In the present monetary system, wealth is commonly held as ambiguous claims against the economy. We call it stocks, bonds, money market funds, mutual funds, etc… People hold their wealth in this way for the promise it makes of more wealth forthcoming! Sound familiar?
Now, when I say that there will actually be much more wealth forthcoming for those with **unambiguous** ownership of physical gold today, some people feel compelled to argue that their ambiguous claims have a better history of "more wealth forthcoming." And this argument is not without merit.
It is true that stocks and bonds did very well in the '80s and '90s. In fact, my own father is still waiting for the Dow to get back to 14,000 to regain the wealth he thinks he lost. The Dow beat CPI inflation hands down throughout the '80s and '90s, and that's how you know you made a good investment, by beating inflation.
The Dow entered the 1980s at $824. So if your $824 investment in 1980 had perfectly tracked official inflation, you'd have had $1,722 in 2000 and $2,264 in 2011 (according to the BLS inflation calculator). But in the Dow, your investment became $11,722 by January, 2000, and $12,045 today. So even though it hasn't done much in the last decade, the Dow still beat inflation by a large margin over the last 30 years.
Bonds also had a huge 30-year run as the Fed lowered rates from 20% down to 0%. Remember, as interest rates are lowered, the price of bonds issued at the previous higher rates rises. So bond investors do very well in a falling interest rate environment.
When we compare investment gains to inflation, what we're really doing is discounting the devaluation of the numéraire over the period of the gain. In other words, we are gauging our gain against the physical plane of goods and services which is what really matters. Another way to look at it is that the dollar was devalued against goods and services while your investment was revalued. This is what I meant when I recently wrote the following:
"I cannot see a dollar collapse without a simultaneous revaluation of something else. It's a seesaw. The dollar isn't collapsing against gold. It is collapsing against the physical plane of goods and services. That's the fulcrum, not gold. Dollar collapse is the force, goods and services the fulcrum, and gold the load. So gold is revaluing against goods and services. The gold revaluation is against the physical plane so as to fill the reserve void left by the dollar's collapse."
As it turns out, FOA wrote a post about this in November of 2001:
FOA (11/3/01; 14:39:16MT - usagold.com msg#129)
An "inflationary depression" is in the cards -- a "price deflation" doesn't have a chance!
----------------------
Back in the mid to late 70s Sir John Templeton always drove his point home for investors watching Luis Rukiser's show. (how does one spell his name,,,,, we always called him Lou Baby (smile))
Sir John, living here on Layford Cay, kept saying that the Dow of the 70s was very underpriced and would soar. He was the most absolutely correct person stating that then! But more into the mechanics of his perception: he knew that anyone buying the Dow and waiting a decade or more, would gain way beyond mere price inflation. Monetary inflation would eventually drive the perceived virtual wealth of US stocks ever higher. So high, in fact, that their percentage gains over price inflationary gains would be incredible. They were!
Truly, what John was referring to was the effects that simple "passive inflation" has on paper assets; especially in a "reserve currency's" domestic market. In this; real price inflation is mostly exported by importing "real goods" competition. This happens as we export excess credit dollars to buy things. It also has another effect; some of that same exported printed money flows in a circle and joins native investors' buying of local paper assets. When this process first starts, "passive inflation", in the form of massive money creation that's far beyond real price inflation, allows one to gain "virtual paper wealth" even before the markets price out the gains. That is; the Dow stays cheap at first then eventually rises to absorb the money inflation! As long as prices don't rise too much.
People that followed his advice, accumulated the Dow over a decade or more; buying "virtual wealth" before the fact! Stock investors made a killing by positioning their assets where this created "passive monetary inflation" would eventually end up. Even though hard money players laughed at them all thru out the 70s, 80s and early 90s! Look who is laughing now? Stocks tromped hard money plays hands down for over 20+ years! Even considering the latest fall on Wall Street.
----------------------
I want to jump in here and add a little more explanation of what he was talking about. FOA's "passive inflation" was money inflation that didn't spill over into consumer price inflation (CPI). The reason it didn't spill over is in my recent post, Moneyness. (See also: Credibility Inflation) FOA says we imported "real goods competition." That is, we ran a trade deficit and ended up with foreign goods that competed with our own domestic goods keeping all the prices down.
And because we were running a trade deficit, those dollars that paid for it came back to the US buying up the stock and bond markets rather than the price of consumer goods. So the more easy credit we created, the more our paper investments would eventually rise, with a time lag that gave "early adopters" a gain far above consumer price inflation. Now, back to FOA:
My friends:
Today, this same "virtual wealth" effect has been created again and is located in physical gold bullion. I believe Sir John has already made part of my point but I will repeat.
When a currency system comes to the end of its reserve use, I'm speaking politically, its domestic market will come to a point where it can no longer export "real price inflation" in the format of; "shipping its excess currency outside its borders". This happens because internal money inflation, that is super currency printing, is increased so much that it overwhelms even its export flow. Worse, even that export flow later tumbles as the fiat falls on exchange markets.
The effect is that local "passive inflation", built up over decades and fully reflected in "Sir John's" paper assets, spreads out as "aggressive inflation" and hyper price rises begin. In this action, the very same wealth effect that was eventually priced into "John's" Dow stocks and other assets, begins a long march of being priced into real gold.
Anyone that has accumulated physical gold over this past long period was doing the exact same thing Dow buyers of the late 60s and early 70s were doing: ------ saving "wealth" as unpriced "virtual wealth" stored up over that "passive inflation" period. ---
----------------------
As "political will" begins to impact the economies of the US,
our old "virtual wealth" that is no longer in the form of "passive inflation" nor limited to the currency, and is openly displayed in our vast sea of paper assets values including stocks, bonds--------
must now be defended in the open with official printed money flow.
---------------
Me again. Notice he says, "When a currency system comes to the end of its reserve use, I'm speaking politically…" and then, "As 'political will' begins to impact the economies of the US…" What he's talking about is the political will of U.S. trading partners to support our trade deficit by stuffing their reserves with U.S. Treasuries, and again it's in Moneyness that this is ending today. At the time FOA wrote that, the "political will" of Europe had already shifted away from the dollar, today it's China.
More from FOA:
The "virtual wealth" in gold, saved over years by patient investors, will also be priced to market in this process.
Never mind that during the Dow years paper gold markets could not work in parallel with all the other asset gains; it couldn't. Hard money players, trying to somehow play the Dow's game, never caught on to what was happening. Instead of buying "virtual wealth" by saving real gold; they bought leveraged bets that gold would be priced correctly during the "paper asset" years.
Obviously, this "trade" failed hard money players as the waves of value from other paper gains and derivatives leverage were employed against their every long bet on gold. Not only that; the "virtual wealth" in gold was never opened for them with the super price inflation they all thought was coming during that era!
Now that the paper game is about to stop for the Dow, it will also cut off the leverage of gold bets. Just as the real game begins.
The reason for this is that our massive, decades-long gains in our stock markets did not bankrupt the leverage in the money system. Whereas any massive rise in physical gold values cannot be priced into "derivative gold" without crashing the system.
Remember; in political inflations, money is printed to save the assets as they are currently priced; not create new loses by liquefying the leverage that's countering your play!
This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed.
------
In this perception USAGOLD has been guiding its clients, and now the world, in much the same way Sir John did decades ago.
"Buy what has value at the greatest discount and wait for the politics of money to price your new savings correctly"!
The politics of wealth today is centered around gold bullion and only gold bullion: that is where the wealth and power will be manifest: this is where the gains will be! To bet on the rest of the hard market; is to bet against the coming inflation making your asset whole!
Place as much of your wealth in physical gold as your understanding allows and save this "virtual wealth" of the ages today: waiting for it to become real wealth, priced correctly in the marketplace, tomorrow.
Make no mistake, the wealth is there "but only there in bullion"! Because a free bullion market cannot be denied or controlled
----- when it stands between the opposite goals of political powers! ---
In this: it will separate from the politically crushing reality the current dollar-based paper gold markets represent. The premium on bullion will soar!
The "Political will" of old world Europe is about to help make our investment real. For myself, a large percentage of my wealth is being saved by going with the evolution of paper moneys: not against!
This trend is visible now and based on the forward flow of human affairs, not the backward rules of money theory!
Our future is today; if not just around the trail!
Sir Douglas; aka FOA
your: Gold - Trail – Guide
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.
FOA: "Remember; in political inflations, money is printed to save the assets as they are currently priced… This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed."
So claims denominated in dollars must be saved, "made whole" for the sake of the system, but claims denominated in physical metal CANNOT be saved without destroying the banks. The entire international monetary and financial system is in dire need of something to save it right now, wouldn't you agree? The whole system appears insolvable as presently priced, a Catch-22 of incomprehensible dimensions.
But the solution is not so incomprehensible, and it was never up for debate. It was baked into the cake long ago, as FOA pointed out. You may personally prefer that they simply let the system fail. But "they" are central bankers, so we can safely predict they will try something. And that something is the only thing that can happen.
The U.S. dollar and gold will both be massively expanded to recapitalize the system, and life will go on. The difference being that the dollar will be expanded in volume while physical gold bullion will be expanded through value. And through this process, all ambiguous claims, both dollar-based and metal-based will become virtually worthless, while unambiguous gold ownership will literally explode in value.
This is an historical first. Today is the first time in history where a massive transfer of wealth will transpire through the conversion of all gold on the planet into unambiguous ownership. Think about this long and hard. More than 90% of all the gold stock has been mined in the last 200 years. During that time, unambiguous, discrete (and discreet) ownership has entailed an unnecessary expense. During the gold standard years gold was the money, so it was all unallocated and ambiguously owned. Even today, most of the gold in the BB system is still on pallets, a remnant of the gold standard years. But that is changing.
It is more important than ever, right now, to make sure that you unambiguously own discrete pieces of gold. You don't want to just own "a bar of gold" at the bank, you want to own bar number JM4835 or whatever. And you certainly don't want to own a fractional interest in a bar when you can own coins down to one gram. Better yet, have your gold unambiguously in your possession, or at least under your control outside of the banking system that is still struggling to cope with this change.
Have you ever wondered why bullion banks have been opening new or decommissioned vaults and clearing space for more gold? It's not because there's more gold coming into play. It's because it takes much more space to store unambiguous, allocated gold than it does to store ambiguously owned pallets of "gold". From my post The View: A Classic Bank Run:
Here's an interesting item that I struggled to interpret until I really thought it through. Do you remember the stories about HSBC clearing out space in their vaults, or JP Morgan building new vaults? What could be the explanation for this if the aggregate gold stock is so stable? Then it occurred to me that unallocated storage is much more space-efficient because the gold sits stacked on pallets. Allocated gold often gets put into cubby holes to assist in recordkeeping. That takes up much more space. So the process of allocation after many decades of non-allocation requires an expansion of vault space. This is how I now interpret these stories.
_________________________________________________________Taking personal responsibility for your life's savings when you've always counted on "the system" to safeguard it for you is not an easy step to take. Converting your savings from ambiguous claims in the system (either dollar or gold-denominated) into unambiguous wealth is not without considerable hassle, risk and expense. But it has never been more important than right now. Conversion is early adoption, like buying the Dow sub-1,000. Conversion to unambiguous pieces you can possess is front running the reset, the global revaluation that could come at any moment. As a long-time reader wrote me just today: the window will be closed soon.
He also wrote this:
"A recent 'convert' to protecting his life savings, a friend said, 'wow, it hit me last night......'
I said, 'what?'
"Well, now I understand, all the policymakers are doing currently is making my gold worth higher in purchasing power as they annihilate my currency.....thus, why the heck would I hold something that they are destroying willingly!"
Yup, that about says it all!
_________________________________________________________
**Christmas Fundraiser**
Old FOFOA needs your help again. It's been 10 months since my last fundraiser, and I know there are a lot of new readers out there. Yeah, I did drop a hint or two back in August, but to tell the truth, that didn't turn out to be much of a fundraiser. There are a few of you who have been very regular and generous in your support! You know who you are, so THANK YOU THANK YOU!! But for the rest of you, I could really use your support right now.
In the spirit of full disclosure, I am living the austere dream! I have no debt, low expenses and a modest stack of gold coins. And I'm able to be here writing this blog thanks to your generous support. For the past couple of years, donations alone have been covering my expenses. But lately they have only been covering a portion of my expenses, and now I've run down my cash reserves to the point that I need to do something, either seek an income or dishoard some of my savings prematurely.
With 2012 right around the corner, we've got a year of heavy events in front of us; a Presidential election, the euro debt crisis, helicopter drops, etc… So if you appreciate this blog and having me here to do what I do, and if you are one of the thousands of readers that checks in every day, please consider making a donation, a contribution toward keeping this going into 2012.
Thank you!
Sincerely,
FOFOA
_________________________________________________________
Watching the Dow rocket almost 500 points yesterday, you're probably thinking Ben Bernanke is pretty fly (for a white guy)…
But don't be fooled. Be like the squirrel, girl, be like the squirrel…
450 comments:
«Oldest ‹Older 201 – 400 of 450 Newer› Newest»Is it possible to have a managed restructuring/haircut/default. Is that what the Troika and the **Greek negotiations** I keep hearing are all about? We'll see what happens but default is not always as messy as you imply. The folks who hold the paper because they made the ill fated decision to buy sovereign debt as a store of value are gonna bear their mistake.
Kyle Bass:
http://www.frankvoisin.com/2011/12/06/kyle-bass-annual-letter-imminent-defaults/
Texan,
As Burns and Lamfalussy note, gold can create lots of liquidity before it flows in simply being revalued.
Our money is credit. Liquidity in a sense can be seen as the availability of money/credit to be able to smoothly transact in goods and assets denominated in that money. You can try to pump money/credit to provide liquidity, but without a corresponding expansion in value, all you are doing is debasing the money/credit. Real liquidity requires value to flow.
Our current system stores value in debt, it holds debt as collateral against credit. Debt is a flawed store of value whose tank can't absorb the flow of value. You need value on the other side to create real liquidity. So debt can be seen as a limit on liquidity in that it is a limit on value. FOFOA email:
"Say you’ve got $5T in either cash or gold (or both) and what you really need to keep the economy flowing is $100T in “liquidity”. To create the “liquidity” you need in cash, you simply print up $95T. But with the “neutrality” of money (in quotes because of Cantillon), all you are doing is debasing the money so it’s not real liquidity in terms of the value that is needed to flow. The insolvent become solvent only because claims against them have been devalued/debased. How is that liquidity or liquid flow of value?
For value to flow, you need sufficient flowable value to exist. So if you created the $100T you need by expanding the $5T worth of gold in value to $100T, you’ve now created real liquid value, “liquidity” and the economy can start flowing value again.
But imagine all that global debt was denominated in ounces (as in a gold standard). Then you couldn’t expand the gold in value without crushing the debtors. Say a debtor owed 5 ounces worth $5,000. All of a sudden that debtor would now owe the equivalent of $100,000. You’d have massive insolvency and default. So the gold expanding in value only works to supply liquidity as a physical asset when it is the secondary medium, not as a claim."
Debt is collateral for the current system, and there's not enough liquidity because this debt can not withstand and absorb the flow of value. Today there is not enough value, and printing up more $$ in the absence of a gold revaluation does nothing to help the flow of value. They are creating more of the numéraire in a flawed attempt to create liquidity, but all this does is kill the debt's value when what they need is not for the collateral to fall, but for the collateral to rise in value.
Thus if you have got gold, you got liquidity - gold is the ultimate collateral like a GELOC. Gold can absorb the value *if* its allowed to do its thing floating separate from the currency. FOFOA email:
"Because where gold is present, value is available to flow via the primary medium of exchange, and later be settled in the secondary. But gold needs to expand in value to provide the liquidity needed for the whole globe. And that will have to crush the debtors with debts denominated in ounces, or else they will simply be cashed out at a low paper gold price as ANOTHER said. Once gold is revalued, there will be plenty of flowable value. Today there is not, and printing up more $$ in the absence of a gold revaluation does nothing to help the flow of value."
Cheers, J.R.
Money is credit. Credit extension/lending requires trust and inherently involves risk. Thus the need for a mechanism to settle and clear imbalances and store value outside of the credit system. Real wealth, aka gold, in the settlement and clearing function satisfies these concerns of trust and risk and stores value.
Along the historical line, the hungry collective cried for "moar," and the tribe assented - enter paper gold.
But paper gold is still paper. Not physical in hand. Paper doesn't store value like physical gold.
We now see the unfolding of the Market's awareness to this. Hence the demand for physical gold, aka real wealth, as a settlement and clearing mechanism for value that is outside of the credit system.
And not to be lent. Possession is a big part of wealth. The market learns this from paper gold - the need to be outside of, to be secondary to the primary media of exchange, the credit system.
Kyle Bass, "There is no savior large enough with a magical pool of capital to stave off this unfortunately conclusion to the global debt super cycle. We think hard defaults are imminent."
Where can we find a Magical Pool of Capital?
I am just a shrimp and maybe I am thinking in a shrimp way.
But if tomorrow, be it Fed, ECB, BoJ, BoE or PBOC came out and say they will make a market for gold at very high price, say $50,000/OZ, my instant reaction would be to buy whatever gold I can and hoard it, just that. No one will release their gold, because, even someone with sub-par IQ will know, the currency has died.
There will never be a 2-way market regardless how you play it. The notion that gold will be released at high enough price is... simply funny. I think you won't find people in Zimbabwe exchange gold for paper currencies but for real goods.
It happened multiple times in history, I just don't see "how this time is different just because the Euro MTM structure".
Where you gonna get that money for gold Bosco? You think this happens cuz everyone gotta job & can pay all the bills?
Bosco,
There is an easy way to tell if the currency has died or not, regardless of the price of gold. Go to a shop, see if people are still accepting the currency for their goods, regardless of how much those goods cost.
If the currency is not being used, then sure, hoard the gold, if it is being used and gold has been revalued, then why not take advantage of the situation to make use of your gold?
Crack,
So you think all the shrimps will just go, oh, gold is now 50,000/Oz and do nothing?
My country has come to that multiple times in the past century, no, that doesn't work.
Max,
What happens when gas goes from $2 to $10 per gallon? What happened when pork goes from $3/lb to $30/lb? What would be your reaction?
Now you are suggesting that when something goes bomb from $2K to $50K and people have no reaction what-so-ever to that? Shrimps are dumb but not that dumb. At least not in my part of the world.
Your country has seen gold goto 50,000/Oz multiple times in the past century?
Thats interestin! Perhaps we can leverage your expirence? So what did y'all do??
Crack, you are not getting what I said.
A high gold price is indicative of a failing paper currency, simple as that. Shrimps in my part of the world are well aware of that, even they are the dumb shrimps. It has happened for countless times in the past 1000 years in my country.
Y'all saw this image up top right?
This aint yaw Zimdaddy's HI we talkin about.
Crack, how's the "this time it's different" sounds to you?
Sounds pretty good to me.
Sounds like hows it gonna be.
You read here already about all that paper gold in the market, right?
When y'all had yaw many HI's at home ... was they big enough to bust the whole world?
Bosco,
I'm talking about 50,000 at today's purchasing power.
What do you mean by a "failing" currency?
A high price of gold will be indicative of debt failing to store value. The currency is irrelevant, it's just tokens with which to facilitate transactions.
Crack, your questions are irrelevant, totally.
I am saying, the dumb shrimps, with super low respect and confidence for these central bankers (regardless of whether they are of good intention or not), would dump their currencies in no time if gold is revalued to such high price. This HAS HAPPENED before and freegold or freesilver or what not HASN'T COME.
Max, my answer is gold is NOT the ONLY WEALTH. Even in HI, that's not the case. Go look for gold's purchasing power in history, see if that 50K today's dollar purchasing power makes any sense in terms of real goods at all.
A high gold price is indicative of a failing paper currency, simple as that.
When there is a high but stable price? Or a rapidly rising price?
What happens when gold is suddenly revalued against everything else (especially currency, but everything), but then maintains a new plateau in its relative valuation? A punctuated equilibrium.
Bosco,
Many of your questions are answered if you read through the articles on this site.
Max, I read them all. I am a long term reader.
DP: "What happens when gold is suddenly revalued against everything else " - this is Price Control at its maximum if you think about it. And we know how that will end.
"Crack, your questions are irrelevant, totally."
One day, you & me gonna laugh about that one.
Max is just being polite now. He meant "all". ;)
Crack, I've made contributions to FOFOA and don't think someone who disagrees is just because he hasn't read/doesn't understand.
He can just disagree. I am being polite here.
this is Price Control at its maximum if you think about it.
Is it?
And we know how that will end.
Do we? I guess we'd better make sure we all properly understand that "price control" thing first, then yes - it will become obvious I suspect.
Let's talk about gold "price control" then, if you like. It's getting late for me, but I'm sure other people will be happy to play with you too if it gets a bit slow. You may want to sit down first though. Especially if you've really read all the articles and comments here and you still believe a Freegold revaluation would be "controlling its price".
DP:
Gold is not the only wealth, it's all relative. When (the relative) price (between goods) is not determined by natural market force but by external force like what's suggested, it's price control. As I said, go find some historical references (non-Western) of the relative gold purchasing power (mind you, gold is NOT money in many times in Asia, if you understand what I meant), you can't have that "stable" high level unless you force it.
"but I'm sure other people will be happy to play with you too "
If this is the attitude that people here take for discussion, then I will stop talking.
FOFOA,
Don't you love it when a comment spurs a post-length response from me?
Each and every time! I'll do my best to keep you going...
I agree with you that GATA are on the wrong track in terms of interpreting past and present CB actions. The way I think about this is as follows:
If GATA and the classic goldbugs were right, then both the Fed and the ECB would keep acting foolishly because the Fed is damaging the value of the dollar in the long run and the whole Euro with its balanced trade account just created lots of internal imbalances that are now causing troubles. With the GATA point of view, no decision really makes sense, for example, why did the Fed let the housing bubble happen?
If you, however, take the view that all the CB politics is about access to resources, suddenly, things start to make sense: The US are trying to keep the dollar in the game as long as they can. This way, they can still import as many real assets as possible while others (China, Japan) take most of the inflationary hit.
In the long run, the US do not intend to service their external debt in real terms (Lawrence Summers in the Financial Times: No country can be expected to run a primary surplus in the long run just to service the external debt; Greenspan after the S&P downgrade: The default risk on US treasury bonds is zero because we have a printing press; US treasury official via Kyle Bass: We are going to kill the dollar - citations probably not literally accurate, just from memory). From this, you might even conclude that the US probably favour a sudden collapse of the dollar ??
The rest of the world ex Japan (100% US faithful), UK (free rider), Canada (finlandized), Australia (for convenience), in contrast, want to end the arrangement in which the US get a free lunch in their international trade. They want the US to pay in hard assets such as gold, but since the US are still very influential can move only in small steps and often not too openly. Suddenly, most of the observed CB and government actions make a lot of sense.
Indenture,
Won't the 'Pan Asian Gold Exchange' solve this problem for us?
If they manage to get it liquid enough so that a foreign CB can purchase blocs of more than 10 tonnes in one go, then yes, perhaps. But they might want to use dollars to do that - most people don't have enough Yuan for this.
Texan,
I thought the post revaluation high gold price would help in two ways. First, governments would suddenly be 'rich' and thus much more credible as debtors. Perhaps some would pay off part of their debt in gold, but it might even suffice to own the gold in order to remain credible.
Secondly, the ECB will end up with a bloated balance sheet with lots of questionable debt on the assets side and too much base money on the liabilities side. They could then sell off part of their gold in order to cancel some excess base money and in order to stop any inflation they may have at that stage.
Victor
A commentary about the value of gold in ancient times.
link
"don't think someone who disagrees is just because he hasn't read/doesn't understand.
He can just disagree."
Y'all can disagree all ya want. Just dont pretend ya understand, cuz its plain ya dont yet. But dont feel bad cuz that aint unusual.
Keep talkin & yule get there by Crissmus! ;)
Bosco,
Look at an historical chart for any of the Rare Earth Elements.
When a commodity finds new function, new utility, by men, then its price changes.
Gold's function is changing.
@ FOFOA et al
Some musings..
Gold and "international liquidity" has me a little confused because it insinuates that gold will have a transactional role internationally. Gold will flow during the reset but after the reset...
Couldn't gold become too precious to even flow very much at all ?
Then couldn't gold become just a reserve asset that only the super producers can afford to bid for ?
In this case, new mine supply would just gravitate toward the super producers and stay there.
JR,
Can you further illuminate the brake and spur concept for me? I am trying to understand how a rising gold price eventually forces the flow of actual goods and services to reverse. Using your Greece/Germany example, I can see that a rising gold price allows them to settle their deficit with less and less gold, but if Greece is under producing, how does a higher gold price force them to produce more and reverse the flow? I am assuming you are not including gold when you talk about "real goods and services".
On Price Controls:
Bosco: When (the relative) price (between goods) is not determined by natural market force but by external force like what's suggested, it's price control.
So you believe the current "gold price" is determined by natural market forces? You understand the "Free" part of "Freegold"?
That the current price is what is "price controlled".
And if so ... we know how that ends don't we?
@DP,
Run outta patience huh? Must be gettin old! ;)
HA!
No respect for the aged these days.
@ Bosco
Do you think that the value of the debt of the US, Japan and every other western bond market combined has any realistic value today in comparison to goods and services now ?
Texan: "The national CBs are never going to allow any of their gold stock to be sold in any meaningful quantities."
Isn't it the premise of A/FOA/FOFOA that the gold will flow (from CBs) not in great quantities, but in great quality? A few billion in gold now is a large quantity. A few billion in an RPG world isn't a lot of gold (comparably).
JMan,
Your question is answered here
A high gold price is indicative of a failing paper currency, simple as that.
It has been the case - which is why gold needs to be separate from the currency, a secondary medium of exchange that floats against the currency.FOFOA:
"Why are the goldbugs getting it so wrong? The answer is found in this post:
"Several years ago, many gold bugs and gold advocates missed the path as the trail turned."
Oh, by the way, this is FOA writing back in 2001, and that turn in the trail was the successful launch of the euro…
"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!"
Enter ZH and AEP stage left, right Matt? ;)
"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!
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!"
Let me just pause to say, Wow!"
==================================
Dilemma
"During his acceptance speech, President of the ECB, the late Dr. Willem F. Duisenberg said this about the euro:
The euro is the first currency that has not only severed its link to gold, but also its link to the nation-state.
My hope is that I have now armed you with what you need to understand the meaning of this powerful statement. The euro solved dollar flaw #1, the Triffin dilemma, by severing its link to the nation-state, and dollar flaw #2, trying to be as good as gold, by severing its link to gold. It did the latter through the Eurosystem quarterly mark to market reserve policy.
[...]
Please think back to what the rise in gold during the 1970's did to the dollar and the international monetary system. It panicked European central bankers to the extent that they confronted Paul Volcker in October 1979 at an IMF meeting in Belgrade, Yugoslavia with "stern recommendations" that something drastic had to be done immediately to stop the dollar's fall. The fear among the European central bankers at the meeting was that the global financial system was on the verge of collapse.
Now compare that to today. As the gold price rises, the euro's monetary reserve assets rise in both value and confidence. They know that even if the dollar collapses today, the gold portion of their reserves will more than compensate for the loss of dollar-denominated assets. And they also know that today, unlike in 1979, there is an alternative currency of sufficient size and scope to pick up the global financial slack. No need to panic like 1979."
Cheers, J.R.
Bosco: "If this is the attitude that people here take for discussion, then I will stop talking."
Please continue talking. It is when people disagree with FOFOA (or his commentators) that more truth comes out. If everyone agreed with Freegold this comment section would be missing an important balance.
Please Bosco, continue posting. I believe the word "play" was used in good humor because if DP wanted to say something, based on past experience, he would have said it directly.
@Indenture,
+1
%<]:o)8
FOFOA,
This may have been suggested before, I have fallen behind on my comments reading. Please put together an e reader book of posting and comments for a reasonable price. I believe that is the best way to continue this blog and make some cash to support your writings. It would also allow me to study FOFOA anywhere.
Thanks,
JeffersonIThinkWeAreLost
Unknown: I'm currently working on converting FOFOA to PDF. When it's done I'll let you know.
FOFOA: I hope you don't mind that I'm converting your blog into a PDF.
Gold Manipulation And Naked Short Selling Are ONE Conspiracy
Hi Max,
Along these lines, here is a thought from an email on what might happen if a nation-state or commercial bank disruptively defaulted. Not the only thought, but a way of seeing how things might go. FOFOA:
"Greece essentially borrows commercial bank liabilities which it spends. Then the commercial banks borrow CB liabilities which they use to clear all the spending. There are less CB liabilities floating around than there are commercial bank liabilities because you only need X base to clear about 10X M2/M3 etc…
The economy’s “money” is the commercial banks’ “liability” or obligation to provide CB liabilities which make up the base. The commercial banks can borrow these CB liabilities at a low cost. The argument is that the commercial banks’ balance sheets are insolvent because when you MTM their assets (Greek promises to pay back the loan of liabilities), they have more liabilities outstanding than they have assets (at MTM price).
The reasoning is that the commercial banks sell these assets on the secondary market when they need CB liabilities to fulfill their obligation to provide CB liabilities. So they should be MTM. But that’s not the only way they can obtain CB liabilities. They can also obtain them by borrowing them from the CB itself. In doing so, they sign their own “promise to pay back the loan” to the CB, much like Greece did for them. This “promise to pay” is held by the CB as its asset offsetting those CB liabilities it issued. But the CB doesn’t MTM that asset, because A) there is no market for those and B) the CB doesn’t need to sell those commercial bank promises to pay in order to raise euros for clearing. The only issue is a technical one regarding the collateral that would be confiscated by the CB if the commercial bank went bankrupt.
So let’s say a commercial bank does go bankrupt for whatever technical reason. The CB then confiscates that Greek debt that was used as collateral. The argument is that there are too many CB liabilities floating around out there versus the assets the CB holds, which are now Greek obligations rather than the (now-defunct) commercial bank obligations. So the market (superorganism) sez the euro should devalue. This is where the CB reserves come into play.
The CB can “buy back” some of its own liabilities with its reserves. If a commercial bank fails and the market tries to take the euro down, the CB simply defends the euro. And what do you think it would use first? It’s dollar reserves, or its gold reserves? Let’s say Greece defaults, which takes down some commercial banks and now the ECB has all this devalued Greek debt on its balance sheet so the marketplace attacks the euro. What would the ECB do?..."
cont.
cont.
This next part is important. Suppose the Euro debt the ECB holds as assets, be it commercial bank liabilities or ultimately the debt of the PIIGS, fall in value as a commercial bank fails or Greece defaults. The ECB would have to defend its currency as "the argument is that there are too many CB liabilities floating around out there versus the assets the CB holds." So, the ECB has to sell assets to buy back its CB liabilities to defend its currency. OK, back to the Thought:
"If a commercial bank fails and the market tries to take the euro down, the CB simply defends the euro. And what do you think it would use first? It’s dollar reserves, or its gold reserves? Let’s say Greece defaults, which takes down some commercial banks and now the ECB has all this devalued Greek debt on its balance sheet so the marketplace attacks the euro. What would the ECB do?
It would first sell all its dollars to buy back its own liabilities. But what if… just saying, what if… it used its dollar reserves to openly bid for physical gold in London? What if it did this instead of buying back its own liabilities? Think about the RPG effect on its reserve account! Suddenly you’ve got Freegold and now the ECB can quietly buy back any excess liabilities using a very small amount of gold. Just sayin’"
==================================
Note this is the ECB defending their currency after ensuring the banking system was operational, not bailing out nation-states. Nation states have to manage their own finances. This is the opposite of a bail out - it is the ECB and its euro currency *surviving* a default/huge haircut by one of the PIIGS.
Cheers, J.R.
Crack, unlike DP, at least he tried, you are offering no substance in the discussion here.
You can call people whatever you want, but you are the same calling others "You are just not faithful enough to see"
I'll stop responding to you.
DP:
"So you believe the current "gold price" is determined by natural market forces? You understand the "Free" part of "Freegold"?
That the current price is what is "price controlled".
And if so ... we know how that ends don't we?"
See, DP, you have a bias in your interpretation on what I said. Did I ever say the current scheme is not price controlled? Is the acknowledgement of current price controlled scheme mutually exclusive with the notion maintaining gold at $50K/Oz as price control? Cant it be like a pendulum that gold is (somewhat) undervalued (price controlled) at the moment but that $50K/Oz notion is also overvalued (price controlled) as well?
The idea that of "unencumbered physical gold priced freely by the market as store of value and not transaction medium" is nothing new. Throughout the history of China, say from around 800 (Tang) to 1900 (Qing), contrary to many would have thought, gold is NOT money, or at least not in narrow sense of transaction medium. The main transaction medium was copper (copper coins/ignots) for small transaction and silver bars for large transaction (obviously there are other materials used like iron). Often times, there would be paper money that represent paper copper (not gold!). They often came and died. Periods of HI are not that uncommon. 99% of the time, unlike in Western world or Japan, gold is not treated as currency, but wealth. Just right now besides me, I have a book published by a Japanese author in 1927 who went through thousands of Chinese literature and recorded the value (purchasing power) of gold and silver during that 1000 years in China and nothing of the sort in those tons of data points, both in HI and non-HI periods, that have suggested Gold is the only wealth and that its purchasing power in terms of real goods and services would concur with the $50K/Oz notion. For gold is never, and will never be the only wealth. Just like Martin Armstrong noted, some will love gold but some will hate gold.
Bosco:
That book you mentioned that collected data points on the purchasing power of gold from 1000 years of Chinese history, what are the findings? How much was gold worth back then? Thanks.
Bosco,
Crack is DP, it's his alter-ego. although annoying at times, THEY mean no harm ;)
Hi Bosco,
Thank you for your comments. The one where you mentioned that book by the Japanese author published in 1927 is a very interesting comment given some things I have been mulling over lately. Is there an English translation of that book?
In relation to the comment itself, in many respects this Freegold-RPG transition is "nothing new" in that it incorporates many lessons derived from history. Likewise the archives here contain much that isn't new but for many readers they offer revelations nonetheless.
However there is something new in the present circumstances. Those who will be revaluing gold (CBs and Treasuries) have "printing presses". All of them (though the value and importance of their currencies vary). Hence there is no objective limit to the price they can pay for gold.
Let's revisit part of the quote from FOA that JR posted:
... both systems (EMU and USG/Fed) will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to!
There has been much discussion here over recent years about the reasons why, when the system reset button is pushed (triggered?), this price will be very high relative to current prices.
I don't have the time to contribute much to this conversation right now but please continue the discussion. I, for one, will look forward to following it.
Franco: It's not aimed as study for PGA like you and me. It just collects on relevant data points. It classified the data points on categories like production locations, volume, purchasing power, general usage and so on. And frankly, this is not a good book in terms of analysis but just a collection of data points.
In terms of findings, the more relevant points I think are:
- gold and silver prices (in terms of copper coins or its paper equivalent, Wen in Chinese) fluctuates a lot (1 tael of gold (1.2Oz or 40g) can be as low as 5,000 copper coins or as high as 35000 copper coins - a caveat here being often times, 5000 is only an approximation, because of currency debasement (again nothing new), they are counted as "near hundreds", that is sometimes 80 copper coins are counted and used as 100, so 5000 can be just 4000 copper coins). And this fluctuation, though might have a time difference, always happens together with the fluctuation of prices in real goods and services and are in the same direction, in fact, in stressed times, prices of real goods and services actually rise faster than price of gold and silver (!)
- There's one thing to look for when you look at relative purchasing power in East Asia, RICE. Rice, not only serves as staple food in that part of the world but also serves at times as currency (people can pay tax using rice) and/or wealth. Throughout that 1000 years of period, most of the time, gold fluctuates between 1 tael of gold buying 4 "shi" to 10 "shi" of rice, with 1 "shi" equivalent to 67kg, that means 1Oz of gold will get you ~220kg to ~560kg of rice, whether that concurs with $50K/Oz notion is up to you (my answer is it's not, that's only $280 to $700 in today's price, obviously rice is much more important and expensive in the past, one can safely assume a person can consume 150kg of rice per year in ancient agricultural times, so that means 1Oz of gold can get you 1.5 to 4 person's equivalent of main feed for a year, I think that's more like $2K to $10K, but definitely not $50K).
- Other comparison with clothing, labor, rent, farmland prices yield similar results. My personal calculation (very rough of coz) is gold's equivalent purchasing power today using those data would be from 3K to 10K/Oz.
Just as an info bit, the word "Money" in old Chinese literature (Qian) means just copper coins (or gov't fiat) and many times, both gold and silver are called the same - "Gold" (Jin).
costata:
I am not sure whether an English translation exists.
My copy is actually a 2006 reprint of the 1944 Chinese translation of the original 1927 publish. The ISBN is 7-101-04948-6/K.2152, the author is 加騰繁 (1880-1946), The book's title in Chinese "唐宋時代金銀之研究 －以金銀為貨幣機能為中心" (literal translation: gold and silver study for Tang & Song Dynasty - centered around their functions as currencies), I believe this was an awarded book in Japan at that time and the 1944 Chinese translation version was done by the China United Reserve Bank, the then CB setup in China by Japanese during Japanese occupation times in China. Don't know if these info helps at all.
Again, this is definitely not the only source one can see for "unencumbered physical gold as store of value and medium of transaction" values. There are many tibits out there in historical accounts.
About your printing press point. My counter would be, we have that for thousands of years. Don't you know that we are, if not the inventor, one of the earliest to have fiat currencies? We have that back in 800 AD , the Song dynasty. They came and go, gold is always there, survive, so are many other types of wealth (oh btw, silver as well :)). CB can do whatever they want, as I said, some like you love gold, but others can love other stuff, overvaluing is just the same as price control. You can bid up gold however you want, you can't stop others to bid up other stuff they deem precious, say Whisky, say Rice, say whatever. Again, shrimps are dumb, but not that dumb.
typo: I meant "nencumbered physical gold as store of value and NOT medium of transaction"
Indenture:
"FOFOA: I hope you don't mind that I'm converting your blog into a PDF."
- this is already done. Mising last few posts.
Bosco,
FWIW, a few people here will know already that I do have a certain amount of sympathy for what you're saying, in spite of appearances.
It's good to talk. :-)
Bosco
You can search whichever data sets you like, nowhere will you find stable prices as high as predicted by this blog simply because this will be something new.
Gold has never fulfilled this function before in history in quite this way.
To make the attempt is similar to looking for the internet before it's existence, sure there may be hints, but you will not find anything like it in history.
$50,000 or whatever it ends up being will not be a manipulated price fixed price, it will be the natural price.
Remember that there is a lot more wealth now in the world than there ever was in ancient times.
TF
Remember that there is a lot more wealth now in the world than there ever was in ancient times.
Because we've never had a system before that managed to bring forward so much demand from the future.
JR,
That's a very intersting perspective.
I'd like to try and put some figures into that model and see what comes out to get a perceptual handle on how the conceptual model works.
You wrote:
"what if… it used its dollar reserves to openly bid for physical gold in London? What if it did this instead of buying back its own liabilities? Think about the RPG effect on its reserve account! Suddenly you’ve got Freegold and now the ECB can quietly buy back any excess liabilities using a very small amount of gold. Just sayin"
OK, so say a bank goes down, and it's a major one, and it has $trillions of derivative exposure. As a result, it brings down its counterparties as well. So we are looking at tens if not hundreds of $trillions of liabilities taken onto the ECB balance sheet.
How high a gold price will it need, from its LBMA buying spree operations, will it need to make its balance sheet credible and stop the run on the euro?
We know that a CB doesn't need to balance its books, and can run a fractional reserve system.
So, let's say it has $50trillion of liabilities on its books, and gold price goes to $100,000 per ounce. That would require 500million ounces on its books to back it 1:1, so let's say 5 million ounces to back it at 100:1 fractional reserve. Which would be 147 metric tons, which is within the limits.
Do these figures represent the kind of situation that you are talking about?
So we are looking at tens if not hundreds of $trillions of liabilities taken onto the ECB balance sheet.
$ liabilities? The ECB?
IMO the Eurosystem doesn't need to ensure performance for investment bankers, only to ensure performance for depositors and that credit remains liquid in the system.
I think it's the Dollarsystem that's praying for a miracle. That the derivatives can perform, along with the other forms of debt.
MF,
"Remember that there is a lot more wealth now in the world than there ever was in ancient times."
Really? We have a lot more people to feed as well (and a lot more gold! - gold production during that period in China was around 70K to 100K oz per year and that country was from 20M to 100M in population, think about that in terms of stock/capita and flow/capita and compare to now). Are you sure wealth per capita (and per Oz) is really higher now?
Modern people often have a bias to think "our time is the fastest in terms of technology innovation, our time is really complicated, our time is really different", student of history would often conclude that's not the case.
Mind you, the period that I quoted are the most wealthy time of China, which perhaps at boom time, contributed more than 30 or even 50% of world total wealth at that time.
"You can search whichever data sets you like, nowhere will you find stable prices as high as predicted by this blog simply because this will be something new.
Gold has never fulfilled this function before in history in quite this way."
You know what, this fits squarely into "this time is different" argument, which as I already said, is nothing new.
I didn't search any those data, I came across those data way before I came across FOFOA. We can agree to disagree, but in so far, I don't see, a very convincing argument put forth to suggest why this time is different (I started reading FOFOA from Feb 2010 and then read the trail once myself and re-read many of the previous posts, I read most of the comments and enjoyed those by victor, ender most).
I just want to offer an additional perspective here, that history (at least in my part of the world) doesn't support some notions many here taken for granted. What FO/FO/A talking might very well be true, following the trails of giants might very well be wise, but if I may say so, if believing all CBs are the same is naive and blind faith, then believing giants or ECB or BIS or old world money are homogeneous in their thoughts and actions are equally naive.
We are all keen for you to reveal your perspective, Bosco. And nobody more than Crack, who was keen to assist. :-)
DP: I am in the chaotic HI camp. That holding gold is wise but many other wealth will survive as well (some might even do better) and the notion that gold will have a very high relative purchasing power to real goods and services thereafter is not supported by the historical accounts that I've seen.
Max,
I don't pretend to know enough details about derivative exposure to comment intelligently on what might happen in detail. Here are a few big ideas. I do not think its quite like the image of exploding dominos that collapse the whole world. Indeed, some big banks have failed, and yet no implosion? And more to the point, the below is antithetical to the entire point we have been hammering - you say:
"So we are looking at tens if not hundreds of $trillions of liabilities taken onto the ECB balance sheet."
Why would you suggest the ECB woul do this in light of what we have disucssed? I just presented an example of the ECB allowing a commercial bank to fail. If banks fail, banks fail. If countries fail, countries fail. The ECB isn't holding massive derivative exposure. The ECB works with solvent banks to ensure the banking system works. We can debate "solvency," but what is clear is the Euro doesn't stick-save massive commercial banking collapses like was done with Bear Stearns or AIG - that's for the Fed/USG. The world operates under the $IMFS - its the FED/USG's show. The top 5 US banks have virtually 100% of 250 trillion in credit derivatives held by American banks. This is all a function of the dollar system built around debt.
The FED/USG is gonna hyperinflate itself trying to maintain the $IMFs. Even if you think of just the derivative's held by Eurozone commercial bank, the big 5 US banks are all tied up in that too. If that goes, the $IMFS goes down too. That's the dollar system collapsing - guess who will hyperinflate itself to try to forestall that collapse holds the bag? <-- These guys are related to the guys who keep bailing out Europe, no?
Cheers, J.R.
DP,
You wrote:
"So we are looking at tens if not hundreds of $trillions of liabilities taken onto the ECB balance sheet.
$ liabilities? The ECB?"
Good point. I meant euro liabilities. I was just using dollar units to make the calculation for the gold price, which is quoted in dollars in London.
Bosco
I would rather be a serf today than a serf in the middle ages, if you get my meaning.
Is there a better standard of living today? Is there more wealth today?
Really, are we even discussing this?
You are correct. The argument is this time is different.
But. Even if it is not, and it is the same, we are looking at another shift from debtors system, to savers system, which means hard money, which means gold at at least $6,000.
I really do think this time is different though. :P
TF
MF, wealth in the relative sense! It's the sense of relative precious!
And you think Song and Tang china is Europe Middle Age, that clearly shows you have no understanding in history at all.
JR,
"Why would you suggest the ECB woul do this in light of what we have disucssed?"
I was trying to envision what would actually take place in the act of 'preserving nominal performance of the system'.
I thought that preserving nominal performance would mean ensuring the solvency of the banks, and that this would mean saving their balance sheets.
I had distinguished this from bailing out countries.
I thought that this was the reason that the ECB would print.
Do you think that the ECB will print only to make depositors whole and then split up the banks into utility-type institutions and bad investment institutions, which would then be allowed to fail?
@Bosco,
I think anything real will survive relatively well.
In an attempt to keep the world out of Bartertown, with a continuation of the global credit and trade system, the ECB will attempt to channel demand for non-monetary assets into gold.
I for one intend to freeride on this specific event as it unfolds.
Once the system has been reset, gold has been freed and revalued in its new purpose as freestanding global SoV par excellance, real goods (and all remaining currencies) will then set on the path to rebalance themselves against each other, based on supply-and-demand in the free market. Gold may stay elevated indefinitely, or it may as you say drift down relative to certain other things (and continue up against others). I do not know - I will decide as events uncover the path before us further down the trail.
But what I am 100% convinced of, based on observable events so far, is that gold will be employed to soak up as much of the HI problem as possible. I want as many people as possible to understand this, before it is too late to act on this knowledge.
Sincerely,
DP :-)
Bronco
I meant to write dark ages, but meh.
Interesting conclusion to draw, from one sentence, about my knowledge or lack thereof of history.
You understand that gold has no practical utility, yes?
Do you grasp what gold represents?
If you did you would see it's value more clearly, I think.
TF
DP:
"in an attempt to keep the world out of Bartertown, with a continuation of the global credit and trade system, the ECB will attempt to channel demand for non-monetary assets into gold"
I understand fully this is the essence of the plan. Any leakage out of those "purchasing power" or what not into the real world is potentially chaotic. And that's why I said: the key is not the faithfuls like you and MF that make this work but the defects like me and others that make it not working! Now has anything massive been done to reduce those damn potential defects yet?
"Once the system has been reset, ... Gold may stay elevated indefinitely, or it may as you say drift down relative to certain other things (and continue up against others). I do not know - I will decide as events uncover the path before us further down the trail."
So great! At least you are now saying it's might not be that the relative price of gold will stay very stable at that high level. So what are you basically is saying? That $50K/Oz (or whatever the absurd price is) is potentially an overshoot, and you are leveraging on that. It's different from what you said before, "What happens when gold is suddenly revalued against everything else (especially currency, but everything), but then maintains a new plateau in its relative valuation?" right? That plateau might fall off as well :)
Have to sign off now as it's getting late, good talking. All I am suggesting is just this:
"Knowledge is the barrier to know"
Interview with Ben Davies.
He describes the way the monetary system is going in his estimation, and uses the word 'Freegold' at 7.58, when describing errrr, Freegold.
Ben Davies on the future of gold:
http://bit.ly/uU1gq4
Under a FIAT currency system clearly in order to maintain the welfare state you want to be able to pay for services, social security and medical care in the US. The fiat currency is the perfect system because you can print as much money as you like. That gets you re-elected so you can argue that the statist approach would be to maintain the FIAT system. What is pretty clear is that the system isn't working. Fractional reserve banking isn't working because effectively you make a zero provision weighting by buying sovereign debt and lending it out multiple times on bank balance sheets and we are now realizing that these sovereign balance sheets are actually worthless, they are bankrupt. So the whole financial system is brought into question and it's not inappropriate now that people are looking for an asset that has no liability that can really store savings and be used ultimately as real capital in the system and that is gold. So perhaps government will be the last thing that they will want to bring back unless we have another Reagan come along who is serious potentially about bringing back the gold standard. I personally don't want a gold standard because at the end of the day that is still by decree of government. Fiat means by decree of government and a gold standard really is a fiat standard, it's just a gold standard. I believe that we should have a free market, free gold, association where supply and demand decided by the free markets will ultimately determine what the price of gold is and the internet is a very powerful tool and people underestimate it. It's got a huge global consciousness out there which is now beginning to understand what is wrong with the financial system and how gold could actually be a huge stabilizer. But in order to stabilize it we need to bring gold back too much higher prices to off-set the proliferation of debt credit money that has occurred in the system over these last 40 years of this FIAT currency system.
Didn't a wise man once say "you think all the shrimps will just go, oh, gold is now 50,000/Oz and do nothing"?
Maybe he meant that all the shrimps will see gold being massively revalued before their very eyes, but they will run to buy other things instead - things that are not being revalued in any way to the same extent. Maybe the average shrimp will get Value Investing religion - who knows?
But my understanding of what he was saying was more like his instant reaction as an average shrimp would be "to buy whatever gold I can and hoard it, just that".
:-)
My expectation is that the price will stay high relative to average consumer goods and services. Not everything, perhaps. And other things, perhaps, continue to fall, relatively. I think a lot of things are overvalued today, while others are undervalued. But we will just have to wait and see how it shakes down between now and then.
You can park your wealth in rice and copper while you wait, if you prefer. I have no problem with you doing that. Only with suggesting to other people, here, that they might too.
@ BOSCO
You didn't answer my question. Do you think the total value of all the debt(JGB's, US t bills and bonds, western bonds) is realistic relative to goods and services ?
You cant deny the fact that this savings was created and exists.
Re: Valuations
I probably need to re-read FOFOA's post on the subject but the questions that continue to come to my mind are
1. What is the value of gold in terms of oil? (Is it 1oz/1000bbls?)
2. What is the value of oil in dollar terms minus the LBMA?
3. Do the above have any impact on the future value of gold in terms of other real things (real estate, food, cars, etc)
Bosco, TF, and others,
if there was a period in China in the past in which gold was a secondary medium of exchange and mainly used as a store of value, and you desperately wish to compare the real value of gold then with today, thenwhat sort of relation would you expect:
1. one ounce of gold buys such and such amount of rice
2. one ounce of gold buys a tailored suit
3. the median annual income of a family of four is worth one ounce of gold
Apart from the fact that such a comparison would probably only make sense if the amount of gold per population is comparable, I would go for option (3) over long time frames because it automatically adjusts for increased living standards.
Victor
Bosco,
the key is not the faithfuls like you and MF that make this work but the defects like me and others that make it not working! Now has anything massive been done to reduce those damn potential defects yet?
I already said it before that I am still waiting for the day on which the ECB launches the grand educational campaign. I agree that what will eventually matter is what the majority of small savers (say reserves between one month and one year of expenditures) do with their money. The super rich are doing fine and the super interested as well.
Victor
VtC, Bosco
That campaign will not arrive.
Yes, in the chaos of the transition people will choose other things than gold also to try and store value. I have said this before. Does it matter? No. Because those will revert to the mean, and less inefficient stores will be exchanged for more efficient stores until over the medium term all excess has found it's way to gold.
Furthermore, the value of excess production created by the masses is minuscule, so their opinion doesn't matter much. The giant producers have chosen, this is what matters. The small fry will learn by example as they always do, after the fact.
TF
Hi Max,
You write:
"I thought that preserving nominal performance would mean ensuring the solvency of the banks, and that this would mean saving their balance sheets...Do you think that the ECB will print only to make depositors whole and then split up the banks into utility-type institutions and bad investment institutions, which would then be allowed to fail
==============================
The ECB provides liquidity to "solvent" banks with adequate collateral. If market conditions change and the commercial bank goes under and the ECB is stuck with devalued collateral, the ECB will defend its balance sheet. The ECB will not try a "stick save" of the commercial bank ala the FED. For example, the FED monetized MBS in part to help the banks, the ECB does not engage in such activity.
As I noted above, we can dispute "solvent," but the key to the idea is Euro banks with adequate collateral can get loans from the ECB. If their collateral is insufficient, the ECB won't save them. I thought DP got at the heart of it in commenting: "IMO the Eurosystem doesn't need to ensure performance for investment bankers, only to ensure performance for depositors and that credit remains liquid in the system."
ECB's Jens Weidmann:
"FT: If funding to Greece did stop, the ECB would have to decide how to deal with the Greek banking system. How should the ECB should act in that kind of case?
JW: I don’t want to speculate what would happen if somebody decided this way or another way. Regarding the role of the eurosystem [of eurozone central banks], I will just confirm to you that we will act according to our mandate and provide liquidity to solvent banks and ensure price stability – this is our task. It’s the task of governments to ensure that banks in Greece are solvent. We provide liquidity to solvent banks against adequate collateral.
[...]
FT: Can you explain why the ECB cannot be lender of last resort?
JW: The eurosystem is a lender of last resort – for solvent but illiquid banks. It must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty [prohibiting monetary financing – or central bank funding of governments]. I cannot see how you can ensure the stability of a monetary union by violating its legal provisions.
[...]
The ECB could not be used to finance governments or prop up insolvent banks.
"Monetary policy cannot and must not solve solvency problems of states and banks, this has to be decided by national parliaments," he said in a speech at Euro Finance Week in Frankfurt."
VTC, Bosco, MF, and others,
Here is some hearty food for thought:
"First, let me ask you a question. Which of these two scenarios should be more instrumental in the transition to Freegold?
1.) A bottom-up shift in value perception as millions and even billions of small savers use their meager dollars all at once to bid up the price of gold.
2.) A top-down shift in risk perception as the very few physical gold holders of size in the world all at once withdraw their physical from the marketplace.
Just think about this question. That is its only purpose. And one more; Would either of these events be exclusive of the other?"
Red Alert: Gold Backwardation!!!
That's a tasty way of looking at it.
Max,
See what Victor wrote above:
"Secondly, the ECB will end up with a bloated balance sheet with lots of questionable debt on the assets side and too much base money on the liabilities side. They could then sell off part of their gold in order to cancel some excess base money and in order to stop any inflation they may have at that stage"
That's good stuff. Selling assets to buy back CB liabilities (euro currency base money) if the ECB balance sheet gets out of whack. See how it echoes what FOFOA wrote in the email I posted above:
"So let’s say a commercial bank does go bankrupt for whatever technical reason. The CB then confiscates that Greek debt that was used as collateral. The argument is that there are too many CB liabilities floating around out there versus the assets the CB holds, which are now Greek obligations rather than the (now-defunct) commercial bank obligations. So the market (superorganism) sez the euro should devalue. This is where the CB reserves come into play.
The CB can “buy back” some of its own liabilities with its reserves. If a commercial bank fails and the market tries to take the euro down, the CB simply defends the euro. And what do you think it would use first? It’s dollar reserves, or its gold reserves? Let’s say Greece defaults, which takes down some commercial banks and now the ECB has all this devalued Greek debt on its balance sheet so the marketplace attacks the euro. What would the ECB do?
It would first sell all its dollars to buy back its own liabilities. But what if… just saying, what if… it used its dollar reserves to openly bid for physical gold in London? What if it did this instead of buying back its own liabilities? Think about the RPG effect on its reserve account! Suddenly you’ve got Freegold and now the ECB can quietly buy back any excess liabilities using a very small amount of gold. Just sayin’"
Cheers, J.R.
To echo MF, it doesn't matter whether the Boscos of the world run to gold or canned spam.
FOFOA: No, Freegold transition does not require small sizes. They will likely be an after effect. The vast majority of currency is traded for life's necessities and debt service rather than the timeless wealth asset of Kings. Following in the footsteps of giants requires more than pocket change.
The transition to Freegold is all about the big players.
"The transition to Freegold is all about the big players."
So the oil producer who is used to getting 1/20 ounce of gold in exchange for 1 barrel of oil, after freegold will be willing to accept a tiny flake of gold that doesn't materially increase his already large stash?
Jeff and TF,
To echo MF, it doesn't matter whether the Boscos of the world run to gold or canned spam.
When the zillions of Boscos in Europe buy gold, too, then gold will go up relative to the euro and relative to other real assets. When the Boscos buy canned food and fuel, then the euro will go down relative to all real assets including gold.
The former is gold revaluation, the latter hyperinflation.
Victor
How much corn can he get for that flake.
Franco,
So the oil producer who is used to getting 1/20 ounce of gold in exchange for 1 barrel of oil ...
It is quite obvious that they are not getting 1/20 ounce per barrel. Just for Saudi Arabia, this would be more than 3000 tonnes per year (back of the napkin calculation using wikipedia, assuming all their exports of $180bn annually are oil and are converted into gold at the current London price of about $1750).
I guess they can count themselves lucky if they can get 300 tonnes per year - for the remainder, they will have to accept dollars, I am afraid. If you want to interpret their import/export data along the ((FO)FO)A line of thought, you might conclude that they are presently trying to spend as many dollars as possible on infrastructure projects, just to make use of them as long as they can still get something for these dollars.
Victor
Victor asks:
"I already said it before that I am still waiting for the day on which the ECB launches the grand educational campaign."
==============================
To continue in the vein of Jeff's fine comment, where he quote's FOFOA:
"No, Freegold transition does not require small sizes. They will likely be an after effect. The vast majority of currency is traded for life's necessities and debt service rather than the timeless wealth asset of Kings. Following in the footsteps of giants requires more than pocket change.
The transition to Freegold is all about the big players. "
See that Victor - As Another told us, "If you are one of "small worth", can you not follow in the footsteps of giants? I tell you, it is an easy path to follow!" --ANOTHER (THOUGHTS!) 1/10/98
Its the Giants, those with real wealth whose footsteps we follow. So how do all the little shrimps know where to go, or as Victor has phrased it "when is the ECB gonna launch their grand information campaign." Why would the ECB need to do such a thing? As Another told us, we follow in the footsteps of giants. There is no need for an educational campaign, the footsteps left by giants are enormous imprints all can see.
================================
FOFOA
"First, let me ask you a question. Which of these two scenarios should be more instrumental in the transition to Freegold?
1.) A bottom-up shift in value perception as millions and even billions of small savers use their meager dollars all at once to bid up the price of gold.
2.) A top-down shift in risk perception as the very few physical gold holders of size in the world all at once withdraw their physical from the marketplace.
Just think about this question. That is its only purpose. And one more; Would either of these events be exclusive of the other?"
cont.
Franco, ANOTHER taught us that oil doesn't care about the price (amount) of gold, just the flow. And oil will be devalued against gold.
Date: Sat Mar 07 1998 13:19
ANOTHER (THOUGHTS!) ID#60253:
In a very real "currency sense", oil will be devalued in terms of gold. As one makes a currency weaker by increasing the money units per ounce of gold. Oil will become very cheap in gold, as the amount of gold paid per barrel will fall dramatically as compared to today's ratio. There will be much more than enough gold worldwide to quantify a "world oil currency". To that end, the world paper "reserve currency" at use in that time, will continue to be traded for oil at an extremely low price relative to today. The only change will be the addition of a "unit of real value" added to each trade, a "world oil currency", gold!
cont.
FOFOA has described our monetary evolution as gold as a gold's emergence as the focal point/secondary medium of exchange will be a "sight to behold":
"Honest money is simply money that does not pretend to be something it is not. And the only way you get there is with "two monies." One that is a primary medium of exchange but does not pretend to also be the primary store of value. In doing so, it will actually become a pretty good short term store of value as it finds stability through stasis with a floating counterweight.
And a second one that is the focal point primary store of value, but does not pretend it can also be a primary medium of exchange at the same time. (There is no need to lend or borrow the secondary medium of exchange!) In doing so, it will become the greatest "secondary media of exchange" that ever existed! It will be a sight to behold! "
Gold becoming the focal point of value will indeed be a "sight to behold," as the demand for gold as a store of value reveals a self reinforcing feedback loop of demand - FOFOA:
"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.
What Mises is talking about here is the focal point effect. As more people focus on a single secondary "money" for the purpose of storing value outside of the primary medium of exchange, it starts to develop a separate kind of demand, apart from its other uses.
================================
FOFOA
"Salience: the state or quality of an item that stands out relative to neighboring items.
[...]
There Can Only Be One
A "focal point" is the obvious, salient champion."
Cheers, J.R.
So do the Euro-area leaders need to undertake an education campaign to tell people to save in gold?
"Instead, the ECB floats its gold publicly and without worry. So while you're wondering in which of the two choices the disconnect will happen in Europe, consider this: Over the last decade, the general price level has performed more or less as expected while the gold price in euro broke off in 2005 and rose 325% in six years:
January 1, 2002 – GOLD @ €310.50
Tuesday, November 15, 2005 - GOLD ABOVE €400
Tuesday, April 18, 2006 - GOLD ABOVE €500
Thursday, January 10, 2008 - GOLD ABOVE €600
Friday, January 30, 2009 - GOLD ABOVE €700
Wednesday, December 2, 2009 - GOLD ABOVE €800
Tuesday, May 4, 2010 - GOLD ABOVE €900
Monday, May 17, 2010 - GOLD ABOVE €1000
Monday, July 11, 2011 - GOLD ABOVE €1100
Tuesday, August 9, 2011 - GOLD ABOVE €1200
Monday, August 22, 2011 - GOLD ABOVE €1300"
Link
It appears the Euro-area leaders have let the market do the talking for them; opting to instead simply formally re-affirm the market's message in their quarterly MTM revaluation.
Got a better educational campaign? Methinks not. This focal point thing is pretty neat.
Victor,
You really think the saudis just suck it up and hold dollars? They have no choice? Those poor, stupid saudis! Not...
FOFOA: Straight from two ministers of finance, "We would rather keep the oil than have the paper money." We thank you for that insight.
...the House of Saud could be looked at as the principle lender (although the borrower doesn't see this)...providing the currency equivalent of the Money (Gold) borrowed by the mining company to pay for Caterpillar's equipment to build the mine. Because this is contracted as a Money (Gold) loan, Money (Gold) must be repaid over time. In a sense, from the Saudis' viewpoint it is similar to the Roosa bonds where U.S. dollars are paid for the bond, with a fixed amount of another currency (in this case, Money (Gold)) expected to be returned upon maturity.
You can also see why the economists can look at the Saudi balance books and see tremendous currency debts and budget deficits where once there were surpluses that threatened to buy up the world. They have in fact bought up a significant portion of the Gold mined well into the future...through Loans and Hedges bought all the way down from the top.
Motley Fool, Great comment
MF said :"Yes, in the chaos of the transition people will choose other things than gold also to try and store value. I have said this before. Does it matter? No. Because those will revert to the mean, and less inefficient stores will be exchanged for more efficient stores until over the medium term all excess has found it's way to gold.
Furthermore, the value of excess production created by the masses is minuscule, so their opinion doesn't matter much. The giant producers have chosen, this is what matters. The small fry will learn by example as they always do, after the fact."
Great comment about why Gold will absorbs all the value stored in bonds etc and why it alone will take the most of the value compared to real estate, commodities etc. Also shrimps(small people) don't matter much to create leakage of value into others assets.
This explains why even other assets on physical plane devalue against Gold, whereas those assets will be revalued up against currencies.
as VTC said, if all VALUE from paper plane moves to useful assets, we get hyperinflation. if all VALUE from paper plane moves to Gold we do not experience Hyperinflation but rather freegold.
Example HYPOTHETICAL scenario:
==============================
(A) - EUROPE just revalues Gold to say $10,000/oz. ie it will buy any Gold that is sold for less than that. This is artificial market manipulation to help pay of it's soverign bonds. (or) Rest of world one day realizes that US bonds are not store of value.
- Immediately most people who hold Gold all over the world will not sell anything because they now realize Gold is store of wealth.
- All the Gold paper holders will demand immediate delivery of Gold from paper market(COMEX/LBMA,etc..).paper market cannot supply, paper Gold crashes while physical Gold is unavailable.
- Govt declares force major and only allow settlement of paper gold with cash instead of physical Gold.
- Now all the Govt bond holders, which can demand currencies from each Govt want to move to Gold, since Gold has been made the reference point and VALUE(wealth) flows only to Gold. ie Gold absorbs all the money printed for the past several decades.
- All the existing Bond money can buy only newly mined Gold. Existing holders don't sell. Mines will be nationalized since govt own land. Mines cut production like OPEC does because Gold in Ground is as good as wealth. Bond money can only flow to a fraction of currently mined Gold.
- No other commodity absorbs the money printing. so there is no price increase in usefull commodities and see price exponential rise only in useless Gold. SO people are not affected.
- we assume that EUROPE or other Govts need not provide support for Gold, because we assume that once paper market is destroyed it settles at a high equilibrium price and becomes the international reference point for world trade settlement.
- US/Japan/other GOvts can settle their debts with little Gold. Nations are happy.
- Trade defecit can also be settled in little Gold.Nations are happy.
- Currencies are values by the Gold it can buy in a country.
- COuntries can increase the value of their currencies by selling Gold for currency and weaken currencies by buying Gold.
- If any shrimps(small people) buy commodities/real estate after liquidating bonds, it creates leakeage of value to that asset and increases it's value,
which can cause small hardship because those assets are usefull things.
- if previous Gold holders sell Gold for currencies, and with that buy any assets, it can cause leakage of vlaue to that asset and cause hardship for people again.
Physical gold is cornered, has been for a long time, and freegold is the way out. Value gold properly and watch it flow.
ANOTHER ( THOUGHTS! ) ID#60253:
Gold is cornered. Plain and simple. No complicated theories, no options problems. The commodity value of gold was forced so low in paper currency terms that all of the new mined gold, going out some 10 years is spoken for. Between the third world buying physical gold and the jewelry industry ( same people buying ) there is none left for the oil states! They do value oil in terms of gold, but not IN the paper currency price of gold! How much is gold worth in terms of oil value? Just stop supplying gold to them in ultra cheep US$ terms and you will find out by watching the currency price of oil!
BTW: http://anotherfreegoldblog.blogspot.com/2011/12/imf-cannes-summit-final-declaration.html
"...The Governing Council furthermore agreed that this initial transfer should be in gold in an amount equivalent to 15% of the sum I have just mentioned, with the remaining 85% being transferred in foreign currency assets. I should stress that the decision on the percentage of gold to be transferred to the ECB will have no implications for the consolidated gold holdings of the ESCB..."
/Mrt : when was it Another mentioned that about 15 percent should be?/
http://anotherfreegoldblog.blogspot.com/2011/12/bis-mr-duisenberg-reports-on-outcome-of.html
I should also add this part (again, I have already posted original doc in past) for those who think that NBs of ECB could sell their gold on their own:
"...Before the end of the current year the Governing Council will also have to adopt an ECB Guideline pursuant to Article 31.3 of the Statute of the ESCB, which will subject all operations in foreign reserve assets remaining with the national central banks - including gold - to approval by the ECB..."
...corection (~of ESCB)
BIS - Mr Duisenberg’s opening statement at the press conference held on 7 January 1999
http://anotherfreegoldblog.blogspot.com/2011/12/bis-mr-duisenbergs-opening-statement-at.html
"...Question: I’d just like to talk to you about gold reserves. The ECB said it will readjust the value of its gold reserves on its books each quarter, and I think it has also decided to keep about 15% of its exchange reserves in gold. If there was a major change in the price of gold on the world market, that percentage would be likely to change, and so I would like to ask you if that means that the ECB would buy or sell gold in order to keep its proportion of reserves at that percenrage amount.
Duisenberg: Christian, you’re the gold man!
Noyer: No, there is no such conclusion to draw, because it was not a decision to hold 15% of foreign exchange reserves in gold, as a structural decision of the Governing Council. The decision of the Governing Council at the time was that in the initial transfer 15% would be made of gold, but that has no consequence on the structure of foreign exchange reserve to develop in the future, nor has it any consequence on the total percentage of gold holdings of the system, including the reserves that are still in the balance sheet of national central banks, and we know that in some cases they have more than 15% gold, and in some cases they have less, but they are for the moment and for the foreseeable future keeping the proportion they have.
Duisenberg: And in this case, the foreseeable future is much longer than in the earlier case.
Question: Mr Duisenberg, the fact that the euro has got off to such a good start is to some extent an expression of confidence in you and can we expect you to stay for eight years?
Duisenberg: This is for the first time that I give the answer which I announced I would give already on 31 December 1998, that is “no comment”..."
Max De Niro/matrixsentry-
That link to Ben Davies is awesome.
"I believe that we should have a free market, free gold, association where supply and demand decided by the free markets will ultimately determine what the price of gold is and the internet is a very powerful tool and people underestimate it. It's got a huge global consciousness out there which is now beginning to understand what is wrong with the financial system and how gold could actually be a huge stabilizer. But in order to stabilize it we need to bring gold back too much higher prices to off-set the proliferation of debt credit money that has occurred in the system over these last 40 years of this FIAT currency system."
Question from the simple minded:
If silver ever appeared on an ECB balance sheet, would that blow a hole in the Salience argument? Or would Salience simply be redefined to mean the Bimetal value of both Gold and Silver, with the value ratio between them defaulting to physical ratio?
Also, if it never were to appear on ANY CB's balance sheet. Is that to be considered a rejection of it as a store of value, or rather in practical terms, that storage space 50 greater than that of gold would make it impractical to store?
Nickelsaver,
The path to the answers is here.
India Gold
I'm posting a link to this article because it provides some up to date research on gold ownership and trends in India.
http://www.ibtimes.com/articles/261113/20111205/indians-carry-gold-worth-950b-macquarie.htm
According to Macquarie research Indians hold 18,000 m/t of gold, around 11 per cent of the global stock.
There are some other interesting snippets in this article. Well worth reading.
h/t Ed Steer - Casey Research
M: missed your question. my answer is no. They have actually soaked up liquidity otherwise your 50K today would be buying nothing. (Similar idea as the membrane exists between SE and PE gold, you can almost imagine there exists a membrane between SE and PE money). Therefore using M3 or total credit or something like that to arrive at the potential freegold price is problematic.
DP:
This - "to buy whatever gold I can and hoard it, just that"
and this - "you think all the shrimps will just go, oh, gold is now 50,000/Oz and do nothing"
are not exclusive.
Because, as I said, gold is just 1 of the many wealth and be hoarded. Some will buy gold some will buy other stuff. When I said buy all the gold that I can find, I didn't mean that that's the only thing I will buy. I will stock up food and whatever I can get rid of the currencies.
"My expectation is that the price will stay high relative to average consumer goods and services. Not everything, perhaps. And other things, perhaps, continue to fall, relatively. I think a lot of things are overvalued today, while others are undervalued. But we will just have to wait and see how it shakes down between now and then."
Who's going to provide you with those "AVG" consumer goods and services? History often indicates that in stressed time, these so-called "AVG" consumer goods and services are the most difficult to get hold of. Think about the logistics and complexity behind of the goods and services that we have today. Again, obviously your assumption might be the transition will be very smooth and no chaos, but will it realistically?
victor,
I would go for option (3) as well and I did say in my reply to Franco, that not just rice, but comparison in terms of rent, salary, farmland prices, all are not yielding towards the today $50K/oz purchasing power.
And yes, I was aware and fully agree with your educational campaign part. It all boils down to how big and quick the defect would be when the reset is on that will lead us to HI or the utopia that many here are so confident of.
MF:
"Furthermore, the value of excess production created by the masses is minuscule, so their opinion doesn't matter much. The giant producers have chosen, this is what matters. The small fry will learn by example as they always do, after the fact."
Again, as I said, if it's naive like GATA to bark on all CBs and assuming they are the same, it's equally, if not more, naive to believe all giants will act in unity. (like, has FO/A ever mentioned and predicted China's involvement on US T-bonds after 2001 to keep the game going for another decade? Didn't they say the reset is imminent? Where's the giant producers already chosen in this one?)
"Yes, in the chaos of the transition people will choose other things than gold also to try and store value. I have said this before. Does it matter? No. Because those will revert to the mean, and less inefficient stores will be exchanged for more efficient stores until over the medium term all excess has found it's way to gold."
Gold has been the best most efficient store of value in the past as well (this is nothing new again), if what you are saying is true, their value would be ascended to the high pleateau that DP has alluded to during periods when they are unencumbered and not as medium of transaction. With that, wouldn't looking at the history, like what I did, gives you an indication of the fair value of gold?
Again as I said, so is money a mental concept, wealth is also a mental concept as well. You can't force me to like something that I don't like. Your precious is not my precious. Chinese people love Jade, in some period of time, that so much more than gold. Do you know what that is? See the cultural, individual differences playing a part here. Again, gold is NOT the only wealth and will never be.
Bosco,
You keep repeating the same errors. This is one of the bigger ones (my emphasis):
It all boils down to how big and quick the defect would be when the reset is on that will lead us to HI or the utopia that many here are so confident of.
I assume by utopia you mean Freegold-RPG. A "utopia" I once described as a mechanical function like a grandfather clock.
But I digress. HI and the transition to this new IMFS, with Freegold-RPG as the backbone, are not an "either or" proposition. The anticipated HI for the USA/US$ dollar is a separate event from the transition. If you conflate the two you will find it difficult to grasp the matters we discuss here.
A second biggie, by way of mistakes, is your superfluous (patronizing?) reminder to me about the long history of fiat currency in China. Tsk, tsk old chum don't be doing that.
The fact that fiat currency isn't new is irrelevant. This is the first time in world history that all currencies everywhere around the globe are fiat and infinitely expandable whereas the private sectors sources of currency to bid up anything are finite. Hence there is no objective limit to the price that the currency issuers can pay for gold. So in this regard this time (and situation) is different.
A third mistake I am only inferring so forgive me if I have misinterpreted the Bosco persona. You seem to be projecting an investor mindset onto a currency issuer/manager (be it CB or Treasury). That mistake often leads to incorrect assumptions about motive and incentives. They are not investors and their motivations are quite different to those of investors. Gold will be revalued to whatever level is required to recapitalize the new IMFS that replaces the dying $IMFS.
The numbers we discuss here are based on estimates of the revaluation required to effect the recapitalization (expressed in US dollars) not expectations about the price that private citizens will be willing to bid gold up to.
As I said earlier the anticipated HI for the USA/US$ dollar is a separate event from the transition, the revaluation of gold we refer to as Freegold, RPG or Freegold-RPG.
costata:
"You keep repeating the same errors."
Let's not jump to that conclusions so quickly, let's call them differing opinions :)
"But I digress. HI and the transition to this new IMFS, with Freegold-RPG as the backbone, are not an "either or" proposition. The anticipated HI for the USA/US$ dollar is a separate event from the transition. If you conflate the two you will find it difficult to grasp the matters we discuss here."
No, that's not my position. My position is, HI is the only probably immediate path as far as I now see, smooth transition to Freegold-RPG is highly unlikely, if at all possible, thus I say utopia. (And other reason for I say utopia is I disagree with the so called pleateau of high value of gold after the reset relative to real goods and services)
"The fact that fiat currency isn't new is irrelevant. This is the first time in world history that all currencies everywhere around the globe are fiat and infinitely expandable whereas the private sectors sources of currency to bid up anything are finite."
This again falls squarely into the "this time it's different" case. First, most currencies, if not all, are fiat in nature (with fiat meaning by gov't decreed) so this is NOT the first time in world history that all currencies are fiat (far from it)! Your $20 gold eagle is also a fiat currency. The point valid is the (infinitely) expandable part. Second, let's look in terms of system. Let's not use China this time but say just Japan (or whatever country). We now live in a global world, so we look at things globally and we suddenly seem to find, oh we are different this time, because things we look at are GLOBALLY. Really? Imagine for people in say 15th century Japan. Their globe is Japan because that's the system that they are in. This sentence "currencies for the whole system are Fiat (and infinitely expandable)" is true now as is true for people in Japan then (I am not sure if Japan have infinitely expandable currencies at that moment but I am sure China had multiple times, but in order not to upset costata here, so I have to refrain from quoting China examples). Don't be fooled by the fact that we are talking globally so things are different, it's just the system is bigger.
" Hence there is no objective limit to the price that the currency issuers can pay for gold. So in this regard this time (and situation) is different."
Yes, there's no objective limit to the (nominal) price of gold BUT there's objective limit to the real price of gold relative to real goods for reasons that I've already explained.
"A third mistake I am only inferring so forgive me if I have misinterpreted the Bosco persona. You seem to be projecting an investor mindset onto a currency issuer/manager (be it CB or Treasury). That mistake often leads to incorrect assumptions about motive and incentives. They are not investors and their motivations are quite different to those of investors. Gold will be revalued to whatever level is required to recapitalize the new IMFS that replaces the dying $IMFS.
The numbers we discuss here are based on estimates of the revaluation required to effect the recapitalization (expressed in US dollars) not expectations about the price that private citizens will be willing to bid gold up to."
No, I don't think CB as investors. I am only looking at responses of all relevant parties (and currency issuers are not the only relevant parties). You can obviously (try to) recap your banking systems through this revaluation (which you have to anyway). I am suggesting that in that process, currencies we see today will fail as well (and I am not talking just US$, in fact, the first currency that will fail is RMB IMVHO).
JR,
Yes I read the Costata Silver post. I put forth a hypothetical. The boil down for why silver isn't a store of wealth is because of the Salience argument and that the ECB does not have silver on there balance sheet, but rather only gold. But why would any bank have silver on there balance sheet if they could have gold, which is at minimum 16 times easier to store.
My hypothetical is simply, that if a CB were to actually pin silver up as an asset - what would that do to the Salience argument.
My other thought is that, since the paper market is vastly larger than physical for gold, it gives the appearance that the CB's are only storing a fraction of the total market, when in reality they are storing a great percentage. When there is no more paper to shuffle around, and only physical, the CB's will come to an end of what gold they can acquire in large quantities. Seeing this happen, they could then view the storage disadvantage with silver as no longer a disadvantage, because they wouldn't be comparing it to gold that they cannot acquire.
Nickelsaver
It's not that because silver does not appear on CB balance sheets that it won't be used as reserve asset, it is because it would not be used as reserve asset that it does not appear.
In the end it is inefficient to have more than one reference point. Variation and arbitrage will always favour one, specifically the one that stores value most efficiently, which means the one with the highest price.
If silver were to become the reference point then we would not need gold. However for silver to replace gold it would need to be twice the price per weight, due to lower density, and we would need to give up all it's industrial uses. $100k silver would not make it practical for industry. We would also need to increase the stock to flow ratio for silver significantly for it to replace gold, etc.
It's not gold and silver ( or and jade or w/e) it is gold or silver ( or jade or w/e).
There can be only one. ;)
TF
Bosco
"Again, as I said, if it's naive like GATA to bark on all CBs and assuming they are the same, it's equally, if not more, naive to believe all giants will act in unity."
I am quickly tiring of this conversation. You are of course free to your opinions.
Since you accuse me of naivete, let us look at the reason.
Is it naive to think that all people will eat because all people need energy to live? People differ don't they, but still they must eat, it is in their own best interest.
Similarly giants must store value. This means they need to choose what to store that value in. Government bonds? Jade? Gold? Silver? Platinum? Palladium? Stocks? A mixture? Only one thing?
Every giant must choose. The argument is simply that eventually the market will teach each giant that gold is the best choice. Is it naive to think giants must store excess value? Is it naive to think they do so because it serves their own best interests? Is it naive to think that one asset class will emerge victorious?
I do not assume all CB's will act in unison, nor do I expect the same from giants. I do hoverer think that in the long run the giants will correct their prior mistakes in judgement, as taught by the market.
TF
MF:
My answer is very simple. history doesn't support your notion of only 1 and nothing else. This is the biggest blind spot of many faithfuls here.
Bosco
Well then, we shall see what we shall see, wont we. ;)
You are of course free to choose to store your wealth in whatever you want, and test your hypothesis. I have made my choice, and am testing mine. :)
Let us be taught by the market in time. I am willing to take my chances.
TF
TF
"It's not that because silver does not appear on CB balance sheets that it won't be used as reserve asset, it is because it would not be used as reserve asset that it does not appear."
That sounds like backwards circular reasoning.
In fact the entire logic of "there can be only one" is merely a convenient support for the desire for it to be so.
You cannot look to the past to justify gold as the only refernce point. On the contrary. Silver has always been "married" to gold.
In fact, the ratio floats the way it does now for the same reason that gold floats right now, the paper market.
Try to make an argument that does not assume that I or everyone else would not see gold and silver as proportional in value. Even if that proportion is 200:1.
I read all of what Costata said. It is like what lawyers do to hide behind the simplest part of the equation.
There is no objective argument to suggest that gold and silver cannot both be reference points, as they both have been in the past. Gold the greater, silver the lessor. Everything else is self serving circular logic.
And don't bring me that industrial metal argument either. Gold is used in industry as well. Costata puts for the absurd notion that Gold not used as an industrial metal gives it increased value, while silver not used in industry gives it less value, using the again circular logic of "there can be only one"
As silver is hoarded, it will keep it rightful place right alongside gold. IMO
Reference Point Metal
MF:
Of course! I am not here to force people to believe what I said.
To all faithfuls here:
On another note to the faithfuls here, following on the notion that the reset suggested by FO/A seems to have been delayed for a decade, and somewhat it might be at least partially related to China's involvement. I am throwing out a hypothetical situation here:
We often talks about US's deficit problem (in terms of real goods and services) that is structural, that the US gov't is like a drug addict on more real goods than it can produce. What if, that in the immediate future, that China became an addict for US goods - food and energy - which makes China the deficit nation in terms of real goods and services. Do you think in that case will there be any impact on both the timeline and probability of freegold and/or HI events in different currencies?
Nickelsaver, you've summarized my view towards that one and only argument better than I can.
Bosco,
That may be the only argument we agree on. LOL
Nickelsaver: it's perfectly fine and natural if that's the case :)
Nickelsaver
I am curious. How much do you know of the use of gold and particularly silver as money historically?
Are you aware of any problems there were, and how such problems were dealt with?
I do look to history, but it seems we come to different conclusions.
There is actually a logically objective reasoning behind my position, but I am willing to simply let the market show me wrong (or perhaps even right- imagine :P ) if you are willing?
TF
Nickelsaver,
Yes, gold is used in industry, medicine and research among other fields. To what extent? Silver's predominant use is industrial. Gold's is not.
Using a general 80/20 ratio just to illustrate, gold and silver are at opposite ends. A small change in investment demand for the 20% of free silver will pressure the industrial demand on the 80% side. The same change in demand for gold would have a much larger pool to affect before value changed enough to raise eyebrows. This is the stock to flow issue.
The concern of only one metal ruling is valid. Consider this: China, India and others are primarily exporting nations, sending heavily to westerners. The former are developing while the latter are saddled with massive debt and have enough difficulty just maintaining their own infrastructure.
Once Freegold fully comes into play, it will allow debts to effectively be wiped clean (mostly at the expense of the shrimp). Ask yourself which nations will be in a position to benefit from BOP? The ones that have relatively strong industry and manufacturing, or the ones that have gutted themselves trying to squeeze productivity out of paper? Gold will flow to those that produce more than others.
Still, I have to wonder whether all of the giants are fully on-board. Sure, gold will be #1. That doesn't mean it's going to be the only thing revalued in terms of fiat. Silver does have investment demand and is second to gold from a social perspective, so it seems folly to disregard it no matter how much official emphasis might be placed on gold. The revaluation delta will certainly favor gold, so the relative rise in silver won't be as great, but it should still rise against other real assets to a lesser degree than gold.
Owing to private ownership, which would remain inconsequential and non-threatening compared to centrally-promoted gold, silver could easily fit into the game on a private level and even for giants that find themselves wary of a lopsided amount of control in gold. Rise in price would quickly induce investment dishoarding which prevents silver from truly threatening gold as focal point. What's to stop a nation rich in silver from trading internationally in gold and internally in silver? Unless silver were outlawed, I see no reason to think gold and silver couldn't act as privately owned wealth.
I'm not willing to put all of my eggs in one basket, just the majority of them. Diversification leaves some maneuvering room.
Bosco:
TBH I think people here are by now probably a little bored of reading about my view. I'm sure they would be a lot more interested in reading yours for a while, since you're new in town. So I'm just going to lean back and see where you take us for now.
Cheers! ;-)
ECB press conference coming up in about 20 mins
FOFOA, J.R.,
interesting e-mails regarding the assets/liabilities issue of CBs.
I have been pondering myself about this issue for some time and have been playing with a thought experiment:
on almost daily basis we read that CB's balance sheets are being expanded by adding government bonds (and other paper) in the »assets« column and at same time issuing currency and putting them in the »liabilities« column. They say that with falling prices of these bonds/paper, the CB's are taking huge losses and could eventually become insolvent/bankrupt.
But is this true? Let's borrow a quote from »Doc« in the »Back to the future« trilogy:
»Marty,you're not thinking 4 dimensionally!« as in, let's take time into account:
We all more or less agree that a currency is a liability of the CB, a currency – zone operator. A debt/bond is a promiss of more currency in the future. So how can a bond become an asset if it only provides more liabilities?
Instead of putting bonds into asset column let's put them into the »future liabilities column«. Let's then transform the current balance sheet of a CBs into several balance sheets depending on time when the bonds mature and are transformed into currency, which of course is, at any time, a present liability.
Therefore, by buying bonds the CB expands only the libilities side of their balance sheets. The currency it prints, represent the present »liabilities« and bonds represent »future liabilities«. But where do assets come from in order to balance the balance sheet? Well, »present assets« are assets that are result of a past economic/social activity and Mother Nature's generousity while on the other hand, »future assets« are yet to emerge as a consequence of economic/social activity.
I won't be getting into commercial bank's balance sheets because we can safely say that any activity on their part only increase liabilites of the CB. They create loans/debt/bonds and off-set them by creating digital credits/deposits. As we can see all instruments are promisses to provide currency and can be traced back to the CB's liabilities.
cont.
---
If we now step back, then we can say that the agregate balance sheet (present + future) of a CB becomes a balance sheet of a particular currency – zone.
The problem for the CBs (currency-zone operator) becomes apparent when assets don't cancel out liabilities. With the system such as it is, this usually happens in the »future« as the »future liabilities« are rising at least at a pace of interest rates. So when »future assets« start falling behind, the »future balance sheet« becomes un-balanced. This normally happens because the real world growth can't meet mathematical growth (interest rates) + new, ever-increasing promisses. This of course also destabilizes the agreagate balance sheet of the currency – zone.
With »future assets« falling behind, a shortage of currency develops when »future liabilities« are due. This prompts CBs (currency – zone operator) to buy »future liabilities« and exchange them for »present liability«, but this of course doesn't solve the problem. With buying »future liabilities« the CBs (currency – zone operator) destabilizes the »present balance sheet (printng currency and creating more »present liabilities«). Since »present assets« have already been created (are given) the destabilization of the agragate balance sheet decreases, but not totally. With time and the increase of assets this destabilization becomes irrelevant to the whole system.
This of course is not the case when we have a catastrophic destabilization of the currency – zone balance sheet when there's a widespread loss of confidence in »future liabilities«.
But before we go into this let's take another step back.
What we now see are multiple currency – zones each with their own agregate balance sheets and their own currency – zone operators. As it happens trade between different currency – zones generates a certain amount of foreign currency denominated assets in a particular currency – zone, usually stored at the particular CB (currency – zone operator) as a present asset. This means that when any currency – zone operator tries to stabilize the imbalances in the agregate balance sheet of its currency – zone, it automaticaly destabilaizes the agregate balance sheet of the currency – zone whose operator has assets denominated in a currency which is issued by the first one. Needless to say that a catastrophic destabilization in any currency – zone whose currency represents a major part of present assets of any other currency – zone, has a deep impact on the latter's agregate balance sheet.
cont.
If we now continue the story from before...
When a agragate balance sheet of a currency – zone becomes seriously destabilized by loss of confidence in »future liabilities« the CB (currency – zone operator) needs to revalue »present assets« in order to stabilize the agregate balance sheet again. The operator can choose to revalue any asset as long as this asset brings stability. Much has been written over this and I won't go there again, let's accept the fact that in real world gold is the »go to« asset because of it's flow/stock ratio. Since CB (currency – zone operator) also holds foreign currency, it could also be used to revalue it but this wouldn't bode well with the currency – operator that issues said currency and would try to devalue it and in this fight between two CBs, the one whos currency – zone is bigger has an upper hand, since it can more easily absorb extra destabilizing actions.
In this thought experiment some interesting issues arise:
a) any kind of debt that is issued and promisses currency in the future, is a liability of the currency – zone and ultimatelly of the CB (currency – zone operator)
b) buying debt/bonds has no effect on the »assets« in a currency – zone since it's basically replacing »future liability« - bond for »present liability« - currency
c) the only way to balance the agregate balance sheet is to revalue assets of the currency – zone, so they match the liabilities
d) if »future balance sheets« can't be balanced through revaluating »future assets«, then »present assets« have to be revalued
e) if there are no »present assets« that can be revalued to balance the »future balance sheet« then »future liabilities« will default and automatically balance the »future balance sheet«
f) if »future liabilities« default then no »future assets« need be produced
g) if »present assets« start to lose value then »present liabilities« need to lose value as well
h) any imbalances in the »present balance sheet« can only be resolved in present not in the future
i) any imbalances in the future can be resolved in present or in the future
cont.
Since this experiment is developing in a long story let's cut to the chase and implement this into real world – today.
Currently we have a large currency – zone (USA) whose currency (dollar) is used in other currency – zones as an asset of their operators. Some are large and other are small. Beside foreign currency, most operators also hold gold as their assets. As it happens the USA is exporting currency which acts in destabilizing manner on agregate balance sheets of other currency – zones, by lowering the value of their assets. Since the USA is also engaged in lowering the price of their other asset, gold, other CBs have been trying to stabilize their currency – zone's agregate balance sheet by increasing the value of their »future assets«. This is of course accomplished by increased productivity or rising prices. To make their job more difficult the governments of said CBs are a major player in the bond markets and as a consumer, so the agregate balance sheets have been experiencing major disruption in the »future liabilities« part. If the currency – zone's currency is also not a part of widespread use in the interantional trade then any asset that comes into the currency – zone has a tendency to rise in price of local currency as the CB tries to stabilize the agregate balance sheet by revaluing any present asset. Many small countries have had encounters with hyperinflation and shortages due to this inability to conduct sovereign monetary policy.
With the creation of the euro-zone, a currency – zone has been formed whose operator's and its present assets are large enough to counter the destabilizing effects of the dollars being exported. It also helps that government interference is limited which brings some stability to the agregate balance sheet and that the euro-zone has a more or less balanced foreign trade. Since major imbalances are currently occuring in the »future balance sheets« the ECB has many assets that can be revalued but since price rises of most are not desireable, it will use only two assets, the US currency and gold, which also reside in the ECB balance sheet. The FED has already indicated that it won't allow for the dollar to increase in value and anyway it's not practicle for the currency – zone to enjoy a fast appreciating currency ag. other currencies, so as a long term resolution it's going to be gold that will implemented.
In this thought experiment gold can be used to balance the »present balance sheet« and »future balance sheet« thereby implying that it can replace future assets that are yet to be created. This would theoretically mean that its total value can exceed the value of present assets less gold of course.
Casper
Interesting thoughts Casper,
Reminds me of a comment from Randy Strauss most recently cited in RPG Update #4:
"The De Facto Ascent of Gold
It is a common misconception that any retreat from dollar-denominated CB reserve assets would, in itself, destroy the value of the CB's portfolio of reserves. This canard is often used by the anti-gold financial media to explain the dollar's apparent strength, claiming that the world is trapped in perpetual dollar use by the existence of its humongous dollar reserves. Here is Randy Strauss from my post Gold: The Ultimate Hedge Fund:
[article] ...Even in light of all of this shifting by central banks into other currencies, the dollar still comprises 2/3 of global reserves and attempts to shift away from the dollar would destroy the value of central banks’ portfolios.
Randy's Comment: Although I should be well used to it by now, it still amazes me every time I see comments like the final remark here regarding any significant shift from dollars will lead to the destruction of central banks’ portfolios. It’s almost as if the commentator is trying to help indoctrinate a paralyzing fear as a means to prevent any such attempt on the part of the CBs, and to also create enough grass-roots doubt against such an attempt ever being made that we the people won’t perceive any benefit in trying to front-run with our own flight out of dollars and into gold...
It is an error in thought or judgment, however, to believe that a “destruction” of the dollar portion of the portfolio would therefore proportionately destroy the portfolio as a whole. That would only be the case if all other things remained unchanged, but life seldom works out so neatly as that. Sometimes an action can set forth an immediate chain reaction that literally changes EVERYTHING you thought you knew about the situation!
In the world of the “new normal,” it is indeed possible (and someday soon desirable) to let the fuse be lit and allow the CB store of dollars be consumed. And to be sure, it is singularly the latent potential energy of the gold component that allows us to make this analogy with gunpowder. The natural chain reaction in the tiny open market for physical gold would immediately bring to bear massive “heat” and “pressure” upon its price… **POW** thus swelling the “volume” of its value relative to all other things. So even without radical changes to the quantity of physical holdings, a simple expansion in golden value will more than compensate the average portfolio of the central banks against the destruction of the dollar component...
cont.
cont.
"Still can’t wrap your head around it? Bear in mind that the gold price is not a simple one-to-one inverse relationship with the dollar. There is a great leverage lurking in there, but it has been largely masked by the artificial abundance of paper gold which weighs down upon the equilibrium price. And even so, since 2002 the dollar value has decline by just 20% on a trade-weighted basis, whereas the gold price has responded with a 300% gain. And the moreso that the public and private parties of the world rightly gravitate toward physical gold instead of the illusion of paper derivative gold as the solid foundation of their savings and diversifications, the moreso you will see this price leverage grow in favor of larger multiples of gold price gains against modest dollar losses....
Central bankers will increasingly prefer gold reserves over the paper reserves created by other countries. Not only for the reasons of reliability/trust as cited in this article, but moreso because in choosing predominantly gold over foreign paper for central banking reserves will give those various national monetary officials an improved degree of latitude in their pursuit of an independent monetary policy.
WITH gold reserves, a central banker in a vibrant national economy can choose to enjoy a strong currency relative to gold, but, importantly, it can still alternatively choose to exercise loose monetary policy (for economic or political reasons) in which its currency is made weak as measured relative to gold. But regardless of choice for the relative strength or weakness of the national currency, the abiding benefit of choosing gold reserves is the superior stability — the systemic strength against procyclicality — that gold offers to the asset side central banking balance sheet.
WITHOUT gold reserves, pursuit of a national currency policy that is (according to their preference) generally strong OR generally weak is made less expedient either way because the health of the central bank’s balance sheet is subordinated to the quality of its foreign paper reserves which are themselves subordinated to the particular monetary policies being pursued by those foreign governments. Generally this structure of foreign paper reserves offers only the option for national monetary weakness built upon other international weaknesses, and worst of all it exposes the national monetary balance sheet to procyclical systemic failure — a domino whose fate is written largely in the hand of its neighbors.
When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.
And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.
The breeze is fair and the road ahead is clear for the ascent of gold.
R."
Remember these graphs:
From my post Your Own, Personal, Freegold, here's how the leverage in gold as a reserve asset behaves. This is what the Eurosystem's quarterly MTM parties reveal, and it can work on an individual level the same as it does for central banks, thus the title of my post. BTW, the pivot point in these illustrations is the physical plane of real goods, real services and real world capital:
ECB gold as % of reserves in 1999
ECB gold as % of reserves in 2009
@ BOSCO
": missed your question. my answer is no.They (bonds) have actually soaked up liquidity otherwise your 50K today would be buying nothing."
Considering the nominal size of the worlds bond markets and the fact that 50k does indeed buy you something then that proves that this pool of savings created by the economy is realistically valued relative to goods and services. The reality is, there is a mathematical limit to the ability of bonds to be a store of value. That limit is hit when interest rates hit 0%. Just like they have in the worlds 2 largest economies, US and Japan.
50k gold is easily realistic, probably too low, if the composition of this savings and future savings changed from bonds to physical gold.
It is one thing for conspiracy websites to indicate that the Fed or the global central bank cartel are doing everything in their power to manipulate the price of gold lower. It is something different when the 'reputable', Deutsche Boerse owned Market News does just that.
* MARKET SOURCES REPORT BIS, BOE & FEDERAL RESERVE WERE SELLING GOLD AFTER IT POPPED TO SESSION HIGH AT GMT 1335 -MNI NEWS via BLOOMBERG
So much for all those sworn testimony claims that the central bankers do not manipulate the price of gold.
MARKET SOURCES REPORT BIS, BOE & FEDERAL RESERVE WERE SELLING GOLD AFTER IT POPPED TO SESSION HIGH AT GMT 1335 -MNI NEWS via BLOOMBERG
Anybody else getting a wierd we aint in Kansas anymore kind of feeling or did someone just unplug the matrix? Lot's coming into view in short order.
FOFOA, your holiday donation will be there shortly. Just gotta find that darned paypal password.
I thought FED didn't own US gold, US Treasury does...so how could they sell it?
Enough,
Paper, paper, wads of paper...
If this "news" is true, does anyone care to venture a guess as to why the gold hostile CB's and BIS have come out of the closet and what is might mean? thanks
5/5/98 ANOTHER (THOUGHTS!)
ANOTHER: The BIS is the gold broker for all interbank sales / purchases. Bullion Banks are for sales to other entities.
FOFOA from Go Go South Korea on yeah, that what the BIS does - facilitate and clear inter-CB gold transactions.
"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. "
JR, so with BIS involvement this means that FED, BOE sales went through the BIS to other CB's or to Bullion Bank/banks?
The sale to BB's might mean the BB's are having delivery problems?
harvey Organ has stated 58 tons standing for delivery at comex for dec. That's 60% of comex registered inventory.
thanks !!
JR,
whenyou say "interbank sales/purchases".....I took that to mean CB and bullion bank.
But now I think you mean only inter Central Bank sales/buys?
My point was more along the lines of "the BIS is the big gold broker," so its LDO that they might be involved in gold transactions (not that we really know what it is they are alleged to have done).
The BIS does deals with BBs, for example as is discussed here by FOFOA.
Yes I remember the WSJ inquiry where BIS did a transaction that WSJ reported was with CB's and BIS corrected WSJ by saying it was actually with european commercial banks.
Still today's extremely public admission of CB involvement in capping the paper gold price is important, no? If true of course.
Whether it was just a transfer from one CB to another via the BIS, it's public announcement was intended to knock paper price of gold, no?
As A-Nation said a few comments ago......plug on the matrix being pulled?
Please know that I concur with (what I take to be) the consensus here regarding the quality of ZH's reporting, but I'm putting the link up because the absolute mendacious garbage that gets spewed now on pretty much a daily (sometimes hourly basis) to prop up all manner of markets-in this case shares-has truly become epic in size.
One really wishes they would just pull the freegold plug and be done with it.
http://www.zerohedge.com/news/presenting-todays-deux-ex-rumor
JR,
I followed your trail on FOFOA and the BIS and it is great commentary.
My counter point there would be that it seems that there is a perversion of the system so severe that absent the Fed we would have been on a more sustainable path long ago and that collecting interest in an environment where all losses are effectively covered and cash is free is pretty close to fraud.
Is it a planned conspiracy, I don't know, but I do know that the concentration of power that exists under this financial system (MAD I believe is the acronym)is such that one would be silly be not to at least "trust but verify." Maybe a lot of the frustrations and tin fiol theories out there are simply the manifestation of disbelief that a system can stay this out of balance for this long without proper planning.
Now, after watching MF Global go down and hearing some of the stories first hand I find it hard to believe that many will be sticking around to see if Bernanke can traverse the Grand Canyon on a piano wire.
A few closing observations:
1) Given the nature of the derivatives complex, any major default is not an option (for the FED)
2) The implosion of the shadow banking system has enough dry powder to stop this system in it's tracks.
3) Both 1 and 2 are dependendent on entirely false collateral asset valuations propped up by FASB and items 1 and 2. These assets as you have stated have been lent out against (probably to several orders of magnitude).
4) Based on the financial position of the US, treasury debt is now nearly entirely worthless.
5) I am starting to have serious doubts about the existence of the US gold hoard. No sane person(s) in their shoes wouldn't have already jumped in front of this if they had the means. (And having read a lot of FOFOA I certainly wouldn't argue that it isn't coming or that they can't see it coming). That scares me some.
6) Today, without fail, where there is smoke there is a volcano ready to explode, they just keep shifting the pressure valves.
7) It amazes me how many people can't see what is staring them right in the face, which may explain the delay in the appreciation of the transmission mechanism/rocket launch.
Just trying to incorporate my practical experience into what I am seeing. Maybe it's all retread.
Some amusement:
Jim Willie: JP Morgan Crashed MF Global to Avert COMEX Failure, European Derivatives Implosion
Bosco,
You also have a reading comprehension problem too I see.
You wrote:
so this is NOT the first time in world history that all currencies are fiat (far from it)! Your $20 gold eagle is also a fiat currency.
No kidding, a coin stamped by an issuer with a face value that exceeds the value of the metal content is fiat too? Keep those revelations coming.
costata wrote:
This is the first time in world history that all currencies everywhere around the globe are fiat and infinitely expandable whereas...
The quality of being both fiat and being infinitely expandable are joined by the word 'and'. I chose that form of words to differentiate the current state of the monetary system from both a commodity money standard and, for example, a gold exchange standard.
BTW Bosco have you ever posted comments here under another name? Your MO is familiar.
Ramon,
You have expressed in logical terms, exactly what my gut has been telling me about silver. I understand the store of value perspective with gold, as CB's seek a single asset in which to base revaluation of fiats, and that is obviously gold. I put out a hypothetical, that if CB's were to begin listing silver on there balance sheets, would that change everyone's perspective on the salience argument, or could it be perceived still as salience in that gold and silver together form a single asset class, that being precious metals. The chief reasoning being that CB's don't store silver right now because they can store gold, but as the physical gold is depleted (and there is no paper market to present the illusion that there is more gold out there), silver will begin to be stored CB's, being in the same asset class as gold.
Again. This is a hypothetical.
Bosco,
Another gem (my emphasis).
You wrote:
Yes, there's no objective limit to the (nominal) price of gold BUT there's objective limit to the real price of gold relative to real goods for reasons that I've already explained.
Your "reasons" are more open to the interpretation that they argue all value is subjective rather than objective. Your "explained" needs a more convincing explanation.
TF,
Please make your argument as opposed to making appeals to your own authority. I do not have a total grasp of history, in any regard. No man does.
Nice find FOFOA. Too funny.
So some one has imported 64 million in gold into our little country ( new Zealand)
http://www.stuff.co.nz/business/money/6114653/Mystery-over-huge-gold-imports
Intriguing..
JR, Can you point me towards the FOFOA post that tells what a sudden revaluation of gold by the ECB would be like? If they finally said, not going to wait for HI? Banking Holiday for how long sort of thing.
Not sure on what you mean Indenture, lets start with Nuclear option ideas:
COMEX being in the US and the LBMA being in London leaves the ECB and the BIS with "the nuclear option" if things ever get desperate enough to use it. This nuclear option is A) for the BIS to begin operation of a public "physical only" market for gold to be used by the really giant participants, primarily sovereign entities and billionaires, and B) for the ECB to use the price discovered by the BIS in its quarterly reserve asset "marked to market" adjustments.
http://fofoa.blogspot.com/2010/02/greece-is-word.html
=================================
Now you might be thinking, "How can this secret help us now if it is so secret and under the control of the Central Bankers?" Well here's the beauty of it: All it will take to deploy this "Nuclear Option" and reset the monetary and financial world back to a sustainable basis is one simple announcement, the revelation of the existence of this market, or even a credible leak will do the trick. (You guys are good at leaking stuff, right?) So here we go.
In case you haven't guessed it yet, this secret market I'm talking about is a gold market. But it is a separate gold market from the LBMA and the COMEX that we all know about. It has a different market-maker and a different price! It is the other half of a two-tiered gold market that has been operating in secret for at least 15 to 20 years.
[...]
So anyway, the two-tier market ended in the early 70's as we all know. But what we don't all know is that it started back up some time later. My best guess is that the BIS started it back up sometime between 1985 and 1995. But why would the BIS do this? The answer in one word... size!
http://fofoa.blogspot.com/2010/05/open-letter-to-emu-heads-of-state.html
================================
or, from an above comment:
It would first sell all its dollars to buy back its own liabilities. But what if… just saying, what if… it used its dollar reserves to openly bid for physical gold in London? What if it did this instead of buying back its own liabilities? Think about the RPG effect on its reserve account! Suddenly you’ve got Freegold and now the ECB can quietly buy back any excess liabilities using a very small amount of gold. Just sayin’"
DP
My view of the "nuclear option" is they would bid to buy, at increasingly high prices in the market. This would automatically increase not only the weight but also the value of their reserves backing the currency. This rising value of pre-held reserves (and also newly purchased reserves) would provide much latitude to print further euro to buy up failing assets and tuck them away on the ECB balance sheet, without lowering confidence of international investors and trade partners.
http://fofoa.blogspot.com/2011/07/euro-gold.html?showComment=1310569088342#c5615456519707015660
==================================
FOFOA
In my mind, it would be infinitely better for the USG to acknowledge Freegold, declare a starting price of, say, $10,000/ounce, and then open the vaults and let the price float. They buy and sell at the market price through the banks, starting at $10K.
The price would soon stabilize, much higher than $10K of course, but the two-way market would be in effect. The gold would not be gone. The currency would be stable once again.
http://fofoa.blogspot.com/2010/10/one-tin-soldier.html?showComment=1287304644906#c4478715547708120433
Draghi Acts to Expand Credit to Banks, Doesn’t Signal More ECB Bond Buying
"European Central Bank President Mario Draghi cut interest rates and offered banks unlimited cash for three years while damping speculation the ECB will buy more government bonds to stem the region’s debt crisis.
Policy makers meeting in Frankfurt today reduced the benchmark rate by a quarter percentage point to 1 percent, matching a record low. They also loosened collateral rules so that banks can borrow more from the ECB and announced two unlimited three-year loans. The measures “should ensure enhanced access of the banking sector to liquidity,” Draghi said at a press conference.
Hours before European leaders meet in Brussels, Draghi kept the onus on them to solve the two-year debt crisis by repeating his call for a “fiscal compact” and denying he had hinted the ECB would automatically support such an initiative with more bond purchases.
[...]
“All euro-area governments urgently need to do their utmost” to deliver fiscal sustainability, Draghi said. He denied his Dec. 1 remark that “other elements” could follow a push toward fiscal union was a signal the ECB could step up its bond-market intervention, saying he was “kind of surprised” it had been interpreted that way.
‘Explicitly Clear’
“The headline event today was that Draghi made it absolutely and explicitly clear that there would be no ECB bond buying bazooka,” said James Nixon, chief European economist at Societe Generale SA in London. “They’ll stay in the market but will only buy small amounts. It’s governments who’ll have to do the heavy lifting.”
[...]
Merkel and French President Nicolas Sarkozy are proposing to amend European treaties to tighten controls on budgets. Leaders are also mulling a plan that would channel central bank loans through the International Monetary Fund to fight the debt crisis. Draghi said this would violate the ECB’s founding treaty if “the IMF were to use this money exclusively to buy bonds in the euro area.”
The ECB is “saying no to almost everything,” said Holger Schmieding, chief economist at Berenberg Bank in London.
While offering maximum support for banks, the ECB “is refusing to address the root cause of the euro crisis...
The root cause being nation-state deficient spending, which the ECB does not address - the nation-states do by getting their finances in order.
costata:
"No kidding, a coin stamped by an issuer with a face value that exceeds the value of the metal content is fiat too? Keep those revelations coming."
No kidding at all. You might want to check out the definition of fiat first. Fiat is simply by gov't decreed. And might be you can also read some of latest Martin Armstrong's musings first. This is definitely not my original invention :)
"The quality of being both fiat and being infinitely expandable are joined by the word 'and'. "
As I've told you, this is not the first time this happens. When you viewed things from a system perspective, rather than just "world, nation, globe" way, (infinitely) expandable fiat currencies for the whole system is nothing new. Obviously I can't say which country we have seen that happened for multiple times...
No, this is my first time posting here. Who do you think I sound like, just curious :)
So JR et al,
What is the ECB/BIS waiting for? If not now, then when?
costata:
"Your "reasons" are more open to the interpretation that they argue all value is subjective rather than objective. Your "explained" needs a more convincing explanation."
That's just your subjective conjecture, the same as I found many of the "reasons" "arguments" of the faithfuls here are just opinions without proper support (regardless how long the essays/comments are). Just like the way you use "your errors" which automatically assume your arguments are sound (which they MIGHT not).
So let's not say words like these which they add no value to discussion at all.
Texan,
If you are referring to the nuclear option my guess is never.
The dollar reserve system has facilitated the greatest standard of living increases world wide in history. Nobody wants to be responsible for blowing that up.
The nuclear analogy fits well imo. Just like geopolitics, the nukes are there but never get used. If old world gold actually exists in some cohesive way (not convinced) and directs the BIS (also questionable), I'm sure theyre content to simply wait as long as it takes. They've already been waiting since the old world ended. When was that again? When Edward VII died?
Nickelsaver:
"The chief reasoning being that CB's don't store silver right now because they can store gold, but as the physical gold is depleted (and there is no paper market to present the illusion that there is more gold out there), silver will begin to be stored CB's, being in the same asset class as gold."
I would like to provide a small historical account, though not entirely similar, to show your hypothetical situation is entirely possible.
(Unfortunately this is a China example, sorry, I can only talk on things that I think I know)
On 1949 May 28, the day when Shanghai was officially "liberated" (or taken over from the Kuomingtang/KMT, now Taiwan/ROC, by the Communist forces, depending which side of political belief you are on), the temporary military gov't announced the abandonment of all previous currencies and everyone have to start using RMB/Yuan. Now obviously who in their right mind, after all these years of war and unrest, would trust another paper money. Therefore it's all black market trading in gold, silver, USD or barter. However, as when the KMT gov't fled to Taiwan, they've already taken most of the gold (and many silver by the way)available in Shanghai at that time with them to Taiwan, there were very few gold on the market. What happened? Here's a direct translation of a newspaper report back then:
"...Confiscated by the KMT govt, there are very few private gold stock availble and thus transaction in the market is very low. ... whereas, the salaried class, who can't afford to buy gold but wanting to protect themselves, they go to the blackmarket to buy silver dollars after they received their salary, silver dollar is now the hottest item on the market"
And according to a later gov't statistic report, here's the prices look like (Shanghai district):
Jan-May 1949:
Gold: up 60682 times
Wholesale product prices (combined, avg): up 78307 times
USD: up 80553 times
Silver dollar: up 112971 times
For what I can understand, Another has said that Euro is a currency superior by design to all others, becouse it has severed all its links to nation state and to the gold.
So in Europe we have the best possible currency...
But the right question is:
Who needs a perfect currency?
Short answer (imho): NO ONE.
Germany doesen't need a strong currency. It needs a currency that stays barely afloat becouse it is an export mercantilist nation. I don't believe too much in people scared by Weimar's ghosts. In Germany, like everywhere we don't have a true democracy, politicians are there to satisfy the interests of exporter lobbies.
Is there a plot to buid a northern euro? maybe... and then? Cui prodest?
Northern Govs will kill exporters to save savers? No way.
Piigs need a strong currency? Of course no. Piigs Govs will be kicked out from Europe? No way. A creditor doesen’t kick out the debtor. He ties himself to the debtor like the men in black suite and bowler that followed debtors everywhere in XIX century England.
So, let’s summarize:
German people fear Weimar...they don’t count becouse they are sheeple
German companies fear strong euro.. of course they count.
Greece people fear depression... they don’t count becouse they are sheeple
Greece companies fear bankrupt... they count and will be aided like the guys in Proton bank (covered on Zerohedge).
So Fofoa is right. Euro istheoretically the best currency, but
Fofoa is also wrong becouse becouse euro on main street is a junk currency, daily sodomized by retailers. Why? Becouse in Germany retailers margins are squeezed by chinese competitors. And you can’t tax chinese imports when they buy eu bonds. In Greece retailer margins are squeezed by new austerity taxes. And when your margins are squeezed you lift prices.
So Zerohedge is wrong. The euro will not die tomorrow. It’s not written in TPTB agenda.
But perhaps Zerohedge is also right. A tremendous pression is building (for different reason as we’ve seen) on Germany main street and on Greece main street.
So the final question. Is the euro good for main street? Absolutely NOT.
You can say who cares about main street? Yes, sure, but... for now.
Conclusions: euro will not solve europeans problems. It will increase them.
And gold? Given this stalemate situation I think it will increase in value at a steady pace. We will see the gold price exploding (with a big perhaps) in the future but I don’t think euro has a role in propelling gold price. Further I think gold price will explode when dollar will die. And I think dollar will not die peacifully. It will die kicking and screaming and in this convulsion the Usa will flex its military muscles with un unknown outcome.
I hope gold bugs will not become some kind of adventists. In particular, in pigs countries they will wait for gold to take off, but in the mean time they will live in worse and worser economic wealth.
And if the pigs nations can’t escape from euro deadly trap, then will be the people that will try to escape local taxes becoming german immigrants.
Maybe the future will be the Germany flooded by greece desperate people escaping greek state trying to tax them for what it has missed to tax the previous generation?
Cui prodest this apart some german real estate crooks?
Do we need a perfect currency or peace for main street?
If the alleged CB gold sales yesterday were paper only (=unallocated), I would have expected GLD inventory to shrink and gold contango to decrease. Indeed, GLD puked (by just over 1%), and GOFO term structure is now slightly inverted between 1 and 6 months.
If they did this in order to plug a leaking hole, the effect should be bigger. I still think that someone keeps making allocated gold available.
Victor
And now some food for taught, an exerpt from Jim Rickards’ excellent Currency Wars (italic mine):
The Atlantic theater, the relationship between the dollar and the euro, is better understood as one of codependence rather than confrontation. This
is because of the much larger scale and degree of interconnectedness between U.S. and European capital markets and banking systems
compared to any other pair of financial relationships in the world. This interdependence was never on more vivid display than in the immediate
aftermath of the bankruptcy of the Lehman Brothers investment bank in September 2008. Although the bankruptcy was filed in U.S. federal courts
after a failed bailout attempt led by the U.S. Treasury, some of the largest financial victims and worst-affected parties were European hedge funds
that had done over-the-counter swaps business or maintained clearing accounts at Lehman’s London affiliates. This transatlantic fiasco, heavily
reported at the time, was amplified in December 2010 when the Fed, in response to disclosures required by the new Dodd-Frank Act, released
extensive details of its emergency lending and bailout operations to Europe during the Panic of 2008.
...
The euro and dollar are best understood as two passengers on the same ship. At any given time, one passenger may be on a higher deck and
the other on a lower one. They can change places at will and move higher or lower relative to each other, but at the end of the day they are on the
same vessel moving at the same speed heading for the same destination.
...
The United States nevertheless has its hands full on the currency war’s Atlantic front, not in trying to strengthen the euro excessively but rather in
making sure it does not fall apart altogether. The euro itself is a kind of miracle of modern monetary creation, having been invented by the members
of the European Union after thirty years of discussion and ten years of intensive technical study and planning. It was the capstone of a European
project begun after World War II and intended to preserve the peace. [quite ironic, don’t you?]
...
It took ten years for all the flaws in this grand scheme to be fully revealed, although they were there from the start. A toxic combination of venal
government ministers, Wall Street hit-and-run derivatives scam artists [goldman, jpm et al.] and willfully blind European Union officials in Brussels allowed countries such
as Greece to run deficits and borrow at levels far in excess of Maastricht Treaty limits while burying the true costs in out years and off-balance-sheet
contracts. Meanwhile investors happily snapped up billions of euros in sovereign debt from the likes of Greece, Portugal, Spain, Ireland and other
eurozone member states at interest rates only slightly higher than solid credits such as Germany. This was done on the basis of high ratings from
incompetent ratings agencies, misleading financial statements from government ministries and wishful thinking by investors that a euro sovereign
would never default.
The path to the 2010 European sovereign debt crisis was partly the fruit of a new entente among banks, borrowers and bureaucrats. The banks
would buy the European sovereign bonds and book the related profits secure in the belief that no sovereign would be allowed to fail. The
sovereigns happily issued the bonds in order to finance nonsustainable spending that largely benefitted public unions. The interests of the
bureaucrats in Brussels were perhaps most insidious of all. If the European sovereign debt crisis resolved itself, everyone would praise the
success of the euro project. If some European sovereign debt failed, the bureaucrats’ solution would be more, not less, integration and more, not
less, oversight from Brussels. By turning a blind eye to the recklessness, Brussels had constructed a no-lose situation. If the euro succeeded they
won praise and if the euro came under stress they won power. The stress came soon enough.
...
And now some food for taught, an excerpt from Jim Rickards’ excellent Currency Wars (italic mine):
part I
The Atlantic theater, the relationship between the dollar and the euro, is better understood as one of codependence rather than confrontation. This
is because of the much larger scale and degree of interconnectedness between U.S. and European capital markets and banking systems
compared to any other pair of financial relationships in the world. This interdependence was never on more vivid display than in the immediate
aftermath of the bankruptcy of the Lehman Brothers investment bank in September 2008. Although the bankruptcy was filed in U.S. federal courts
after a failed bailout attempt led by the U.S. Treasury, some of the largest financial victims and worst-affected parties were European hedge funds
that had done over-the-counter swaps business or maintained clearing accounts at Lehman’s London affiliates. This transatlantic fiasco, heavily
reported at the time, was amplified in December 2010 when the Fed, in response to disclosures required by the new Dodd-Frank Act, released
extensive details of its emergency lending and bailout operations to Europe during the Panic of 2008.
...
The euro and dollar are best understood as two passengers on the same ship. At any given time, one passenger may be on a higher deck and
the other on a lower one. They can change places at will and move higher or lower relative to each other, but at the end of the day they are on the
same vessel moving at the same speed heading for the same destination.
...
The United States nevertheless has its hands full on the currency war’s Atlantic front, not in trying to strengthen the euro excessively but rather in
making sure it does not fall apart altogether. The euro itself is a kind of miracle of modern monetary creation, having been invented by the members
of the European Union after thirty years of discussion and ten years of intensive technical study and planning. It was the capstone of a European
project begun after World War II and intended to preserve the peace. [quite ironic, don’t you?]
...
It took ten years for all the flaws in this grand scheme to be fully revealed, although they were there from the start. A toxic combination of venal
government ministers, Wall Street hit-and-run derivatives scam artists [goldman, jpm et al.] and willfully blind European Union officials in Brussels allowed countries such
as Greece to run deficits and borrow at levels far in excess of Maastricht Treaty limits while burying the true costs in out years and off-balance-sheet
contracts. Meanwhile investors happily snapped up billions of euros in sovereign debt from the likes of Greece, Portugal, Spain, Ireland and other
eurozone member states at interest rates only slightly higher than solid credits such as Germany. This was done on the basis of high ratings from
incompetent ratings agencies, misleading financial statements from government ministries and wishful thinking by investors that a euro sovereign
would never default.
The path to the 2010 European sovereign debt crisis was partly the fruit of a new entente among banks, borrowers and bureaucrats. The banks
would buy the European sovereign bonds and book the related profits secure in the belief that no sovereign would be allowed to fail. The
sovereigns happily issued the bonds in order to finance nonsustainable spending that largely benefitted public unions. The interests of the
bureaucrats in Brussels were perhaps most insidious of all. If the European sovereign debt crisis resolved itself, everyone would praise the
success of the euro project. If some European sovereign debt failed, the bureaucrats’ solution would be more, not less, integration and more, not
less, oversight from Brussels. By turning a blind eye to the recklessness, Brussels had constructed a no-lose situation. If the euro succeeded they
won praise and if the euro came under stress they won power. The stress came soon enough.
...
excerpt from excellent Jim Rickards "Currency wars" part II
...
However, in the European sovereign debt crisis, Europe was not alone. Both the United States and China supported the European bailouts for
different but ultimately self-interested reasons. Europe is a massive export market for the United States. A strong euro keeps up the European
appetite for U.S. machines, aircraft, pharmaceuticals, software, agricultural produce, education and the variety of goods and services the United
States has to offer. A collapse of the euro would mean a collapse in trade between the two giants of global output. A collapse of a European
sovereign could take down the European banks and the euro with it, as investors instantaneously developed a revulsion for all debt denominated in
euros and fled from European banks. The consequences of a European sovereign debt default for U.S. exporters to Europe would be too great;
here was an entire continent that was too big too fail. The U.S. bailouts, swap lines and support for issuers like Fannie Mae were all part of a
multifaceted, multiyear effort to prop up the value of the euro.
China also had an interest in propping up the euro, but its efforts came with a political agenda. Europe is a huge export market for China as well
as the United States, and to that extent China’s interests are the same as the United States. But China’s banks are not nearly as entwined with
Europe’s as are America’s, which gives China more degrees of freedom in terms of deciding how and when to help. The European sovereign debt
crisis offered China the chance to diversify its reserves and investment portfolios away from dollars and toward euros, to acquire leading-edge
technology systems that had been denied it by the United States and to develop platforms from which it could engage in large-scale technology
transfer back to China.
Germany welcomed the U.S. and Chinese support for the euro. As an export powerhouse, Germany might have been expected to favor a weak
euro for the same reason that the United States favors a weak dollar and China favors a weak yuan: to gain an edge in the currency wars with a
cheap currency that promotes exports. Germany, however, was not only an external exporter; it was an internal exporter within the European Union.
For those eurozone exports, there was no currency consideration since both the exporter and the importer, for instance Germany and Spain, used
the euro. If the euro were to collapse or members broke away from the euro and reverted to their old currencies at devalued levels, those markets
might be lost.
Conventional wisdom had it that Germany anguished over support for Greece and Ireland and the other weak links in the euro chain. In fact,
Germany had no attractive alternatives. The costs of a euro collapse far outweighed the costs of regional bailouts. Germany actually benefitted from
the European sovereign debt crisis. The continued existence of the euro gave Germany a dominant position inside Europe while a somewhat
weaker euro internationally enabled it to gain market share in the rest of the world. The sweet spot for Germany was a euro that was weak enough
to help exports to the United States and China but not so weak as to collapse. Germany was successful in finding that sweet spot during 2010
despite the sturm und drang surrounding the euro itself.
With the self-interests of the United States, China and Germany all pointing in the same direction, there would be no doubt for now about the
survival of the euro. That the banks were flush with rotten assets, that the periphery nations were running nonsustainable fiscal policies and that the
people of Greece, Ireland, Portugal and Spain were facing austerity in order to keep the assembly lines moving in Seattle and Shanghai were all
matters that could wait for another day. For now, the center held.
Bosco,
The local phenomenon you described probably hurts the hypothetical more than helps it. Such a scenario, if it took place on a grand scale, would pit the debtors against the savers, putting silver in the hands of the debtors.
What I was talking about was CB's embracing both gold and silver at the same time. And there is no real support for this in history. That being said, what is on the horizon will be unique from any angle.
Including, IMO, the possibility of a Single World Fiat currency.
Yeah, I said that.
Read my blog and you'll probably stop quoting me going fwd. LOL
Nickelsaver: notice that I said "not entirely similar".
I didn't read your blog and I am not commenting on what you believe but just on the hypothetical case you proposed and I do not agree with your conjecture.
Gotta love it....hehehe
Hello Victor,
Regarding the alleged CB involvement in the paper gold dump yesterday…
"MARKET SOURCES REPORT BIS, BOE & FEDERAL RESERVE WERE SELLING GOLD AFTER IT POPPED TO SESSION HIGH AT GMT 1335 -MNI NEWS via BLOOMBERG"
…were you aware that the Fed, BOE and BIS had trading accounts? That was a surprise to me. Last time the BOE sold gold it was by auction to the BBs. But supposing the "market source" was a GS or JPM deep insider that knew about an order from the CBs for the BBs to dump masses of paper gold, isn't it remarkable that he/she was able identify the specific perps? I mean, you'd never have just the Fed make such a call, right? And if it was the BOE and Fed on that conference call with the BBs, I suppose they could have invoked their position at the BIS to be sure their BB puppets knew this was serious, with the backing of all the CBs in the world (the BIS)! I mean how else would our "market source" have been able to identify the BIS, BOE and Fed by name? Surely it wasn't just an off-the-cuff assumption by a "market source" who's also a fan of the ZH/GATA CB thesis.
But let's say, hypothetically, that it was the BIS, BOE and Fed acting in concert to smash the price of gold yesterday. Heck, let's assume the ECB was in on it too, just to make the assumption CB-solid. My two questions are these:
1. Is our assumption in any way mutually exclusive with what FOA said? "both systems (EMU and USG/Fed) will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to!" (In other words, which is more demonstrative of high level intention? A 10-year levitation or a one-day correction?)
2. Would our assumption necessarily make Enough's characterization of CBs correct? Enough's characterization: "..gold hostile CB's and BIS" (Perhaps… paper gold hostile?)
I can certainly imagine a scenario consistent with A/FOA in which the CBs would want to limit the price of paper gold if the financial system was on the brink of collapse. But unlike ZH, I found the wording of that Market News headline to be less than convincing. What was your take, notwithstanding your studious use of "alleged"? ;)
Sincerely,
FOFOA
PS. Thanks for the Puke alert! Lance didn't email me this one.
BoE - THE ROLE OF THE BANK OF ENGLAND IN THE GOLD MARKET
http://anotherfreegoldblog.blogspot.com/2011/12/boe-role-of-bank-of-england-in-gold.html
Speech given by
GRAHAM YOUNG
SENIOR MANAGER, FOREIGN EXCHANGE DIVISION
At the London Bullion Market Association Annual Conference, Lisbon
Tuesday 3 June 2003
"This morning I would like to talk about the role of the Bank of England in the gold market. One element of that is our management, on behalf of the Government, of the UK’s official gold reserves, and I’ll be saying a little about that. But I will be saying more about other aspects of our involvement in the gold market that may be less familiar to some people in the audience here. In particular I will describe the Bank’s provision of custodial and account management services to central banks and to commercial firms active in the London market, reflecting our role in seeking to ensure the efficiency and effectiveness of the UK financial sector. And I will explain the Bank’s contribution to the self-regulation of the wholesale gold market. In all these areas we cooperate closely with the LBMA, and I shall explain how that relationship functions..."
Source: http://www.bankofengland.co.uk/publications/speeches/2009/speech372.pdf
Is the "MARKET SOURCES REPORT BIS, BOE & FEDERAL RESERVE WERE SELLING GOLD " a "lost in translation" event?
CBs are managing all the time their gold portfolios. The price movement (IMHO) is not out of the normal % levels.
If CB sales would be the case it will show up on stats. It also has to accomply the WGA yearly limits of sales which are allowed.
"One of Canada’s biggest mining groups is mounting a high-stakes move to gatecrash a deal involving a Qatari sovereign wealth fund and a London-listed gold miner, I can reveal.
Eldorado Gold Corp, which is listed on the Toronto Stock Exchange, is understood to have approached European Goldfields about an outright takeover of the company in recent weeks.
The move threatens to scupper a transaction announced in October that would see Qatar Holding, owner of the Harrods department store, become European Goldfields’ largest shareholder. A vote to approve the deal, which would include an initial $750m outlay by the Qataris, is scheduled to be held in Toronto on December 22....
European Goldfields, which is also listed on the Toronto market, had sought the funding from Qatar in order to construct two new gold mines in northern Greece which it hopes will eventually produce 350,000 ounces of gold annually, making it Europe’s largest gold producer."
Exclusive: Canadians Gatecrash Qatari Gold Deal
I wonder where Qatar's SWF will look next if Eldorado takes over the mines.
well..here's 1 place. $1 Billion in Indonesia for commodities and natural resources (gold?)
"Qatar Holding said in a Thursday statement that the subsidiary, QH Indonesia, will initially have $1 billion to invest.
It says the Jakarta-based division will mainly focus on investments in Indonesian commodities and natural resources, but will also consider other sectors."
Qatar state investment fund looks to invest up to $1 billion in Indonesian natural resources
BoE/HMT - 2011 Budget statement by the Chancellor of the Exchequer, the Rt Hon George Osborne MP
23 March 2011
"...We gambled on a debt-fuelled model of growth that failed.
With the state now accounting for almost half of all income, we simply cannot to go on like this.
Britain has to earn its way in the modern world.
...
All countries have to steer a course between two central risks.
The risk of a European sovereign debt crisis on the one hand and on the other the risk that comes from rising global commodity prices.
Food prices around the world have increased by nearly 50% since the beginning of last year.
Oil has risen 35% rise in just 5 months.
...
But this is an opportunity for me to report that we had already decided to rebuild the UK’s foreign currency reserves, which are at a historically low level.
We will purchase a range of high-quality assets – though unfortunately, with the price of gold now at record highs, we will not be able to replenish the gold reserves sold at record lows.
..."
http://anotherfreegoldblog.blogspot.com/2011/12/boehmt-2011-budget-statement-by.html
JR I just wanted to thank you for your recent comments about the ECB using their dollar reserves to bid for gold in the dollar paper gold markets. It really added some extra missing colour to what FOFOA said in a comment on Euro Gold:
In the CB world buying gold from the London markets and taking it into CB possession is called monetizing it. Selling CB gold into the commodity market is likewise called demonetizing the gold. Commodity gold/paper gold trades in dollars. If any CB enters the London commodity market as a physical buyer, at best that's going to skyrocket the price in dollars, at worst it will destroy the dollar paper gold market.
As the price of gold rises, so does the published value of the Eurosystem's gold reserves. Compare that USDEUR chart I linked with the gold value chart up in the post. Can you see any similarity? In fact, the ECB could potentially buy gold from London and NY while simultaneously selling gold for euro to Europeans, you know, those European savers saying "oh, sh1t". That would cause a physical inflow of gold from the US/UK into Europe while supporting the value and market convertibility of the euro with gold sales inside the zone. Making sure physical gold is always readily available for sale at a floating price prevents a currency from collapsing. Something to think about.
Sincerely,
FOFOA
Thank you!
Mortymer,
I am now convinced that the UK is on the road to currency collapse. Japan too. And of course the US.
Osborne is a liar, and I am sure there is a quasi-faustian pact between the Treasury and the Bank of England, whereby austerity measures (albeit nothing significant) are balanced with more QE.
Once the bond markets realise the Treasury's numbers don't add up the gilt market will come under attack, and I just don't see them sitting on their hands and accepting that, they'll just QE with larger and larger sums. I was so hoping the UK could avoid that.
A question I have been pondering is who will get to experience hyperinflation first? My feeling is that Japan goes first, maybe the UK, and that the US lasts the longest.
In other news I got to handle a 1kg bar of gold last night, at my annual client seminar, where my guest speaker was a gold dealer who bought along some goodies.
Nice stuff it was!
Hi All,
in my last post I did clarify that I was refering to possible CB hostility to the paper gold price.
I guess going public to smash paper gold price is nothing new as the IMF announced/reminded the mkt it was selling gold a hundred times over a 3 year period when paper gold price was rising.
I guess as the IMF finally did sell that gold, it's now the CB's themselves turn to break out the megaphone.
But now all the tinfoil hats can be removed as their gripe of CB intervention in the paper gold mkt has now been verified. Isn't this important?
That the FED has now announced that it is not only managing bond and FX mkts but paper gold mkt as well? Probably equities as well though they are still in the closet on that one.
It would seem clear to paper gold investors that there is no point in buying as the FED will not allow paper gold price to rise. At least for now.
And why now? I can think of lots of reasons and all of them point to real fear by TPTB (debt/lack of coherent monetary and political policy)that things are out of control.
Could it mean we are now on the verge of FREEEGOLD?
I mean doesn't it seem like it's time to break the glass? Especially by Europe?
Of course this "news" has not been confirmed or denied by the FED BOE BIS so all this is quite possibly moot.
Going back to China's entry to the WTO
It appears it was also the catalyst for the China - ASEAN FTA
China's admission to the WTO brought forward the establishment of a free trade area (FTA) between China and the Association of Southeast Asian Nations (ASEAN), Xu Ningning, executive secretary-general of the China-ASEAN Business Council, said.
Xu recalled that when he and other Chinese representatives negotiated with ASEAN counterparts about setting up an FTA back in 2001, some Malaysian officials said: "If we cannot defeat you, we will join you."
China and ASEAN signed the Framework Agreement on Comprehensive Economic Cooperation in November 2002 and slashed tariffs substantially on more than 500 kinds of products in 2004. The China and ASEAN Free Trade Area (CAFTA) finally came into effect in January 2010.
Chinese and ASEAN leaders had been working toward this aim while China was trying to join the WTO.
But compared to the arduous journey China undertook to regain its status with the General Agreement on Tariffs and Trade (GATT) and then joining the WTO, Xu said it took a shorter time for China and ASEAN to reach consensus on building an FTA, as ASEAN members realized they would have to meet major challenges in foreign trade from China once the latter joined the WTO.
WTO entry catalyst for ASEAN FTA
JR: This fuddled potato farmer was thinking along the lines of the S&P threat. Won't Wall Street downgrading the EU send nasty ripples through the continent so why not look back at Wall Street and wave your dollar reserves towards gold? Why would the EU allow the downgrade or am I putting too much into what might happen?
Five gold bars and 15 silver bars underlie eight Comex contracts between the brokerage and client Jason Fane of Ithaca, New York, London-based HSBC said in a court filing yesterday. Both parties have asserted claims to the bars, creating difficulties for HSBC, which is storing them, the bank said, asking a judge to decide who the rightful owner is.
“HSBC has received conflicting instructions regarding ownership and disposition of the property,” it said. “Accordingly, HSBC is exposed to multiple liabilities with respect to the disposition of the properties.”
http://www.bloomberg.com/news/2011-12-09/hsbc-sues-mf-global-brokerage-over-stored-gold-silver-bars-1-.html
Speech by OPEC Secretary General, HE Abdalla S. El-Badri, to the 20th World Petroleum Congress, Plenary 6: Producer-Consumer Dialogue: Expectations and Deliverables, Doha, Qatar, 7 December 2011.
http://www.opec.org/opec_web/en/press_room/2169.htm
"...Given today's topic - 'producer - consumer dialogue: expectations and deliverables' - let me stress upfront that OPEC has long recognized the value of adopting a cooperative approach to addressing major topical issues.
Today, it is clear the importance of dialogue between all stakeholders has never been greater in our increasingly interdependent world. And the heartbeat of this world is the global energy system.
It is a global, complex and ever expanding system; one that is finely balanced and where stability must be the mantra..."
FOFOA,
in September and October, we had rather big purchases by CBs that are neither part of the US block not part of the euro zone. Do they buy allocated or unallocated? Perhaps unallocated though BIS or BoE, but in any case these are not the customers that will be cheated. Or they get allocated gold. In any case, this is buying pressure in the physical market.
Given the current events, it is further plausible to expect that the buying goes on. So it makes sense for the Fed, BoE and friends to ensure that the market is well supplied. I am not sure the ECB or the SNB would join. I doubt it. The big member banks (Germany, France) and the SNB have not sold anything for a long time. Also, they shut down their leasing some time ago.
So let us assume the Fed or BoE wish to keep the market supplied. For this, they need at least some physical - paper alone is probably not sufficient. I don't think it is easy to scare enough gold investors out of their physical just by dropping the price to what still is the medium term rising trend line.
I don't know [b]whose[/b] gold they are selling. It might be their own or they might be strong-arming someone else.
Yes, they do need a trading desk for this because they want to influence the current spot price. It is not enough to directly see to one of the buying other CBs because that would not drop the spot price like a stone by $50.
I think (but cannot prove) that the story came out of Deutsche Bank. So one interpretation might be that some people are getting fed up with the Fed intervention and now leak a story or spin a rumour in a way they would have never done a few years ago.
Victor
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/12/7_Peter_Schiff.html
Last few minutes of this Peter Schiff interview sounds like another step along the road to FREEGOLD..
To summarize Peter has launched a gold backed debit card so your physical gold reserves can be instantaneously be converted to currency at market when needed.
Not saying he's the first whith such a product just pointing out that the free market continues to further the cause.
-v
Well, this is two ZH references in two days. Having said that I think it's quite relevant.
http://www.zerohedge.com/news/gold-rehypotecation-unwind-begins-hsbc-sues-mf-global-over-disputed-ownership-physical-gold?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29
"...August 1, 2011 "to align our U.S. business with our global network and meet the local and international needs of domestic and overseas clients", HSBC Holding Plc, agreed to sell 195 branches in New York and Connecticut for around $1 billion to First Niagara Financial Group Inc. HSBC will also close 13 branches in Connecticut and New Jersey in 2012. The rest of HSBC's U.S. network will only be about half from a total 470 branches before divestments.[47] On August 9, 2011, [Capital One Financial Corp.] agreed to acquire HSBC's U.S. credit card business for $2.6 billion[48], netting HSBC Holdings an estimated after-tax profit of $2.4 billion[49]. In September was announced that HSBC seeks to sell its general insurance business for around $1 billion. This is a part of Chief Executive Officer Stuart gulliver's plan to divest some assets..."
http://en.wikipedia.org/wiki/HSBC#2010_to_present
Introductory statement to the press conference (with Q&A)
Mario Draghi, President of the ECB,
Vítor Constâncio, Vice-President of the ECB,
Frankfurt am Main, 8 December 2011
"...Question: You said a moment ago that it would not be OK if euro area national central banks lent to the IMF in order to lend to other euro area countries, but it would be OK if they lent to China or Indonesia. This seems a little odd when the problems are so apparent. I just want you to reflect on the fact that around the world people are heaping expectations on this institution, and on you personally, and that quantitative easing in its full form has been a normal thing at the Bank of England and the Federal Reserve. Why is it that you cannot or will not do that? Do you really think that the Bank of England and the Federal Reserve are monetising their debts?
Draghi: I think that each central bank has its institutional set-up, within which it operates. The ECB operates within the limits of the Treaty, and I said a moment ago what our primary mandate is, and especially what the Treaty says the ECB cannot do. I think any central bank is constrained by its institutional set-up. In the United States, as you know, the primary mandate of the Federal Reserve is completely different from ours. And the same is true of the Bank of England..."
http://www.ecb.int/press/pressconf/2011/html/is111208.en.html
/Mrt: The split getting deeper and wider.../
J,
Thank you very much for that link on the ASEAN-FTA. It's contributions like this one that make this blog such an excellent forum for sharing information and discussion.
Now my thoughts turn to the entry of Russia to the WTO. How many levels and/or dimensions are there in this deal?
Cheers
Hi Bosco,
I wrote:
"No kidding, a coin stamped by an issuer with a face value that exceeds the value of the metal content is fiat too? Keep those revelations coming."
Bosco replies helpfully with this comment:
No kidding at all. You might want to check out the definition of fiat first. Fiat is simply by gov't decreed. And might be you can also read some of latest Martin Armstrong's musings first. This is definitely not my original invention :)
LOL I guess I have a fairly steep learning curve ahead of me.
You also wrote:
No, this is my first time posting here. Who do you think I sound like, just curious :)
OK, so you are a new poster and not one of our frequent flyers appearing under another name to regurgitate the same ideas that have been discussed and dismissed here a hundred times before. So giving you one of their names probably wouldn’t salve your curiosity.
Let’s just say you sound presumptuous. And since sarcasm appears to escape you, just to be clear, definitions for ‘presumptuous’ here and here.
Cheers
PS. You and Nickelsaver have prompted me to fulfill a commitment I made to the silver bugs dating back to the silver open forum. There’s a couple of things you chaps said in earlier comments that I would also like to address. So this "faithful" will try to “kill two birds with one stone” figuratively speaking when I address the GSR once again in a ‘longer response’.
Nickelsaver,
"I put out a hypothetical, that if CB's were to begin listing silver on there balance sheets, would that change everyone's perspective on the salience argument, or could it be perceived still as salience in that gold and silver together form a single asset class, that being precious metals."
Don't conflate cause and effect. CB actions are evidence of salience, not salience. The tail does not wag the dog. CBs are participating in this new system, but its much bigger than CBs. It is the giants, those who produce more than they consume, the super-producers, who drive the show. ¡Visca el Superorganism!
=================================
Its really all about private reserves:
"In reality, gold reserves are any physical gold inside your currency zone, no matter who owns it. It's not just CB gold that counts, but all gold inside a zone.
This is a super FOFOA 4-part comment from Reference Point: Gold - Update #2 in which FOFOA explains the above statement. Here's a good quote followed by an excerpt from the denoument:
The reality is, and always has been, that the real reserves behind any currency are primarily the physical gold held in private ownership within that currency zone's physical boundaries, and secondarily the collective reserves held on public display. Those collectively-owned (official) reserves are only for the management (or mismanagement) of the currency until and unless they are finally used in defense of a full-blown collapse of the currency, the ultimate end of a mismanagement timeline, or in times of all-out war when gold becomes the ultimate (and only) transactional currency among distrusting neighbors.
[...]
You wrote:
"I am having a hard time understanding how gold in private hands lends credence to a currency if it is not backed by/redeemable for that gold in some form or fashion."
Then later you surmised:
"Maybe FOFOA's comments about private gold being counted as reserves were related to a post Freegold environment; prior to a gold-backed currency environment though, I still don't see how gold held in private hands would ever lend additional credence to a currency."
If I have done my job; if I have painted the picture that I set out to paint, then these statements should seem a little silly to you now. The first one is the complaint of someone trained by that great Hard Money Socialist FDR. "How on Earth could gold in private hands be more important to our trading partners than gold available at the great American gold window?"...
Cheers, J.R.
Costata
You are finally going to justify a 1:5000 GSR?
Oh goody.
costata:
Being a new poster doesn't mean I am not a long time reader of comment sections. I do realize you have past spats with Art and Ash and perhaps a few others.
Looking forward to your silver comment, though I hope you do not (implicityly) assume that I am a silver bug.
is there any mathematical proof on the existence of the petrogold deal that another mentioned
something like matching trade data between us and saudis or other methods
appreciate any points/references on this
LS
JR,
Thanks. I read the Ant's Life article and all I could think about was how jealous I am of FOFOA's ability to write and make an argument so clear.
Um. I guess my problem is not with the facts. I get it. And the Ant analogy is actually a great piece for me to articulate what my problem is.
This super-organism of which we are a part of, may prove to be too smart for its own good.
The argument, from a technological standpoint, is a very sterile one. For me, it totally breaks down when you introduce the concepts of good and evil, and a truly sovereign giant who hoards so far outside the system, He isn't even noticed.
And I will keep it cryptic, because I made a promise to FOFOA that I wouldn't push my views overtly on this forum. I do welcome in-depth discussion on my own blog though.
LS,
There is some good history and context on Another's oil-for-gold story in:
It's the Flow, Stupid
Flow Addendum
Cheers, J.R.
JR, you said "The euro solved dollar flaw #1, the Triffin dilemma, by severing its link to the nation-state"
My understanding of Triffins dilemma is that a nation whose domestic currency is also designated and accepted as the worlds reserve currency must run an unnatural/unfair trade deficit in order to send enough of its currency to the ROW in order to facilitate sufficient liquidity for global trade. And that this initial shortage of the reserve currency is a function of trade imbalances between ROW now being settled in this reserve currency and because commodities are being priced in this reserve currency on global markets.
So in your quote are you referring to the Euro recognizing gold instead of itself (the Euro) as the global reserve currency and thus avoiding Triffins Delema or do you mean something else?
I ask because if the Euro attempted to replace the dollar as the worlds reserve currency and say commodities on global markets are now priced in Euros (including oil), wouldn't Trifs Dilema still exist. i.e. an insufficient amount of Euros to create global liquidity.
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