euro-zone banks will give them greater incentive to roll over existing liabilities rather than merely shrinking their balance sheets at the current breakneck pace. Anything the Fed can do to stop or slow the process of deleveraging in the short term will support the U.S. economy. This is enlightened self-interest rather than altruism.
And it appears to agree with you on this:
"Front lawn dump is the final innings."
with:
"One of the most striking implications of the latest action is that it suggests the Fed is now persuaded that the U.S. economy has more to lose from doing nothing than from accepting that moral hazard."
=================================
"Accepting that moral hazard" echoes of the "This vicious cycle of "moral hazard" is a policy that's hard to change" - FOFOA quoting John Law aka MM
"Fed policy since the crash of 1987 has been to insure against risk by stabilizing crises with liquidity injections - that is, hefty dollops of new money. It's no secret that the financial industry has responded by taking on more and more risk. This vicious cycle of "moral hazard" is a policy that's hard to change. For today's Fed, short-term rates of 5% are dangerously high. 25% is not a serious option.
Any fractional-reserve banking and monetary system, like the US's, is destabilized by any outflow of dollars. For the Fed, what is really frightening is not a high gold price, but a rapid increase in the gold price. Momentum in gold is the logical precursor to a self-sustaining gold panic.
In a self-sustaining panic, flight to gold destabilizes the banking system and the bond market, causing waves of bankruptcy across the financial industry. The Fed's cure for bankruptcy is more liquidity - but monetary expansion only increases the incentive to buy gold. In the endgame, money flows out of the dollar as fast as the Fed can pump it in. This is the collapse scenario that leads to... Freegold!
re: talking Freegold; A little late to the party, but better late than never.
FOFOA and crew,
My enlightenment, and continual learning from the posts and comments can be attributed to a pervasive theme among all of the core personalities here and it reflects a very old quote:
Education is the kindling of a flame, not the filling of a vessel. In the same way, conversation has to natural occur without telling someone what to do.
re: talking Freegold; A little late to the party, but better late than never.
FOFOA and crew,
My enlightenment, and continual learning from the posts and comments can be attributed to a pervasive theme among all of the core personalities here and it reflects a very old quote:
Education is the kindling of a flame, not the filling of a vessel.
In the same way, conversation has to natural occur without telling someone what to do.
My alter ego life as a crime fighting salesman, the maxim 'people don't like to be sold, but they love to buy' is very true. Combining education and letting people 'buy' into freegold is the key to mass dissemination of the topic. Personally (and FOFOA mentioned this earlier in the comments), the link to the ConFinStat of the Euro is the easiest link to freegold. Not only that, it's highly topical.
For me, the dots that lead to further interest and deeper conversation always lie at the feet of "did you know that the Euro actually marks itself to market every quarter with its assets?" Follow up question is almost unilateraly what does that mean, so they can adjust the money supply according to their books? It allows for a casual reference of gold (in its pure form as a floating asset of wealth) and also generally brings up the question of where the CBs of the world are supposed to park their hundreds of billions in surplus (that seems to be the only defense for the UST at this point - so parallel to the politcal/nation link, but I digress).
I assume it would be much harder for some of the major personalities here to follow my next advice, but I never, ever have any answers - I only have more leading questions of wonderment, typically things I 'want to find more about' and asking if they know. And because I'm a salesman, I set a follow up to finish our conversation after we look more into it separately. Not to brag, but I've closed at least 2% of the people I've tried this with in the last month...
maybe as many as 50%, but most of those suckers are still looking into it ;)
If we're all trying... :)
I find the most reassuring approach to answering "why gold?" and "why only gold?" in the language of the paper-bug mind (sadly, my own mind) goes like this:
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Every paper-asset is another's liability. Every paper-asset carries counter-party risk. Physical possessions carry risks, but not counter-party risk. Possessions have different trading values, and different physical properties... therefore different qualities of moneyness. Gold is the possession most suitable for the quality of moneyness.
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That's why gold and why only gold. Period. Everything else is just holding hands while you link these answers to why *now*. Why *now* itself is wildly complicated, but everyone somehow already understands it, especially paper bugs; amazingly, gold-standard-bugs actually seem to be the only people on Earth who don't understand why *now*. [smh]
As to making that whygold to whynow linkage? Different for EVERY audience. That must be why this blog has so many posts! As concise as I can get, maybe something like:
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When counter-party risk, the contagion of counter-party risk, and the socialization of counter-party risk drive all value from paper-assets into possessions... that value will seek moneyness above all other properties, including prior value. A given possession may have properties of "industrial usefulness", but that possession won't be replacing an asset that was held for its "industrial usefulness", it'll be replacing a paper-asset held ONLY for moneyness.
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a quick look at self sustainabiity that I normally wouldn't post to this blog .......http://youtu.be/KMAendQCNtA
Perhaps it's time to start paying attention?
JR,
So, the BIS took gold from Eurodollar players in exchange for claims for real dollars (eurodollars).
This means that the eurodollar players need realdollars to get the gold back from the BIS, so Bernanke is making sure that banks have this capability, so that they can get the gold back, and bring it back into play so that it can bid on dollars?
That sounds a bit speculative (on Bernanke’s part). Bernanke doesn’t know that that is what they will use the dollars for. I would have thought that the dollars would be used to meet dollar denominated liabilities.
Why would these BBs have swapped gold, the ultimate liquidity, for claims for realdollars in the first place? Could they not have put it to much better use fractionalising it themselves? This tends to suggest that they didn’t perceive any possibility of not being able to deliver. That doesn’t sound very much like a cornered market.
The only reason that I can think of is that they are sheltering the gold with the BIS, just in case there are any potential claims on it during a chaotic transition.
These central banks have agreed to lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50 basis points so that the new rate will be the US dollar Overnight Index Swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from 5 December 2011. The authorisation of these swap arrangements has been extended to 1 February 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.
As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the US dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorised through 1 February 2013.
http://anotherfreegoldblog.blogspot.com/2011/12/eu-30-november-2011-coordinated-central.html
or orig:
http://www.ecb.europa.eu/press/pr/date/2011/html/pr111130.en.html
I added links to those announcements - saves time... note the swiss one, links to here:
http://www.snb.ch/en/ifor/finmkt/id/finmkt_usdollars
US dollar auctions conducted by the SNB
Since 17 December 2007, to counter the heightened pressure on the money market, the SNB – in consultation with the US Federal Reserve – has been making US dollar liquidity available via repo transactions. Given the improvement in conditions on this market over the past year, the SNB has discontinued this measure with effect from 1 February 2010.
The SNB has decided, in coordination with other central banks, to resume the operations for the provision of US dollar liquidity with effect from 11 May 2010.
Very good detailed info at:
Frequently asked questions: U.S. Dollar and Foreign Currency Liquidity Swaps
http://www.federalreserve.gov/monetarypolicy/bst_swapfaqs.htm
Which central banks could engage in swaps?
The Federal Reserve established swap arrangements with the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank, the Monetary Authority of Singapore, the Sveriges Riksbank, and the Swiss National Bank.
Hi Max,
Interesting thoughts!!! "This means that the eurodollar players need realdollars to get the gold back from the BIS, so Bernanke is making sure that banks have this capability, so that they can get the gold back, and bring it back into play so that it can bid on dollars?"
In a sense the Eurodollar players are long gold short the dollar, essentially borrowing the dollar against gold, knowing the dollar will be devalued and they can get the gold back with cheaper dollars later because the FED is the lender of last resort stuck in a vicious cycle of "moral hazard." The FED is acting as everyone knows they will and must, changing the nature of money from credit to monetary base in the face of credibility deflation.
"So what does this process have to do with the BIS swapping its own "claims on entities within the US for Realdollars" for gold from Eurodollar players (those banks with liabilities for Realdollars)? Well, first of all, all that gold is no longer having to bid for Realdollars on the open market. Remember, last July I wrote: "the dollar NEEDS voluntary bids from private physical gold to survive." So the BIS is now providing needed Realdollars for gold by swap, not bid.
Second, you now have US banks that owe Realdollars to dollar account holders in Europe. Meanwhile, the Fed is still expanding its balance sheet changing the very nature of the money supply from credit to monetary base. So while we have no new money being created, we now have a direct line of liability leading from European account holders back to the Fed and its base money creations. And if/when the dollar finally collapses, you'll be able to get your gold back from the BIS for really cheap dollars."
Your idea, while perhaps not as direct a causal link as you suggest, is basically that ultimately the FED's hand is being forced by contracting credit. This contracting credit/ credibility deflation's root cause is there is not enough of a bid for dollars from gold. Thus the BIS is/was furtherexacerbating this issue of "not enough gold bidding for dollars" by diverting potential bids from gold for the dollar.
================================
The quote from Red Alert: Gold Backwardation!!!
"The dollar NEEDS voluntary bids from private physical gold to survive. My guess is that pool of REAL bids of size is bone dry and cracking. And "dollar liquidity" is just a cheap façade at this point. This is why the dollar NEEDS a rising gold price. As the price (for selling, not borrowing gold) rises, weak little bits of gold here and there will bid for dollars."
Cheers, J.R.
JR,
"This contracting credit/ credibility deflation's root cause is there is not enough of a bid for dollars from gold."
This is the link that I'm attempting to fathom. Trying to link credit contraction - "our money" contracting, through to base money "their money" changes, back through to size of physical gold reserves.
I can't see how fewer bids on dollars by gold causes either a contraction in base money and hence a required contraction of credit, or simply an outright contraction of credit.
I can see that dollar price falling (in gold) affects the paper gold credit markets, but not how this then translates into the credit money markets, or any of the other markets for that matter.
I imagine that it has something to do with oil also bidding on dollars, but I can't make the link. If this had been pre-winding down of gold for oil deals, then I might be able to work it back through the combined oil/gold deal, ie oil priced at $19 + XXX gold, but I can't see how it is working now.
JR,
I can see from the quote from Red Alert: Gold Backwardation!!! that it the dollar needs gold bids to survive, so is there not actually a direct linkage between credit creation and gold bids on dollars, but simply that there must be SOME bids on dollars from gold to get any credit creation at all?
This would then not make it a linear or any other progressive relationship, but simply a binary relationship - gold bids on dollars=dollar liquidity creation, no gold bids on dollars=no dollar liquidity creation.
If this binary relationship were the case, then the answer to my original point would be that you couldn't tell anything about physical gold availability from the size/frequency of dollar liquidity injections, but just that if there are dollar liquidity injections, there is still gold available for purchase in size.
I was trying to figure out a link that would shed some light on the state of the paper gold markets, in order to get an idea of timing for a revaluation.
Hi Max,
Here's some food for thought - hope you are hungry:
"When all the holders of physical gold -->IN SIZE<-- stop bidding for dollars with their physical gold. This will be concurrent with the loss of confidence in the dollar, because it's gold bidding for dollars that matters, not dollars bidding for gold, although causation between the concurrent collapses may be unclear at the time."
Comment to Just Another Hyperinflation Post - Part 3
==================================
Relativity: What is Physical Gold REALLY Worth?
"5/3/98 Friend of ANOTHER
Merrill Lynch, et al, don't grasp the gold valuations by the BIS. Gold is valued by the number of outstanding claims against it. Kind of like a house for sale with ten bidders. Each bidder thinks the house is in the bag because they have a valid bid ticket. Each one thinks he can have the house at any time, even though nine others want it too, because all I have to do is bid a little higher and take it! Insane, but that's what is going on! Somehow, the BIS and the major private gold holders know the total claims, as does Another. The Euro group is going to force those claims into real bids instead of just claims!
[..]
A Fresh Look
With this new frame of reference in mind, let’s take a fresh look at this FT article from last week. I cut out some of what I consider to be “spin”...
“…In a gold swap, one counterparty, in this case a bank, sells its gold to the other, in this case the BIS, with an agreement to buy it back at a later date.
“The gold swaps were, in effect, a form of collateral… Gold is widely regarded as one of the safest assets, but has not been widely used as collateral in the past. Mr Caruana described the transactions as “loans with a guarantee”.
“Investors have bought physical gold in record amounts during the past two years and deposited it in commercial banks. European financial institutions are awash with bullion and some are trying to pledge gold as a guarantee.
“George Milling-Stanley, managing director for government affairs at the industry-backed World Gold Council, said: “The gold swaps commercial banks carried out with the BIS demonstrate the effectiveness of gold as an asset class, because even in the depths of the worst liquidity crisis in living memory, institutions with access to gold were able to make use of it to generate dollar liquidity.
“The issue also feeds right into the current debate among Asian central banks about the lack of assets suitable for use as cross-border collateral.”
“Last year, CME Group, the world’s largest derivatives exchange, allowed investors to use gold futures as collateral for some operations. Other institutions, such as central banks, had begun using and requesting gold as collateral in the past two years as perceptions of counterparty risk have risen, bankers and officials said."
[...]
A Final Word
The dollar/gold bid dynamic is a relativistic Thought experiment, not unlike Einstein’s Special Relativity. It can be viewed differently from many reference frames.
Dollars bidding for gold.
Gold bidding for dollars.
Dollars bidding for paper gold.
Paper gold bidding for dollars.
Dollars bidding for physical gold.
Physical gold bidding for dollars.
Smart dollars bidding for physical gold.
Paper gold bidding for “idiot dollars”?
And with this, I leave you to finish the puzzle on your own. Hopefully a new frame of reference helps."
==================================
Cheers, J.R.
see that:
"George Milling-Stanley, managing director for government affairs at the industry-backed World Gold Council, said: “The gold swaps commercial banks carried out with the BIS demonstrate the effectiveness of gold as an asset class, because even in the depths of the worst liquidity crisis in living memory, institutions with access to gold were able to make use of it to generate dollar liquidity."
==================================
like this from "Reference Point: Gold - Update #2"
"That's an interesting concept. So if the biggest debtor in all of history suddenly acknowledges that he still has an asset of real value, that asset might explode in price to heights that would almost cover his debt just from the act of publicly acknowledging it? Hmm
Let us think of analogies. I know someone who is buried in debt. A large mortgage and HELOC, two car loans, lingering student loans and a baker's dozen of credit cards. A prime candidate for bankruptcy. But let's say he also has a hidden asset that, even though it is not collateral to his debt, is still valuable enough to almost cover it. He hasn't filed for bankruptcy or stopped paying on his debt yet, so even if he reveals the secret asset, his creditors won't have a claim to it. Yet if he reveals it, they may actually extend him more credit that he will then use to keep rolling over his debt, because his books will no longer look so underwater.
Or how about this? I know two people, each with a million dollar debt hole. One guy has no assets and can't get any more credit, so he'll probably have to declare bankruptcy. The other guy has two million in assets and he has no trouble getting more credit.
Now I'm not saying that rolling over debt is a good way to manage one's finances. I'm just saying this is an interesting concept that you've brought to the table.""
Open Letter to Ron Paul
"Think back to when house prices were actually rising. If you bought a house for $250K and it was suddenly worth $350K did that revaluation automatically appear on your bank's balance sheet as an additional $100K asset? Of course not! But you, as the homeowner, could put it on the bank's balance sheet with a HELOC or a second mortgage.
Maybe you could call this gold revaluation a GELOC to tide you DC spendaholics over until you can get your act together later this year. And that (soon to be) $400 billion "bridge loan" will not even be debt in the traditional sense, and it certainly won't be "debt subject to the debt limit" any more than Bernanke's QE is subject to limit.
Honestly, the Eurozone is so far ahead of you DC guys on this it's not even funny. They mark their official gold reserves to the market price every quarter, and they just voted to make gold a system-wide acceptable collateral asset. [2]"
See how gold creates liquidity as gold is the ultimate collateral (aka they will always lend against gold). Unlike the willingness to create further liquidity by lending against other credit (aka trying to leverage credit by offering debt as collateral).
From Unambiguous Wealth
"Were you able to follow all of that? This little bit gets right to the heart of the matter; the difference between paper gold and real physical bullion. Remember from Moneyness that the people's money throughout history has been credit denominated in something. The majority of exchanges up until the invention of paper money were largely on the basis of credit and trust, with accounts later cleared and imbalances settled in metal. In this way, a relatively small and stable monetary base serves a much larger economy.
But today we use that credit, that debt or liability asset as our savings, not just for trade. Now I want you to think about the fundamental difference between claims denominated in paper money versus claims denominated in gold metal. The claims denominated in paper money can be liquefied in actual base money terms by the central bank. But the claims denominated in actual gold metal cannot. "
JR,
Now that's a hearty breakfast!
Thanks
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