A few people have reported problems accessing the second page of comments, so here's a new thread for new comments. This link should get you to the 2nd page of the last thread:
fofoa.blogspot.com/2012/01/yonder-thur-be-dragons.html?commentPage=2
Some of you only read comments in the popup window, but you can also read them right under the post. If you click on the name of the post at the top, here's where that page 2 link appears at the bottom once the number of comments reaches 201:
Sincerely,
FOFOA
PS. Here is the link to the second page of comments on this thread:
http://fofoa.blogspot.com/2012/01/open-forum.html?commentPage=2
I see we're on page 3 now. To get there, just change the two to a three in your browser bar if you still can't see the links at the bottom. Or try a different browser.
http://fofoa.blogspot.com/2012/01/open-forum.html?commentPage=3
454 comments:
«Oldest ‹Older 201 – 400 of 454 Newer› Newest»VtC,
Thanks for translating Victory's translation...
Now I think I also almost also get it :P
Like OBA said:
"No V, T-bills ARE a Cash proxy ...guaranteed 100% by the USG ...and NOT subject to Bank risk. They effectively will become THE Asset."
Meaning the gold/US$ swap for all practical purposes is a gold/T-bill swap for the big guys, in turn leading to negative yield (less than one ounce back per leased out ounce) when lending your gold out.
Think I get it... The key to much of this stuff seems to be using giant-like thinking...
/Burning
Just connecting some black swan type dots...
What constitutes a credit event according to Jim Sinclair?:
http://www.youtube.com/watch?v=9802NwSSS6U
70% haircut, maybe?:
http://www.zerohedge.com/news/greece-releases-new-proposal-even-greater-losses-creditors
/Burning
MF wrote:
"The war in Afghanistan gave gave the USM a excellent starting base of operations to expand their war in the middle east to procure reserves."
Some months back I asked my local butcher(Afghan immigrant shop) - why is US still there in Afghanistan ?
He replied - they are there to mine Gold . I was surprised to hear this. But I would rather believe him, who has ear to the ground realities and relatives there than a new report from TV or Print media.
Texan,
Oil was very very cheap for almost two decades prior to official gold sales.
There were official gold sales throughout the period you cite. Take a look at Rob Kirby's summary of the gold sales by US allies.
Now I have to admit the google search took 5 whole minutes of my time but I think it was worth the effort to find this paper. (It uses the figures to make a different claim but it provides some convenient tables.)
http://www.gata.org/node/104
You wrote:
I just don't get the "USD was a broken currency" bit and Europe somehow supported a strong dollar.
Europe consolidated figures for gold reserves:
1980 - 17,515 m/t
2005 - 13,682 m/t
Three thousand, eitht hundred and thirty three m/t of gold reserves sold (as far as market observers can see).
Canada:
1980 - 652 m/t
2005 - 3.4 m/t
Australia:
1980 - 247 m/t
(1997 sold 167 m/t with no competitive process)
2005 - 80 m/t
South Africa:
1980 - 378 m/t
2005 - 124 m/t
The list goes on and on. US allies and puppet states sold large quantities of gold. Don't forget that gold was still being mined in size throughout this period as well. South African gold production peaked c1970 at around 1,000 m/t.
Consider also the psychology of markets. The threat of gold sales from a credible seller is sufficient to depress prices. Meanwhile US bonds are offering virtually guarranteed profits from falling interest rates.
I haven't really thought too much about it yet.
When is 'yet' coming, Texan.
@Biju re: Afghanistan
Perhaps this is what he was referring to: J.P. Morgan's hunt for Afghan gold
Michael H,
FWIW I agree that this game is ultimately about the US dollar.
You wrote:
There are two different possibilities: the US want access to the ME oil, or the US wants control of the ME oil. I am guessing that it is the latter that they are after: control over the ME oil via ensuring the $-pricing mechanism. The oil can then flow to China all it wants, as long as China turns around and sends stuff to the US to get USDs.
J put it pretty well: "I'd just like to add that OIL has been secured twice in Iraq and let go. Why? It's not all about the cheap flow. It's about the flow in $'s."
And I would add at a price in US dollars that fits with current USG policy objectives (whatever price that may be).
Texan,
Now this comment from you has my wholehearted support:
Ok y'all - you need to provide some facts.
I would add that we need to take some care in selecting those facts as well. And even more care in the interpretations we place on said facts.
Sir OBA,
On fire. Thanks for fleshing out the detail of your scenario.
It will be interesting to see the impact on confidence this week if the ISDA tells the market that CDS are effectively worthless as insurance against credit default.
It's also going to be interesting to see how people react to MF Global being allowed to take the Chapter 11 route as opposed to Chapter 7. If I understand this situation correctly that favours creditors over customers.
We seem to have a somewhat unbalalnced regulatory regime at the moment in some jurisdictions.
Cheers
@ OBA
"The Key here is to get your head around "a complete loss of faith in the economic FUTURE" ...then Sir, put yourself "in the moment" ...and see what YOU see."
I don't see a treasury rally into -20 yields which seems to be what you see. Yields are already way negative if you use the alternate inflation number. Simply put, a loss of faith in the economic future is a loss of confidence in the US economy to be able to service the debt that backs the dollar.
It all ends when the treasury bubble bursts. Until then, the DOW will keep creeping up, probably to a new all time high. The Canadian and Aussy housing bubbles will hold up and Japan will be on its way to 500% debt to GDP.
Matt,
You wrote:
Euro marking its gold to market is hardly a 'secret weapon'. I posted a link above that Australia's RBA already does that and I'd wager that most CBs that came off fixed exchange rates with the USD do too.
Who suggested that MTM was a secret weapon? It's announced every quarter.
Of course when the EMU adopted this policy in the late 1990s it contravened IMF rules and only much later other countries (such as Russia) adopted the practice. Australia came off fixed exchange rates (adopting a free float) in 1983 so until quite recently you would have lost your wager.
There is copious amounts of material at mortymer's blogs about IMF rules and policies concerning gold if you want to investigate them.
DP,
LOL. Thanks I love that episode.
Cheers
"No V, T-bills ARE a Cash proxy ...guaranteed 100% by the USG ...and NOT subject to Bank risk. They effectively will become THE Asset."
They have currency risk. Just because you don't save the bank doesn't mean you saved the currency.
I also don't think that if the financial system collapses that the transactional use of the dollar will produce a sustained rally in it.
Hi Michael H,
I think your re-telling is pretty good.
My only concern is sorta the interpretation of what you mean by:
"Europe steps in with ‘stern recommendations’ for Volcker on interest rates, but also by arranging the forward-gold sales to support a falling $-price of gold, thus leading to a falling $ oil price."
I just want to be clear that its not like the Euro/BIS stepped in to help support the dollar to the chagrin of the $IMFS, or without the $IMFS involvement. This is the key point I keep trying to make to J.
Both the $IMFS and the ECB/BIS supported the paper gold market because they both wanted cheaper dollar prices oil at this time.
Its not like the ECB/BIS were acting alone or unilaterally or against the dollar. The BB's who set up the trade include American banks, Barrick was of course an American company, Bob Rubin and Larry Summers are Americans, et cetera.
In other words, who came up with it first or set it up sorta confuses the issues (likely thinkers from both 'sides", although vieiwng it as such a dualistic dichotomy is itself a gross oversimplification more for conceptual clarity that nitty gritty truth) because both the the Euro/BIS and $IMFS folks worked to supported the paper gold market. Sure the $, as the golden outlaw, couldn't credibly contribute their gold or paper gold, so it had to come from the Euro/BIS and BoE, but its not at like the $IMFS was involved.
Do you see why J's idea that the dollar wanted more expensive gold is not really consistent, and why I broke it up into three parts. Both the $IMFS and the ECB/BIS wanted to keep gold cheap during this time post oil crisis and pre-Euro launch, roughly the 1980s and 1990s, and both participated in the paper gold market. That the US couldn't supply gold because it had just shut the window a decade earlier and was still a golden outlaw doesn't mean the $IMFS was not involved.
IMO this is a key point that some of the more vociferous opponents of A/FOA/FOFOAs message (including the one who thankfully recently silenced himself on his own) can't get their skinny little heads around, so they end up building on this faulty foundation and therefore making tremendous missteps in advancing their alternative theories to A/FOA/FOFOA. This is why I keep harping on J because he seems to honestly want to understand this, and its easy to be misled by the barkers' noise to the contrary.
Does this make sense?
from It's the Flow, Stupid
"the $IMFS is the main printer of paper gold."
Do you see?
Thanksgiving Week Open Forum
"Europe is presently operating under the $IMFS (that's the dollar international monetary and financial system) and has been since WWII. Europe has supported this system, kept it alive, and bought into it for the last 30 years. The foundation of the $IMFS is the use of contracts obligating someone's, anyone's debt as everyone else's savings, their security for later years, their nest eggs, their pensions, 401K's and IRA's. The tradable value of these "investments" is the very lifeblood of the $IMFS. When that value fails, so will the system."
==================================
"The Gold Man" (not Goldman) at the BIS
"This Global Financial Crisis is not so much about the dollar as it is about the dollar system, the $IMFS. The dollar system is a system of selling debt as a wealth reserve. This system went global in July of 1944 at a meeting in Bretton Woods, New Hampshire. All 44 Allied nations participated in the meeting that took place a year before the end of the war.
[...]
The $IMFS
The US Dollar International Monetary and Financial System is represented in visible form by the big Wall Street banks. These banks control the Fed, the money distribution system, and the debt, the "wealth reserve" distribution system. And the global expanse of the this system can be viewed most easily by simply looking at their websites.
Here is the list of countries where the Goldman Sachs parasite has attached itself as found on goldmansachs.com > Careers > Locations:
[...]
And here is Morgan Stanley's list from morganstanley.com > Global Offices."
==================================
Is my point becoming clearer Michael H?
Enough,
The MFG story just gets worse. If counterparty wealth can 'vaporize', then the center does not hold. It looks like exter's pyramid is vaporizing, IMO.
FOFOA: In the inverse pyramid, each level you go up is essentially a derivative of the lower levels. And during expansionary times those derivatives yield a little more than the lower levels. That is why capital climbs during the good times. But when PRINCIPLE is destroyed, this dwarfs the meager benefits of a yield and the capital scurries down the ladder to safety.
Interesting posts OBA and I really appreciate your taking the time to post them!
For those who missed them: post1, post2,post3,post4,
Here are some incomplete thoughts in response: I agree that it is not necessary to invoke the existence of a clandestine group controlling the world for their own benefit. I see most developments whether they be in finance, politics or other spheres, as simply consequences of the emergent properties of the system, that is to say, inevitabilities. The evolution of the current monetary system was inevitable, based on the development of the need for loans. To evolve, a system must have a mechanism (the “termites”) by which it can change, and a means of competition, to remove the unsuccessful variants (the “Remnants”). What is often misunderstood about evolution and “survival of the fittest”, is it does not mean that the best, the most efficient, or even the most worthwhile survive. Fitness depends upon the parameters that have been set. For example, in finance, if the parameter for judging success is “the maximization of nominal profits” then this is what will determine the structure of the system, the behaviour of its components, and its emergent properties, namely inevitabilities, aka black swans. Hypothecation is an inevitable consequence of the design of the financial system that eventuates in unpredictable inevitabilities such as the MF Global collapse.
Evolution is not forward-looking – its substrate is the past. Evolution is also a part of the system, itself. The termites are baked in the cake! One other feature of complex adaptive systems (other than emergent phenomena), is their sensitivity to cascading failures. A superorganism may be able to prop up system for a while but eventually there are too many balls to keep in the air. The result is a phase change to a new stable state(punctuated equilibrium). So we fall down the rabbit hole to a new paradigm.
In a new system with different constraints, the termites of the old system are powerless. But there are always termites!
comments
Hi Edwardo,
I'd like to clarify a couple of things about my attitude to the peak camps. I left both those camps because their dialogue and arguments seemed to be going nowhere. After the 1970s oil shocks we showed how much the energy intensity of developed economies could be reduced (and reduced quickly).
Every policy I see enacted appears to be focused on one overriding goal - maximising consumption. I don't see any serious moves toward conserving these energy resources despite the claim that we face an emergency.
In relation to peak cheap oil specifically I think that the way the LNG market has failed to develop as it could have undermines the arguments about causation as well.
Perhaps the price discovery mechanisms are so profoundly corrupted that the wrong price signals are being sent. If that's the case what do prices tell us? Perhaps they tell us more about currencies (and debt loads) than the resources that are priced in currencies.
JR,
one small correction: Barrick is Canadian.
A few further items:
5/5/98 ANOTHER (THOUGHTS!)
Q: ***Your associate says that BIS helped China increase its gold holdings. Please tell me what the source of that information is, or is it simply a speculation on his part. ***
A: The BIS is the gold broker for all interbank sales/purchases. Bullion Banks are for sales to other entities. I think, at first, China was leverage against the oil producers. Then Arabia was allowed into BIS for Euro.
JR, how do you reconcile this with your claim that the gold-for-oil scheme blew up when Big Trader started buying. This sounds as if the BIS deliberately let the Chinese in on the deal. Which one is it?
Finally
FOA (5/8/99; 20:16:12MDT - Msg ID:5772)
When Central Banks (mostly the European, at first) began to lease / lend gold, they were beginning what was to become "the master plan". The creation of a broad, liquid paper gold market that would ulltementally undermine the dollar, in time. As I said above, initially it was offered as an "appeasement" for continued dollar use.
The "master plan" to ultimately undermine the dollar. Sounds like cooperation among friends, doesn't it?
What do you think the word "appeasement" refers to?
Victor
VTC,
Re: China
I suggest you consider the possibility that the BIS helped China's CB to increase its gold holdings and then one or more of the leading families decided to feather their own nests via Big Trader by front running the Freegold-RPG transition.
And BTW I don't think Big Trader was an individual. I think it was a trading hong with mainland connections and a well established network that spanned the globe.
OBA,
Picking up what I can from just reading all of the comments here. I have nothing to give regarding the technicals, as I am student in that regard.
I would make an observation though. The concept of "FAITH". As you say The Key here is to get your head around "a complete loss of faith in the economic FUTURE", implies the inverse, which is a "faith" in the current system.
So if we take that concept and apply it to the creation of the Euro, its design (as implied by FOFOA) is such that it is meant as a hedge to that faith, not merely as an alternative something to have faith in. And if taken one step further and applied to Freegold, what we are really saying is that we prefer our wealth to rest in something (gold) that requires little or no faith whatsoever.
And this is where I believe that those that question the intent of Euro design are missing the point. The Euro was not meant to replace the dollar as a focal point of faith, but rather to secure itself to that which requires no faith, Gold! In doing so, it simply waits for faith to be lost.
-------------------------
As far as moving your writings over to my open forum, I could do that. But it seems to me that what would be better is for you to have your own blog. I would be willing to set that up for you, let me know.
I thought we knew Big Trader was not an individual.
FOA:
"The HK / China central bank system, also known as Big Trader"
RLP,
Just when I think I know the A/FOA archives well:
"The HK / China central bank system, also known as Big Trader"
Can you point me to where this is discussed?
Thanking you in anticipation.
Last page of FOA commentary:
http://www.usagold.com/goldtrail/
Search "Big Trader"
He says it in response to a comment about Japan.
Nice one RLP!
"Japan is a different problem. They have been locked into the US dollar economy for so long that they cannot escape. There is simply no way that China will let them into the Euro house. The HK / China central bank system, also known as Big Trader, simply wields too much economic sway between Asia and Europe. In historical precedent, the orient express always headed to Europe and never saw "The Japans".
com
Hello OBA,
Thank you for once again stating your Time-Currency Theory as clearly as possible! Since you left and closed up shop at your own blog two years ago, I have used your theory a couple of times when trying to convey what "the end" will likely look like on the trader's computer screen. I'll just throw them out here JR-style, and you can confirm or deny that I got your theory right, or not. ;)
From my Gold: The Ultimate Wealth Reserve in Dec. 2009:
Debt is the very essence of fiat. But as debt fails, the fiat currency can spike sharply in response. Expect the end game to look very different from what you have been told. The dollar as rated by the USDX, a flawed rating system, may rise briefly to something like 150, a level certainly not expected for a currency on the verge of a hyperinflationary collapse! The COMEX gold price, which is really just the price of paper, may drop to $200 or lower before trading is halted.
You can expect this kind of "spiritual experience" price volatility to be heralded as proof that the goldbugs were wrong all along. But don't be fooled. Many a strong hand will turn weak at the worst possible time. Many a bug will be lured by the warm glowing light only to be electrocuted. Don't be one of them.
Remember that ANY volatility is the enemy of the system. Even the price movements that don't go your way are still bringing down a system that has become a complete farce. Hold tight your gold wealth for a brighter day comes. The world of paper debt is, and has been, circling the edge of a lavatory vortex from which there is no escape.
[And then quoting you from your Time Currency blog] The “PRICE” of short-term paper simply “cannot” be seen to go above PAR …as that in itself rings the death-knell of the System.
Yield in the short-end is essentially determined by how much you pay NOW ..to get back Par over the time period. When you pay $1001 to get back $1000 in 3 months …you're in negative yield. Of itself an oxymoron …and declaring for all the World to see …there IS no monetary Future.
Can ONLY happen in a “Global” Fiat construct FOFOA …the likes of which holds sway at present.
This System is unique in that we've "never" had an arrangement in place before where there was "no escape" monetarily speaking.
In the past, when the economic situation in (say) the UK deteriorated, one simply transferred to a stronger currency ...or Gold ...or Silver ...as they were all monetary functionaries of specie ...or at least "some" of the available currencies were.
We now have the situation where the entire System is stressed beyond coping ...with the $US/Oil configuration back-stopping said System.
It (the REALITY) will permeate ALL facets of "future-derived" valuations FOFOA. Bonds, Stocks, Real-estate ...and even our beloved PM's. (as they are NOW priced with a futures-leaning bias)
The closer you get to the Kernel however (short end of the curve ...<6mo)>DX
...that's why it's SOOO important NOW to dis-associate mentally from the $US pricing of PM's.
We KNOW they're "worth" more ...what we have to realise is ...they're essentially "priceless" under the current regime ...despite what the current market tells us.
What is being priced as Gold ...TODAY ...and what you hold in your hand ...are vastly different. (but you already KNOW that ;-)
-Topaz
Cont…
2/3
From my Big Gap in Understanding Weakens Deflationist Argument in April last year:
Okay Rick. If the financial system collapsed tonight and wiped out everyone's assets, their 401Ks and IRAs, their pension and trust funds, the US dollar would spike on the currency exchange like never before. I could imagine it rising well above 100 on the USDX, maybe even to 150, as all that financial sludge frantically unwinds. As you say, many will simply be wiped out as much lower valuations are imputed onto their 401Ks. They will never see it coming; never get the chance to withdraw that retirement money and use it to bid up real goods. So what? Do you really believe this will cause the dollar's purchasing power to rise?
In imagining the dollar being "loved to death" I'm picturing crowds piling into a bomb shelter ($IRX) for protection, and once they are all in, the shelter itself blows up. They never have a chance to rush out into something else. Simply stated, all something else's drop their bid for dollars.
A spike to 150 on the USDX sure sounds deflationary, doesn't it Texan? And it seems impossible to M, right? But it cannot be a sustained spike. Imagine, the price of all US imports from China, Europe, the ME or wherever being cut in half almost overnight, simply because big money rushed into the dollar! Now, suddenly, the dollar buys twice as many euros as it did yesterday. That's twice as many real goods, twice as much oil, and twice as much gold, right?
And because big money rushed into the dollar forcing it too high too fast, the ROW will be happy getting half as many dollars for real stuff. And all dollar debtors will be happy working twice as long to pay of the same nominal debt. And the Fed will suddenly just let the dollar be super strong and not do anything in response.
Cont…
3/3
Meanwhile, "the price of gold" will be despised to death. From my Sept. 2010 post, The Shoeshine Boy:
So, in conclusion, the price of gold will plummet!
That's right. At some point in the future, after the price of gold rockets upward, it will fall like a box of rocks! And right about that time you'll see more of Robert Prechter on CNBC than you ever thought was possible.
But here's the challenge. When the price of gold falls to $200 per ounce, try and get some physical. I'm sure that Kitco will sell you some from their pooled account. And GLD will be standing ready to sell you a share at $20. But just try to take delivery. I think you'll find it will be impossible at that point.
And that's why you've got to take delivery NOW, at the current "high" price of $1,300. Don't wait for the dip. Oh, yeah, the big dip is definitely coming. A **BIG** "correction." But will there be any physical available? Perhaps at $1,200 if you're really lucky. At $200? No way.
When I look into MY crystal ball, here is how I see a future gold price chart developing (roughly, of course): The flight out of "gold"
In other words, it will appear on the surface (very briefly) to be a deflationist's wet dream, but in reality it will be anything but that. And it will happen so quickly and with such confusing signals that most people will simply be trapped in their positions. And the few traders with cricket-like instincts (but no understanding of what is happening) will likely jump into the fire rather than away from it. And then, when the dust settles, a new price discovery market for gold the elemental metal will eventually make itself known.
A long time ago I dubbed this phenomenon a deflationary head-fake that sometimes comes right before currencies collapse.
Does this scenario square with your Theory? Enquiring minds want to know!
Sincerely,
FOFOA
Barrick Gold Corporation evolved from a privately held North American oil and gas company,[2] Barrick Resources.[3] After suffering huge financial losses in oil and gas,[4] principal Peter Munk decided to focus on gold.[5] Barrick Resources Corporation became a publicly traded company on May 2, 1983,[6] listing on the Toronto Stock Exchange.
http://en.wikipedia.org/wiki/Barrick_Gold
One of the spookier considerations in freegold thought is "gold goes into hiding". By this is meant that a collapse of the current paper market for gold could result in gold offerings going bid less and the 'market value' for gold collapsing or going to 300 or some low level 'to allow certain trades to clear'.
Has there been discussion of buying Puts to protect against such a scenario?
The low volatility and rising price of gold now make some of the further out Puts look reasonable. Thoughts?
A Question on China
"Another had said "Big Trader" was "HK people", meaning Hong Kong.
Big Trader - circa 1997
MK: "As implied by ANOTHER's own words, his motivation for these postings was the discovery by "big traders" in the Far East of this opportune facility to buy gold at ever lower prices."
Another: "When everyone that has exchanged gold for paper finds out it's real price, in oil terms they will try to get it back. The great scramble that "Big Trader" understood may be very, very close."
"The problem is, "if the CBs don't expand their roll as "primary suppliers" LBMA will implode and in the process create the greatest bull market in oil and gold the world has ever seen. That is why some "Big Traders" are holding ONLY gold as events unfold. Interesting, don't you think?"
"That's why "Big Trader" and his bunch closed out all paper and pulled in bullion. Don't worry about the CBs selling everything, the market is huge compared TO WHAT THEY HAVE! And Comex is nothing, if "only a silly game". Worldwide trading in gold could be cut in half and still equal all the metal in existance!"
"Well a funny thing happened right after the Gulf war ended. What looked like big money before turned out to be little money as some HK people, I'll call them "Big Trader" for short, moved in and started buying all the notes and physical the market offered. The rub was that they only bought low, and lower and cheaper. They never ran the price and they never ran out of money. Seeing this, some people ( middle east ) started to exchange their existing paper gold for the real stuff. From that time, early 1997 LBMA was running full speed just to stay in one spot! In other words paper volume had to increase to the physical volume on a worldwide scale, and that was going to be one hell of a jump. It could not be hidden from the news any longer."
And one more from JTF (Oct. 12, 1997): "My assessment is the following: The Central banks began the gold market manipulation by offering private gold to brokers. Since they could use their own real gold as "insurance", they did not need to sell their own gold. As the paper gold (the derivative gold?) became popular, all the trading of US$/oil/US treasuries became based on the paper gold method. Eventually "Big Trader" or some other individual stepped in and started pushing down the "paper" price of gold. Other traders, possibly those selling oil decided that they wanted to go back on the gold standard, and wanted real gold. Now however, the paper trading volume was so high that the Central Banks could not possibly maintain control of the markets, let alone supply enough real gold to cover all demands. If we are now talking about the CB selling of 1/3 to 1/2 of their gold, the public will find out, with catastrophic consequences, regardless of how "worthless" that gold they were told is. Looks like the choice between the proverbial rock and the hard place! Is there really any gold in Fort Knox?"
cont.
One interpretation could be that the exposition of the daily trading volume of the LBMA on January 30, 1997 was driven by massive Hong Kong buys, in essence, busting open the gold for oil charade of the paper markets. What followed were posts by "Big Trader" (HK?) and Another (BIS?) explaining what had happened, in their cryptic way, the only way they safely could.
The logical question that follows is "did these HK purchases require the physical transfer of gold to HK in 1997, or just the 'paper cornering' of it?"
Another clearly said that the CB's would have to step in as primary suppliers or the whole thing would fall apart.
The Day Backwardation Came
Well, two years later on May 7, 1999 we had the BOE announcement and "Browns Bottom" where the Bank of England became a primary supplier of 400 tonnes.
This action was followed four months later on September 26, 1999 by the 'Washington Agreement on Gold' during the IMF meeting in Washington, DC. Under this agreement, 15 European CB's agreed that no more than 400 tonnes of gold (between the lot of them) would be sold in any given year. This agreement was in direct response to "Brown's Bottom" (and I'm guessing to prevent rogue politicians from doing what Gordon Brown had done with "the people's gold").
Three days later, on Sept. 29th, the paper gold market almost imploded. On this one day, gold went into "backwardation"!
cont.
Recap
So let's recap our scenario. Prior to 1997 we have an "oil for gold deal" that is run through the paper gold market. It is a means of price suppression so that private gold will be sold to "buyers in the know" at ridiculously low prices. Then right at the beginning of 1997 we have Hong Kong entering this market - as a buyer - "to get in on the deal".
Then, on January 30, 1997, the monstrous paper volume is exposed under mysterious circumstances. We then have the appearance of "Big Trader" and "Another" on the only internet gold message board of the time, explaining what is happening and how individual gold investors should react.
The events that followed over the next 12 years, including the price rise from $265 per ounce to $1015 per ounce (383% rise so far), seem to confirm that something happened in 1997 to change the gold market.
JR,
“Do you see why J's idea that the dollar wanted more expensive gold is not really consistent” Is this where your argument stems from? I never said the $ wanted more expensive gold. I said a higher price of oil allows the U.S to run greater deficits. We seem to agree more and more and I’m wondering if this was the basis of your argument?
Michael H – Thanks for laying it out. I have not put together a timeline myself. I do not know exactly when a higher price of oil became more important than “cheap” oil but it’s logical that it is.
Texan – As stated earlier it’s not just the U.S buying oil in $’s. a 20% increase in the price leads to a 20% increase in $ usage around the world for those purchasing oil in $’s
Without directly quoting Another again I’d like to summarize by saying - currency competes for USAGE. The currency that prices OIL will win this game. Oil will rise as it is priced in $’s as a Defensive mechanism. I.E more $’s get used, USAGE increases.
Everyone knows where we have been. Let's see where we are going!"
I did not expect these comments to get so much attention. I’m here to see where we are going and this is why most of my comments are focused on what is happening today as well as what impact these moves may have. Trade, like oil, is(was) carried out in $’s. We see the $ getting thrown to the side more today than ever. What impact will this have? Is a crash imminent? Will the Price of oil spike to fill this gap? Or will the fabric hold as the world makes way for a 3rd currency?
I got a lot on my plate today. If you have anything else I’ll try to respond a bit later but I can’t spend much time on this at the moment.
What would have happened if big demand went into the physical market?
Could it have busted the thin membrane that separates sovereign entities (SE) and private entities (PE) when it comes to gold transfers?
===================================
Open Letter to EMU Heads of State
The Central Banks ran a two-tier gold market openly prior to 1971. They traded their CB gold with each other for $35/ounce while the plebes traded gold in the ordinary market at around $44/ounce. But even that $44/ounce price wasn't a totally free market price because the market had to price in the probability that the two-tier system would eventually end and the 'membrane' separating the Central Banks' 30,000 tonnes and the private ~100,000 tonnes would be broken.
[...]
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!
What the gold market evolved into after 1980 was a market based mostly on legal contracts instead of physical gold. Futures contracts, forward contracts, mining contracts, custodial contracts etc, etc... And while this contract gold market worked well for the plebes, it did not have the physical liquidity to supply really big orders, like the ones that come from sovereign entities and central banks. So the choice faced by the BIS was to either let these large entities bid for their gold in the contract market (and bring down the system like almost happened in 1979/80), or to restart the two-tier system where very large orders of physical gold could be transacted without affecting the contract market price. And restart it they did!
[...]
So here's what's going on: The regular gold market suffices for the general public, some of the "big money" like the ETFs and hedge funds, and the hedging needs of the commercial banks. The majority of this demand for gold is for hedging against a currency crisis like... uh... this one! And the banks are perfectly happy with their contracts to show on paper that they are hedged. Fine. Whatever. But what the regular market CANNOT handle is the really big physical gold transactions. That's where the BIS comes in.
So this is what the BIS is doing, and has been doing for probably 20 years. It is making the market for a second-tier, physical only, sovereign and central bank gold market. This market is totally separate from the LBMA and the COMEX because it has a separate market-maker and... a separate price!
from the comments
Here's the way I picture it. In my post I mentioned the 'membrane' between sovereign/CB gold and private gold (which includes most mining operations). "The deal" was a secret deal to breach that membrane without breaking it, for the Saudis only to take gold from the private sector at the ordinary price. Normally Giants like "oil" couldn't do this without spiking the price. The delicate structure of the breached membrane was threatened when others like Big Trader noticed what was happening. This threatened to break the membrane completely and openly, a threat we still face today.
comment to Defending a Virtual Currency
Since 1933 there has been a thin membrane that separates sovereign entities (SE) from private entities (PE) when it comes to gold transfers.
Gold moves from PE > PE as a commodity. And it moves from deficit running sovereign entities (SE-D) to surplus running sovereign entities (SE-S) as a monetary asset; a balancing function in the monetary system. SE are different than PE because they can print money, and they collect foreign currency surpluses.
Whenever gold starts to pass through that membrane, no matter in which direction, a phase transition starts to occur. If a SE-S tries to buy gold from the PEs, gold starts to phase-shift from a commodity into a monetary asset. If a SE-D tries to sell gold to the PEs for the foolhardy scam of lowering its commodity value, gold starts to phase-shift to a monetary asset because it is clear what SE-D is doing (especially to SE-S).
comment to Defending a Virtual Currency
The paper gold market (mine hedging, forward sales, gold leasing, futures, ETF's etc...) became (serendipitously?) a way for the SEs to "virtually" permeate the membrane without breaking it and causing a phase shift. This was a way to trick the PEs into settling the trade deficit with certain SE-Ss. It worked as long as the SE-Ss (large physical accumulators) were limited in number.
Michael,
The low volatility and rising price of gold now make some of the further out Puts look reasonable. Thoughts?
We recently heard a couple of scenarios about how it might end:
1) The BBs scramble for physical and bid up the price into the $3000s. After a few days it turns out this did not help, and they stop trading.
2) Insiders who smell the problem start to dump paper gold. This dominates the price discovery. The paper price crashes, but physical becomes unavailable. Even the Perth Mint decides to skip a few auctions and to keep their inventory until the dust has settled.
3) The CBs manage a stable paper price increase of 19% per year according to some unknown agreement. One day, trading in London stops without any significant price action in advance.
I bet you will eventually lose money if you just buy options in order to gamble on one of these three outcomes without having any idea about the timing.
Victor
The View: A Classic Bank Run
The thing was, the incoming flow from the mines was not exploding as hoped and expected. And the overall flow from the mines combined with the Western gold bugs puking up their private stashes was nothing compared to the sheer volume of the "oil" wealth in line around the corner. At the current price there was literally unlimited demand at the "outgoing" window and a limited supply coming in. This is what Another meant when he wrote that the oil states had already (almost inadvertently) cornered the gold market by 1997.
ANOTHER: "People wondered how the physical gold market could be "cornered" when its currency price wasn't rising and no shortages were showing up? The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold flowing during a time that trading would have locked up."
This is important! Important enough that it was in Another's very first post. And this blogger (at least) believes Another was most probably a European CB insider, so as to give his words significant weight.
What he's saying here is that when the CBs lent gold to the BBs, it was in a banking backstop or lender of last resort capacity, not unlike when the Fed created trillions to backstop the frozen interbank lending market in 2008 or when it swapped billions with the ECB in 2009 as a Eurodollar backstop. All the BBs ever got from the CBs was paper, "CB certificates." Think of it in commercial banking terms. These "CB certificates" would have been analogous to "reserves held at the Fed." Reserves held at the Fed fill a void of cash in the vault for the banks, just like these high powered certificates acted like physical reserves to the BBs.
ANOTHER: "This whole game was not lost on some very large buyers WHO WANTED GOLD BUT DIDN'T WANT ITS MOVEMENT TO BE SEEN! Why not move a little closer to the action by offering cash directly to the broker/bank ( to be lent out ) in return for a future gold note that was indirectly backed by the CBs. That "paper gold" was just like gold in the bank. The CBs liked it because no one had to move gold and it took BIG buying power off the market that would have gunned the price!"
But then, like I said, something happened:
ANOTHER: "The Asians are the problem, by buying up bullion worldwide and thru South Africa they created a default situation on all the paper, for the oil / gold trade! …Asia put an end to a sweet deal for the West! From the early 90s it was working very well. But now: The problem with gold physical supply is very real indeed! … The oil "understanding" was broken by the Asians. More gold has been sold than can ever be covered! This market is not the same as the past. … The great mistake by the BIS was in underestimating the Asians.
"Some big traders said they would buy it all below $365+/- and they did. That's what forced LBMA to go on a spree of paper selling! Now, it's a mess. … Instead, the BIS set up a plan where gold would be slowly brought down to production price. To do this required some oil states to take the long side of much leased/forward gold deals even as they "bid for physical under a falling market". Using a small amount of in ground oil as backing they could hold huge positions without being visible. For a long time they were the only ones holding much of this paper. Then, the Asians began to compete on the physical side." (See this post for more detail on the oil for gold trade.)
cont.
Now the real picture is starting to emerge. "Oil," lined up at the "outgoing" gold window, had the physical flow already cornered because of oil's indispensable value to the West. Then the Asians showed up at the window. Well, not completely. They were also taking supply right out of South Africa so it never made it into the Western paper liability system, the BB reserves. This caused the BB reserves (think cash on hand in a bank) to shrink
Hi J,
I agree with Victor that a rising price of oil helps the U.S and I disagree with your argument about extending it out.
[...]
The $ is used in the oil trade therefore it is(soon to be was)a requirement that it be held overseas and accumulated. The higher the price of oil(to a certain extent) means more $’s will be needed. If more $’s are needed the USG can AND MUST run a ever increasing deficit. See what I’m getting at?
[...]
Well..the U.S wanted that privilege and found a way to obtain it via the petrodollar. Kill gold convertibility, price oil in $’s, and then fill the worlds reserves up because we print your oil coupons. The higher the price the more coupons that you’ll need.
[...]
I said a rising price of oil helps the old Buck.
[...]
What I’m saying is a rising price of oil gives the $ an unfair advantage when competing for usage. Does it not make sense that more $’s get used, sought out, and bought when the price of oil rises?
[...]
My 1 and only point is that a rising price of oil sucks up more $’s and allows the U.S to run a larger deficit. Yes, we were able to get oil out of SA and others “cheaply” but that does not mean that the $ and USG do not benefit from a rising price.
now you say:
I never said the $ wanted more expensive gold. I said a higher price of oil allows the U.S to run greater deficits.
Umm, the paper gold market (aka cheap gold) is all about cheap $ oil. They are related. Again
"My 1 and only point is that a rising price of oil sucks up more $’s and allows the U.S to run a larger deficit."
OK, so why did they do the opposite - create a paper gold market (keep gold cheap) to be able to keep oil cheap?
=================================
I did not expect these comments to get so much attention.
Its kinda obvious when you pretend you know what you are talking about, so you should probably consider just expecting people to call you on it.
J, JR, Michael H and others,
Re: Price of gold and oil
As FOFOA has pointed out in some of his posts the price of oil in gold ounces has varied only minimally from a ratio of 16:1 over the past 65 years.
Now consider the implications if the price of oil had remained static in US dollars over the past decade while gold's purchasing power in oil had been increasing at 19 per cent per year (h/t VTC).
An oil importing gold producer could have seen a compelling argument to take control of their gold production as a way to obtain cheap (and increasingly cheaper) oil couldn't they?
From a CB reserve perspective if the main reason for holding US dollars is to be able to buy oil (and other goods priced in US dollars) then it would make sense to hold gold as your reserve asset instead of dollars. As a superior reserve asset for oil purchases gold would be de facto a superior trade currency.
So a possible explanation that fits the known facts is that the USG had to have a higher oil price to defend the $IMFS if the rise in the price of gold had been made inevitable due to the partial withdrawal of support for the paper gold manipulation strategy by the Europeans (initiated through the Washington Agreement).
I look forward to hearing your thoughts on this possible angle.
Cheers
h/t Biju for his anecdote about his Afghan local butcher's claim that gold was the reason for the US remaining in Afghanistan.
Let's broaden that perspective to include other minerals and consider this article:
http://www.indianexpress.com/news/SAIL-plans-to-bid-for-gold-exploration-in-Afghanistan/905393/
The consortium to be led by Steel Authority of India Ltd (SAIL), Hindustan Copper Limited, National Aluminium Company Ltd and Mineral Exploration Corporation Ltd, would bid for Afghan gold and copper assets scattered across Afghanistan.
“We are working out the details and have opened talks with other companies aspiring to join us. Afghanistan is endowed with rich mineral resources and it makes enough economic sense for us to explore them. We are very positive on the issue,” SAIL Chairman CS Verma told The Indian Express....
...The Chinese are reported to have begun exploration activities for mining the Aynak copper mine located in Afghanistan’s Logar province.
I find it intriguing that so many of the investment opportunities in countries that have captured the American military's "attention" in recent years are NOT going to American companies.
JR,
“Its kinda obvious when you pretend you know what you are talking about, so you should probably consider just expecting people to call you on it.”
HA, you caught me. I'll continue studying up on the world and reading archives from my Mother's basement.
HI J,
I'm glad you've acknowledge the relationship between cheap oil and the paper gold mechanism for shipping cheap gold in the opposite direction. Its a basic building block.
I'm even more heartened in seeing how you also choose to spend your time :)
From the Intro to Another (written by MK)
===========================
When the once highly secretive London Bullion Market Association (LBMA) -- its venerable membership comprising the world's largest gold dealers -- published its daily clearing volume for the first time in January 1997, it rocked the tight-knit world of international gold traders and analysts.
According to this first of many subsequent LBMA press releases, thirteen hundred tonnes of gold (representing more than 50% of the world's annual mine production) changed hands daily in this fog-shrouded center of the global gold market. This figure represented over $10 billion per day and $4 trillion per year in bullion banking activity!
The gold market had always stood in austere, quiet contrast to the highly charged, mega-volume world of stocks and bonds. Now this first LBMA report forced analysts, investors, and brokers to reassess their understandings of the gold market. While some revelled in the glow of the large LBMA numbers, others began to raise some very important and rather unsettling questions. First, Why was this much gold on the move? Second, Where was all this gold going? And third, Where was all this gold coming from?
Then, in October of 1997 at the internet's only gold discussion forum of the day (hosted by Kitco), a series of remarkable postings began appearing under the pseudonym "ANOTHER", offering plausible answers to those questions.
[...]
As explained by ANOTHER, an opportunistic arrangement for massive physical gold acquisition among important petroleum producing and exporting nations could be comfortably facilitated within these astronomical trading volumes now being publicly revealed via the LBMA. For the oil states this meant receiving real money (as opposed to government-sponsored paper) in payment for their depleting oil reserves. For the industrialized countries, this meant a continuing supply of cheap oil to fuel the economic boom already in progress. These transactions were to be cleared through the bustling London gold market. Up until late 1996, the volumes were a tightly kept secret so "the deal" proceeded without the knowledge of the general public.
When the LBMA went public with its figures, it raised the shroud off "the deal." But by then, according to ANOTHER, it no longer mattered. The oil states had already (almost inadvertently) cornered the gold market. As implied by ANOTHER's own words, his motivation for these postings was the discovery by "big traders" in the Far East of this opportune facility to buy gold at ever lower prices. Their subsequent heavy purchases of physical gold upset the delicate balance. Now there was no longer a reason to keep it secret, and hence, the revelation of this extraordinary tale.
JR,
OK, so why did they do the opposite - create a paper gold market (keep gold cheap) to be able to keep oil cheap?
This is not a counter-argument if it is true that it was the Europeans who wanted the gold for oil deals. Mortymer found the papers from the 1970s in which the idea came up.
Victor
Another
Date: Sun Oct 12 1997 10:42
ANOTHER (THOUGHTS!) ID#60253:
How DO they do it?
It's more complicated than this but here is a close explanation. In the beginning the CBs didn't sell their own gold. They ( thru third party ) found someone else who had bullion. That "party" sold to a broker who sold forward for a mine or speculator or government ) . In the end the 3rd party had the backing from the broker that he had backing from the CB to supply physical if needed to put out a fire. The CB held a very private note from the broker as insurance and was paid a small fee. This process mobilized free standing bullion outside the government stockpiles. The world currency gold price was kept down as large existing physical stockpiles were replaced by notes of future delivery from the merchant banks ( and anyone else who wanted to play ) .
This whole game was not lost on some very large buyers WHO WANTED GOLD BUT DIDN'T WANT IT'S MOVEMENT TO BE SEEN! Why not move a little closer to the action by offering cash directly to the broker/bank ( to be lent out ) in return for a future gold note that was indirectly backed by the CBs. That "paper gold" was just like gold in the bank. The CBs liked it because no one had to move gold and it took BIG buying power off the market that would have gunned the price! It also worked well as a vehicle to cycle oil wealth for gold as a complete paper deal.
Are you with me?
Well a funny thing happened right after the Gulf war ended. What looked like big money before turned out to be little money as some HK people, I'll call them "Big Trader" for short, moved in and started buying all the notes and physical the market offered. The rub was that they only bought low, and lower and cheaper. They never ran the price and they never ran out of money. Seeing this, some people ( middle east ) started to exchange their existing paper gold for the real stuff. From that time, early 1997 LBMA was running full speed just to stay in one spot! In other words paper volume had to increase to the physical volume on a worldwide scale, and that was going to be one hell of a jump. It could not be hidden from the news any longer.
This was not far from the time that "Big Trader" said that "if gold drops below $370 the world would see trading volume like never before seen". The rest is history. Now the CBs will have to sell 1/3 to 1/2 of their gold just to cover whats out there. To use the Queens English "it ain't gona happen dude"!
costata,
you are saying that the US will have to ruin their economy just in order to keep the US$ afloat.
Or to capture the Canadian (and Mexican and Venezuelan) oil when Brent goes up this March.
Victor
V - Vtc: -
I must admit I haven't got to how REAL Gold might react to a negative T-bill occurrence ...in an "opaque" sense - just following the bouncing ball to a linear conclusion.
VTC,
Ruining the US economy seems to be a popular pastime in Washington.
http://www.financialsense.com/contributors/james-j-puplava/debt-supercycle-part-2-on-borrowed-time
But no I'm not saying anything of the sort. My angle places the oil price alongside the gold price as part of the management task for the Americans. It does, however, argue that increasing US$ gold prices required higher US$ oil prices to maintain that long term gold-oil ratio.
If that made the Europeans happy I guess you could put that down to altruism on the USG's part.
Cheers
FOFOA: -
The issue with REAL Gold - IF things eventuate according to my prognosis is a curious one indeed. Clearly, it's (largely) going to stop moving ...and then what?
There is clearly a FreeGold-by-accident scenario developing IMHO.
In your opinion, what might be a plausable option going forward from there?
Nickel: -
Don't have the time for Blogs right now Sire, perhaps I'll get to sorting it all out "in order" over the week-end.
...and will be in touch.
FOFOA (again;-): -
Does this scenario square with your Theory? Enquiring minds want to know!
IF that was a question Sire - Absolutely!
In view of the apparent imminent default by Greece why does the Bank of Greece still hold 111.7 mt of gold?
I am aware that there may be a long and a short answer but IMHO this question is at least as interesting as
the recent history lessons on this excellent forum.
For instance what is the point in holding gold as a perfect store of value if you never (can?) use it?
Hi ChrisF
good question, especially under the aspect that last year greece CB even bought MORE gold and german CB was dishoarding gold. WITH WHOSE MONEY HAVE THEY BEEN BUYING?
As I said: The Euro is not a "old golden ecomony", it's a fraudulent economy.
Greets, AD
Nickel: -
Re: Faith.
Not necessarily Sir, losing Faith in the econ future is ultimately a loss of faith in the system ...which in turn is totally dependent on a future in contango - across-the-board.
As you know, my take is that ALL market contango's are dependent upon $IRX staying at a positive Yield, and as per recent posts, I feel that's about to change.
Curiously,as IMHO we're now on the brink, even a "left-field event" can't stop the process now.
M: -
The $TYX:$IRX Yield Ratio is a pretty good indicator that there persists a problem "in-the-curve". Which is in turn indicative IMHO of a flight to the present ...represented ONLY by wads of $Cash or Cash-proxies the Government-guaranteed short maturing UST-bills.
In my prognosis, ALL assets with potential settlement beyond a week will be severely adversely affected IMHO as the Long-dated determinants for IR's in the RE Patch etc. ratchet up and through their own parity prices.
Let's watch eh? ...and we'll re-visit end of Feb.
FOFOA didn't give his best quote on zero bound. Here he sounds like OBA.
FOFOA: But the thing about THIS bubble's rise that is so different from any rise in gold is that the price of past issued debt has a natural upper limit. And the "lowering of interest rates scheme" has a physical floor, an inevitable and unavoidable dead end... call it ZERO.
Yes, we have seen a couple ventures into negative interest rate territory lately. But this is simply anathema to the very concept of money, period. It is the ultimate froth, the last breath of air you can blow in before a bubble pops. It is the sure signal that the end is nigh.
When interest rates hit ZERO, they only have one way to go. And that means that the value of past issued debt, the very kind of TRASH that China is sitting on a land-fill mountain of, only has one way to go... DOWN. This is the very definition of a bubble that is about to pop. As Peter Schiff calls it, this is The Mother of All Bubbles!
cosatata
Paraphrasing : The US$ will force up the price of gold because they must, the Euro will force up the price of gold because they want too.
Gold and oil is of course inextricably linked.
TF
OBA
As you know note yields and note prices are inversely correlated.
Prof. Fekete has argued that since mathematically every time the yield halves the bond price doubles, it is theoretically possible to halve the yield indefinitely.
So perhaps the game can go on a while longer.
TF
I wonder why people assume that yields can not go below zero for longer or further indefinitely. Its just the question who is buying those bonds.
e.g. last german bond auction also below zero.
Upps, was that just right after germany was not happy that the ECB purchased further PIGS bonds and discussing about that lovely basuca?
Oh, no, that is just a coincident, can not happen in the golden economy like La-La-Euro-land, we got gold to balance...
AD,
You forgot the "Greets" bit Jimmy.
The trillion dollars in mineral wealth meme for Afghanistan is pretty old and, not exactly independently verified. However, one can easily imagine that a nation with that sort of terrain has a lot of mineral wealth waiting to be tapped. Of course, being
perhaps wilder than the wild wild west will amount to subtracting a substantial amount of profit from mining enterprises.
In the meantime, Costata, it may be the case that there are myriad quid pro quos (and plain old bribes I imagine) being extracted from foreign companies wishing to do business in Afghan land.
Hi AD,
Are you a modern monetary theorist? Maybe we can all quit working because the gov can just issue treasuries and buy them up. Sweet! Free stuff from the physical plane forever. Or not.
FOFOA: Today we are debasing our monetary reference point in defense of that inflow of goods from abroad. And, at this point, it is entirely attributable to the USG alone, and not to the US economy at large which has contracted, unlike the government.
By increasing the volume of the base which credit references for value, simultaneous with a constant inflow of necessary goods, we are in essence devaluing—or more precisely debasing—the credit money flow that flows in the opposite direction of the goods flow. The fact that this doesn't show up immediately in consumer prices is perfectly normal.
The dollar is the global reserve currency, so it is the physical plane that is the biggest threat to the dollar in the same way the FX market was a threat to the Weimar Mark. And it is not the nominal debt service that is the threat like it was in the Weimar Republic, but it is the structural (physical plane) trade deficit.
FOA: Once a nation embarks down a road of inflating its currency for local political use, the cast is set for a constant redenominating of the money unit; that is "real bad" price inflation. However, modern economic evolution has presented an even more profound reply. Once a nation embarks down a road of inflating its currency for international political use, the cast is set for the world to find said fiats useful limits, then drop it from use; that is super price inflation as a result of fiat replacement. To this end we come.
Hi Jeff,
no, I'm not a modern monetary terrorist, I am just watching the game :P
What you say is so far true from the rational perspective, but things are not rational. You noticed whenever you have a short sequeze in a particular currency, you can "save" it.
Just look what happend after the japanese tsunami. From todays perspective it looks like we need plenty of these tsunamis to happen not to fall over the cliff, I wonder how those will be created next time.
JR,
Thank you for your detailed response.
”I just want to be clear that its not like the Euro/BIS stepped in to help support the dollar to the chagrin of the $IMFS, or without the $IMFS involvement … Both the $IMFS and the ECB/BIS supported the paper gold market because they both wanted cheaper dollar prices oil at this time.”
Understood. My previous hangup is that I couldn’t see exactly why Euro/BIS would support the $IMFS, it just seemed to me like Europe was licking the US’s boots because they didn’t have a choice.
Now it is starting to make more sense. At that time, Europe was still economically weaker than the US, though not by as much as it had been immediately after WWII. And they did have a choice: support the $IMFS or ‘gold will become the "world oil currency"’.
I now see that the choice of words ‘world oil currency’ are very specific. Not the ‘world currency’, not the ‘reserve currency’, but ’oil currency’ -- so what Europe was buying with their support of the $IMFS was continued access to cheap oil.
Of course the $IMFS was also involved as the US also wanted cheaper oil at that time, since the oil price had way overshot their intended upper target.
costata,
”So a possible explanation that fits the known facts is that the USG had to have a higher oil price to defend the $IMFS if the rise in the price of gold had been made inevitable due to the partial withdrawal of support for the paper gold manipulation strategy by the Europeans (initiated through the Washington Agreement).”
I wrote in a previous comment that I was unsure whether, since 2000, the USG policy goal would be a rising price of gold, or a rising price of oil. As you pointed out, the two are connected. Gold seems to be in a neater uptrend than oil, but that by itself does not mean it is the goal – it could simply be that the gold market is easier to manage.
Higher oil prices was a USG policy objective in the past, so why couldn’t it be a policy objective again after 2000? Here’s a train of thought:
There is too much debt, we need to devalue the USD. What does it mean to devalue the world’s reserve currency? Simply devaluing vs other currencies won’t work because other countries will devalue themselves in response – aka currency war. So the USD needs to devalue against something else.
What gives the USD value? The fact that you can buy oil with it. So why not devalue the USD against oil?
How do you devalue the USD against oil? You raise the price of gold.
That said, for now my position is that the uptrend in gold is the objective. However, I will continue to consider the other possibility as an interesting counterfactual.
Texan,
Victor posted some circumstantial evidence to support the assertion that the gold ‘sales’ of the 00’s were really just to cover leases from the 90’s gone bad. IIRC, the amount of gold held at the FRBNY declined through the 90’s and then leveled off, signaling when the gold actually moved.
From victorthecleaner,
http://fofoa.blogspot.com/2012/01/gold-must-flow.html?showComment=1326911940177#c531133160654786983
”But I don't think it is true that the gold never left the vaults. From the FRBNY vault inventory, we know that in the 1990s, about 6000 tonnes (if I remember correctly) that was owned by non-US CBs and international organizations, left the vault. According to Frank Veneroso, another up to 14000 tonnes of forwards were still open in 2002 (again if I remember correctly). Most of that would have been forward sales by the mines, i.e. paper gold loans taken from BBs plus hedges. As far as I understand, these were wound down in the period from 2000 to 2006. Just look at Barrick Gold, for example.”
ChrisF,
”…why does the Bank of Greece still hold 111.7 mt of gold?”
Imagine you are behind on your mortgage and are getting close to being foreclosed. Do you sell your family heirloom jewelry, which should be worth a million dollars, for a thousand bucks at the local pawn shop just so you can make your next payment?
Or do you wait for better price discovery, and pay off all your debt outright when the right buyer comes along?
The fact that Greece hasn’t sold their gold shows that gold is undervalued at today’s prices.
Hi Costata, a commentator just above my post called MTM the Euro's secret weapon. Not to challenge that poster in particular but just the general notion that the Euro's MTM policy is somehow unique.
If you know the time frame that others adopted an MTM policy on gold i'd like to hear it. My position was that it would make sense for those who came off a fixed exchange rate with the USD to MTM while the USD having the heritage of the fixed gold backing is most likely the exception to the practice (whereas here it seems to be taken for granted that the Euro is the exception).
OBA,
Looks like others are picking up on what you are getting at.
http://www.zerohedge.com/news/supercommittee-runs-america-urges-end-zero-bound-demands-issuance-negative-yield-bonds
MF,
"Prof. Fekete has argued that since mathematically every time the yield halves the bond price doubles, it is theoretically possible to halve the yield indefinitely."
I can see how this is (approximately) true on the long end, but does it hold on the short end?
I am having trouble finding the correct bond-valuation equation, but:
Current 3-month yields are 0.06. Say a $100 bond is sold today at 0.06; if the 3-month rate were to drop to 0.03 tomorrow, would you buy that 0.06 bond for $200?
Curiouser and curiousererer.
< 10 weeks?
Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association
There was a lengthy discussion regarding the bid-to-cover ratios at recent Treasury bill auctions. It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical.
The second charge was to explore the viability of Treasury issuing floating rate notes (FRNs). In particular, the presentation [attached] assessed potential client demand, optimal maturity, reference index, and reset frequency. The structural decline in the stock of global high-quality government bonds, coupled with an increase in demand for non-volatile liquid assets, should make U.S. government issued FRNs extremely attractive. Pricing for a hypothetical two year FRN was estimated to be in the arena of 3 month Treasury bills plus 8 basis points.
A discussion then ensued over whether 3 month Treasury bills or Fed Funds Effective was the more appropriate floating rate index. In conjunction with fixed-rate issuance, FRNs give Treasury an attractive alternative to increase the average maturity of its debt. While more analysis on the specifics of the program must be done, the Committee was unanimously in favor of Treasury issuing FRNs.
ZH link
Seems about that you were talking about...
Michael H
Ahh I see it is the case for bonds, but nor fill bills.
Carry on then. :P
TF
Michael H,
The front end of the curve is far less sensitive to movements in rates and the 3mo bill is sold at a discount to par so at 5 bps you would pay 99.95 for 100 in 3 mos. at 10 bps or double the yield you would pay 99.90, hence its' close proximity to cash.
Doubling would occur much futher out on the curve as more future cash flows are evaluated in comparison to the current market rate. The price of a 30 yr bond paying 3% coupons would rise in price to about 136 from 100 if rates went to 1.5% but drop to 60 if rates doubled to 6%.
It's an interesting dynamic in that as rates go lower you gain far less upside price potential from falling rates and take on significantly higher price risk exposure from rising rates.
Losely translated it takes a lot more firepower to get rates from 3% to 2% than from 6% to 5% the further you go out on the curve due to compounding. At 3 months its just about equivalent to a linear move.
Matt, I can tell you that the UK mark their gold to market. However, all of the UK's and BoE's accounts are in US Dollars, so maybe still paying homage to their US masters? Who knows?
Also, for what it is worth, Morocco also marks its gold to market every month.
I haven't checked any others, but I am sure you are right, it would be the norm. Perhaps we Fofoa visitors should divvy up the other nations and get checking.
I think the more we find, the more supportive it is of the transition to freegold.
Hi Garry&Matt,
what I can absolutely not understand, what that MTM is good for anyway? Where have I missed the fine print, that I can buy or sell at that price to the CB? So what are those cooked books good for in the first place anyway, those crooks can not even be hold liable, so why care for those numbers? No guarantee for any transaction or any prove of any existance at all. They might as well account for moon stones, still on the moon.
e.g. The german parlament is even not allowed to ask the german CB how much PHYSICAL gold they actually have where. Sure "gold+gold CLAIMS".
So when so freegold climax over the Euro-MTM-Gold, I better dump any euro I can.
Look at sly Uncle Costata,
"So a possible explanation that fits the known facts is that the USG had to have a higher oil price to defend the $IMFS if the rise in the price of gold had been made inevitable due to the partial withdrawal of support for the paper gold manipulation strategy by the Europeans (initiated through the Washington Agreement)."
==============================
Date: Fri Nov 07 1997 21:59
ANOTHER (THOUGHTS!) ID#60253:
Date: Wed Nov 05 1997 22:06
GOLDEN CHEESEHEAD ( @ANOTHER SHOCKING POST! ) ID#431263:
All paper gold will be worthless just like stocks and bonds! Am I right? If not please correct!
Mr. GCH,
You may be more right than wanted to be. For some it is a long torturous wait to go without paper gains. For ones outside the west, it is not hard. Days pass easily as a thousand years of history give backing to our investment. "For what I hold is not an empty promise. Nor is it a major thought of debt. I am now today, paid in full!"
Turn slowly now and view all directions. The wealth that was had was not real. The Pacific Rim started, now South America. Next will be Europe closely followed by the US. Remember, all currencies are the same now as they are "digital paper"! Nations will defend the system at all cost They will never sell US$ treasury debt as that debt is their currency! The dollar will soar as a final defense! As part of this defense they will allow oil to rise as oil is priced in dollars. How do you get oil to rise? Today, we stop our CBs from selling gold!
How do you get dollar priced oil to rise - we stop our CBs from selling gold!
MF and Michael H,
Regarding price / rate relationship of T-bills.
From:
http://www.investopedia.com/calculator/TBillPrice.aspx
Remember, T-bills are discount bonds. This means they sell below par value and mature at par. The lower the price, the higher the effective annual interest rate will be, and vice versa.
Examples:
5% annual yield: You purchase a 90-day bill for $98.75, and get $100 when it's mature.
0.05% annual yield: You purchase a 90-day bill for $99.988, and get $100 when it's mature.
/Burning
BTW, now to the real question: Is profit from negative rate T-bills tax-deductible :-P
To non-dollar investors...
Quite possibly.
Date: Wed Nov 05 1997 20:33
ANOTHER (THOUGHTS!) ID#60253:
At this moment in time and space, the price of oil in US$ terms is about to roar! It will crush the Pacific Rim and South America. It will drive the US$ sky high in terms of other major currencies but the dollar will collapse in terms of gold! Short term interest rates in the USA will be driven thru the floor much the way they have been in Japan from the early 90s. This will be done to combat an imploding equity market. Long government bonds will almost stop trading as their yield soars from the oil price fears of "inflation"!
Hey Gary - the BoE keeps its accounts (books or bank accounts?) in USD? That is very weird!!!
A/D
I am not sure if Gold MTM really means that the CBs are primed for Freegold, that is one way of looking at it and is what is promoted here but personally, I like to hedge my bets and wait patiently for the known unknown to transform itself into the the known known. Last thing I want is to mistake a known unknown for a known known and end up making an unknown unknown (life is tough enough already!).
Reading your prior comments I think you believe the Euro is a disaster and can't understand why this blog promotes it as the pinnacle of fiat. If I may, the position here is that what the Euro is going through what capitalism is normally supposed to go through - irrational exuberance is permitted, but when the tough times come, there's no-one to bail you out. The bleeting from the banker/govt class is just as it should be, they are in fact learning the lesson that everyone else avoids.
Now whether the ECB is doing bare minimum to support the Euro or doing 'a little extra' to support its connections remains to be seen.
While I can see the beauty of the Euro design I have also seen a young Spanish Austrian Economist who did a study on the Euro and came to the conclusion that it was really driven by the French getting shitty with the restrictive impact of Germany's austere government, the exchange differential stopping the French from going 'Deficit 5000'. His conclusion was that the Euro was the result of a bureaucratic wet-dream and from memory he had convinced some previously supportive senior austrian economists of the same.
Once again, I personally hedge my bets and wait patiently to see.
How do you get dollar priced oil to rise - "we stop our CBs from selling gold!"
How do you get the price of oil in US$ terms to roar - "Short term interest rates in the USA will be driven thru the floor much the way they have been in Japan from the early 90s. This will be done to combat an imploding equity market. Long government bonds will almost stop trading as their yield soars from the oil price fears of "inflation"!
The King of Bonds in the footsteps of Another:
Where else can one go, however? We can’t put $100 trillion of credit in a system-wide mattress, can we? Of course not, but we can move in that direction by delevering and refusing to extend maturities and duration. Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.
Where does credit go when it dies? It goes back to where it came from.
Victor
Sir OBA,
...well well this is timely
"Supercommittee That Runs America" Urges End To The "Zero Bound", Demands Issuance Of Negative Yield Bonds
"....One of the laments of the uberdoves in the world over the past several years has naturally been the fact that interest rates are bound by Zero on the lower side, and that the lowest possible rate on new paper is, by definition, 0.000%. Which is what led to the advent of QE in the first place: in lieu of negative rates, the Fed was forced to actively purchase securities to catch up to a negative Taylor implied rate. This may be about to change, because as the just released letter from the Treasury Borrowing Advisory Committee, or as we affectionately called the JPMorgan/ Goldman Sachs Chaired committee, the "Supercommittee That Runs America", simply because it alone makes up Tim Geithner's mind on what America needs to do funding wise, demand, "It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical." And what JP Morgan and Goldman Sachs want, JP Morgan and Goldman Sachs get. And once we get the green light on negative yields at auction, next up will be the push for the Fed to impose negative rates on all standing securities, which means that coming soon savers will be literally paying to hold cash. And that will be the final straw."
-v
JR,
'Long government bonds will almost stop trading as their yield soars from the oil price fears of "inflation"!'
Perhaps Bernanke knows all of this, as it would explain 'Operation Twist' aimed at the long end of the curve.
Only 11% foreign buyers for US debt last year I saw on a ZH post, and I'd bet that number is dwindling. Thank God for primary dealers!
Matt, yes, very odd, I was meaning to send in a FOI request to the UK Treasury or the BoE to find out why, but I'm sure I would get a BS reply anyway. Morocco prices in Dirhams though!
VTC,
Best line of the thread:
Where does credit go when it dies? It goes back to where it came from.
Ashes to ashes ...
Matt and Gary,
I think you will find your answer in IMF rules. Accounting for gold reserves in US dollars or SDR at the "official" rate of $42 approx. Though some folks don't seem to be as much in awe of the IMF as they once were eg. Russia c2006 if memory serves me.
Costata,
We already know that the CB's of Australia, EZ, UK, Russia and Morocco MTM so the IMF rules if applicable are potentially only being followed by US (as their 'legacy'?). If we could find out about Japan, Canada and New Zealand we'd have covered the 'developed' world at least
Feb. 1 (Bloomberg) -- MF Global Inc.’s brokerage customers can’t have the bankruptcy of the company’s parent converted to a Chapter 7 liquidation or conduct their own probe into its collapse, a judge ruled
http://www.businessweek.com/news/2012-02-01/mf-global-holdings-judge-rejects-customer-bid-for-chapter-7.html
(Boy ...this getting to Page 2 is becoming a task eh? ...or is it just ME!)
V: -
Systemic-maltdown-by-decree eh?
My understanding is that when dealing in Bills, it is a matter entirely between you and Timmy.
Ben and his tribe of hangers-on -Market-makers ...(or should I say "movers") et-al are effectively sidelined ...much to their chagrin.
It's getting interesting - to say the least Sir V.
Let's watch!
There seemingly STILL persists a notion that the Fed et-al are in control of the Systemic Process -
I for one don't see it this way.
Ben et-al eke out their meagre living managing the DEBT side of the Ledger. It is the CREDIT side which is NOW firmly in control IMHO ...and Ben is on the verge of of becoming the proverbial Voyeuristic Eunich watching Credit and Timmy going at it "Hammer 'n Tongs"
VtC: -
It appears King Billy has been reading my stuff ;-)
...but he doesn't quite "go the whole nine yards" IMHO.
WHEN our good friends at Yahoo re-configure this Chart with one ...or several lines BELOW the Zero - GAME OVER!
Cheap vs not cheap oil
ANOTHER (10/10/98; 16:47:10MDT - Msg ID:488)
THOUGHTS!
...."The troubles we find today are troubles of a "paper currency nature" that brings to the forefront the need for low priced oil. Yes, you may extrapolate the order of confluence in this way; "paper currency created thru the creation of debt" then "always the continuation of more debt to expand business and commerce" then " the limits are reached for world trade to repay this paper debt" then "a further creation of debt for the creation of paper money with purpose only to save banks and governments" then "the need for raw commodities (oil and others) to be priced unfairly low for the continuation of business and debt payment"! Today, if oil was priced fairly, in real terms, the dollar/IMF currency structure would not stand.".....
Matt,
Nice spade work on MTM. I take this as a sign of fragmentation in longstanding alliances and see the recent round of currency swaps in a similar light.
A Captain of the Costa Concordia moment perhaps. Crew on the good ship $IMFS electing to go down with the ship - NOT.
I have a little project underway at the moment so I can't help with your MTM list except to say that you should take a look at the CB of Mauritious who are the clearing bank for one (or more?) of the African trade groupings.
This might interest everyone as well:
http://www.thenewage.co.za/41765-1019-53-Borderless_Africa_Continental_free_trade_zone_eyed
The year 2017 is the goal for implementation of a free trade union much like the one enjoyed by the European Union, where trade flows freely across open borders.
"An open common market from Cairo to Cape Town," said Tanzanian President Jakaya Kikwete recently, laying out a future vision for the mooted Continental Free Trade Area (CFTA).
The first step is to merge some of the eight overlapping trade zones that stretch across parts of Africa. The initial focus is on three of them: the East African Community; Southern African Development Community; and the Common Market for Eastern and Southern Africa.
Should be fun if these leaders can bring 500 million+ Africans to the post-transition trade party.
Jeff,
Thanks for the link to that MF Global ruling. So it looks like the customers will be shafted.
The equation for bond valuation requires both the interest rate and a calculation of the time value of money. If the rate dropped from .06 to .03 on a short term bill the amount would never go to $200 because the time value of money could not justify the extra $100 of valuation.
It has been 20+ years since I did my managerial accounting course and my HP12C is at work but 'trust me' $200 could never be.
Michael H, MF: etal-
Bonds and T-Bills are different.
With T-Bills you "invest" an amount with Treasury (can be, and is often DIRECTLY) and get back $1000 after the period (say 3 months) The term "discount" is a bit misleading.
Yes, to go from 6% to 3% on a 6% "coupon" Bond effectively doubles the price of the Bond in the Marketplace ...however, therein lies ONE OF the Systemic RISKS.
Please may I offer this short example for your consideration -
Yesterday Jack acquires $500K X 3mo T's at or about parity ...and Jill is considering picking up a tranche of 30Yr Bonds for a similar amount with 20Yr's still to maturity, in the secondary market.
Given the current state of the curve,the "coupon" on these is 5% and so it will cost her (say) $1200 / $1000 Face to grab the 5% Yield in this here 4% environment.
She THEN will have to TRY and arrange "Insurance" in the Futures / Options arena thus adding to her costs.
Insurance ...and Carry-Time in this current IR climate is what she needs to concern herself with and ...given the oft-mentioned Ratio Chart, IF she proceeds, Jill will probably find she's a very lonely lass indeed! In a rapidly moving situation, Insurance might NOT work and Jill could well be left holding.
The "face" on her Bond is $1000 ...and ultimately Treasury-Tim is good for that ...I think!
So her "total investment" of (say) $1300 can "potentially" drop to $1000 ...and maybe lower if Tim doesn't come good!
The pile of IF's and BUT's she may well encounter if left holding over the next 20Yr's simply boggles the mind.
Think long - stay short Jill!
Matt,
You ask: What is the normal CB policy on gold valuation? (Genuine question - we all know about US and EU, but what of some of the other key players?)"
I found a map that illustrates which countries currently mark their gold reserves to market. It can be located here:
http://www.flickr.com/photos/68989849@N04/6648048247/in/photostream
Hope that helps. Thanks to Freegold for putting that together.
ERRATA: -
In the previous example 4% should've read 3% ...D-uh!
If US treasure hunters can't keep the "Spanish" gold they found on the bottom of the ocean, then I don't think the US will confiscate the European gold held in the NY vaults.
Treasure from sunken galleon must be returned to Spain, judge says
Nice find Wendy,
So this Another piece was written during the period when oil bottomed at around $10 per barrel?
Cheers
GATA have posted a gold swap agreement between the US and the UK (dated 1981):
http://www.gata.org/files/GoldSwapTreatyUSUK-UN.pdf
This is before the time we are interested in, but it establishes the fact that the US borrowed BoE gold in the past in order to be able to trade it in the London market.
Victor
Yes costata, the price was about $12/barrell average over the year, which is crazy low even then.
I found his further remarks even more interesting in terms of the response of gov/fed to the problem of debt .... this is what has unfolded, and continues to unfold.
It's also worth noting that in this post he does not "sound" foreign, as some have asserted. He sounds less foreign in the regular forum that he did in the thoughts series. FWIW :)
Michael H,
From your comment above:
http://fofoa.blogspot.com/2012/01/open-forum.html?commentPage=2#c2175857144088450341
How do you devalue the USD against oil? You raise the price of gold.
That said, for now my position is that the uptrend in gold is the objective. However, I will continue to consider the other possibility as an interesting counterfactual.
I think you have answered your own question incorrectly. You appear to be assuming that the pice of oil "wants" to rise. What if its natural trend was to fall? Hence:
How do you devalue the USD against oil when the price of oil wants to fall?
Raising the price of gold won't do the job. Oil would be falling in all currencies (relative to their exchange value in dollars) as well as gold.
More ominously if the price of gold alone rises it lays claim to the position of global oil currency for all of the currency issuers. The disaster that Another feared was imminent in the late 1990s.
So if gold was likely to rise anyway (post WAG) and oil was likely to fall (recession) you have to raise the price of oil as well in tandem with gold to obtain the devaluation you describe.
Okay, as VTC points out this means some pain for the US economy but the alternative is collapse of the $IMFS.
Is this making sense to you?
Great link Ryan!
So the America's excluding Brazil maintain a fixed gold (or at least now MTM) as does Japan and New Zealand.
Could it be that those countries maintaining an association to the USD don't MTM? The more independent of the USD you get more able to MTM. I note that the Real and the Rand are the two strongest currencies in their continents and the only ones to MTM, assumedly many of the smaller economies in those continents still use the USD at a fixed exchange or concurrent monetary system.
Perhaps its as simple as countries having a developed CB accounting system and not relying on the IMF 'guidelines' as China uses MTM and yet has a peg to the USD.
Great to see the Scandinavian counties and the BRICs all MTM as well!
Costata - your link on the African trading block is very interesting too - we can envisage the world being broken up into trading blocks with their own currency system ala the Euro (or even based on the dominant currency for the region: Real in SA, Rand in Africa, Yuan in East Asia, etc) with gold being the valuation and settlement mechanism between each one.
As this process occurs, using the USD as the global reserve system becomes less and less of a realistic proposition. Yet another way that freegold will develop naturally as demand for the USD as global reserve currency is steadily superseded.
How The Dollar Made It This Far
"...During the '70's, dollar price inflation was bad, but by no means did we see the "runaway price inflation" that should have come from a reserve currency without gold backing.
In practical theory, oil now backed the dollar as world oil payments were settled in dollars. In return, gold now backed oil from a US guarantee of an open market for the metal. Over time, a portion of oil dollars could be replaced with real gold through actual physical purchases or in participation with evolving world gold banking (paper gold). Even though the dollar gold price had surged, the higher oil prices were allowing a percentage of those dollars to be converted back into gold at the old gold/oil rate. [Note: After the gold window closed, dollars surrendered for gold REMAINED in circulation!]
Slowly, the old dollar holdings (prior to 71) were effectively being used to reclaim gold. The expansion of the world dollar money supply was seen as reflecting the more modern importance (value) of oil in the economy. As long as growth in the production of economic goods outstripped dollar price inflation, the dollar could be expanded to match the unrealized value held in oil. ..."
Ryan, good find with the map.
However, it doesn't show Morocco as marking to market, so perhaps it is out of date?
I'll try to do some digging over the next few weeks, see what I can find on some central bank sites.
Gary - I checked the financials of the Canadian CB - Gold was not mentioned once. I assume its included in the catch all 'Other Assets' if held at all(?).
This is a key point:
[Note: After the gold window closed, dollars surrendered for gold REMAINED in circulation!]
Note: when loans are defaulted, only under certain specific circumstances does the banks credit money, that was created by the banks through loans, cease to exist.
DP,
http://www.youtube.com/watch?v=N8s1fNvMtR0&feature=related
Come back! Come back girls!
We know you snagged your clothes on our razorwire earlier, but, honestly - we do still have gold for you. Honest!
Sometimes it feels like everything is about Iran these days.
[Note: Prior to the gold window closing, dollars surrendered for gold were taken out of circulation!]
http://www.chartsrus.com/chart.php?image=http://www.sharelynx.com/chartsfixed/Gold1800to2000.gif
Wendy,
"It's also worth noting that in this post he does not "sound" foreign, as some have asserted. He sounds less foreign in the regular forum that he did in the thoughts series. FWIW :)"
My first thought was that this might have been FOA posting under the ANOTHER name, as happened when A first started posting, but the date is much later -- at the time of the post, the 'Friend of ANOTHER' identity was already established.
Even though the dollar gold price had surged, the higher oil prices were allowing a percentage of those dollars to be converted back into gold at the old gold/oil rate.
As long as growth in the production of economic goods outstripped dollar price inflation, the dollar could be expanded to match the unrealized value held in oil.
===========================
A post expanding on this idea
"The Setup
Part of the reason the rest of the world did not abandon the dollar in 1971 was that the rate of economic expansion flowing from Middle Eastern oil cheaply priced in U.S. dollars was already exceeding the expansion rate of the money supply. So the switch from a semi-gold-(con)strained monetary system to a much more expandable "balance sheet money system" as I like to call it — or another name I like is "purely symbolic monetary system" — allowed for the non-deflationary addition of many new "quality of life" gadgets, widgets and shipping lanes that the world had never before imagined.
For the next three or four decades we would be able to comfortably afford the new introduction of Betamax VCR's, microwave ovens in every home, personal computers, DynaTAC cell phones, camcorders, digital cameras, LaserDiscs, Compact Discs, DVD's, MP3's, and on and on. Eventually, all of these wonderful products would be built cheaper by someone else on the other side of the world and shipped to us cheaply using the oil purchased from the Middle East with easily available U.S. dollars.
The reason I like the term "balance sheet money" is that whenever there is a need for more dollars they can be easily gotten from any bank's balance sheet. The dollars don't have to be there in the bank. You simply jot down the "need" for them on one side of the balance sheet and the dollars magically appear on the other side. Presto!
Of course once that "need" (demand) is supplied, the balance sheet must then be serviced with interest. But the thing about easy money is that you can always borrow new to service the old. In the previous system (con)strained by its parity fixation to the U.S. Treasury's limited supply of gold all these wonderful life-enhancing advances would have put a deflationary pressure on the dollar.
What this means is that when all these new products came to market, the dollars we needed to purchase them would have become more and more precious with each new widget that came to market. The cost to borrow dollars to buy a new BMC-100P or DynaTAC-8000 would have been prohibitive. And even if you did borrow the money, the service of that debt would have grown more and more burdensome over the life of the loan as dollars became ever more precious.
This deflationary dynamic would have stifled the global economic growth rate and confined it to only reasonable risk-taking. Which is part of the reason the foreign central banks, represented by the BIS, did not lobby the U.S. to officially devalue the dollar against its Treasury gold in 1971.
Rather than closing the gold window, the U.S. could have, for example, raised the price of gold to $200 and kept the system going for another 30 or 40 years. A move like this would have been the mathematical equivalent of increasing the Treasury's physical stockpile 5X to double what it was at the height of the Bretton Woods experiment.
But while that would have satiated the monetary transgressions of the past, it would have done little for the future. It would not have substantially changed the system to one of easy money. It would only have extended the old system of hard money....
Costata
"Note: when loans are defaulted, only under certain specific circumstances does the banks credit money, that was created by the banks through loans, cease to exist. "
I have given this a lot of thought considering FOFOA's post on it from a couple of years back. I agree that default doesn't destroy money - how could it take someones money of the system? - yet I believe even Another stated that default destroys fiat.
If you have any links or recommended reading you could direct me to on this topic it'd be greatly appreciated.
see this:
[Note: After the gold window closed, dollars surrendered for gold REMAINED in circulation!]
is hard money --> easy money
===============================
Moar from above link
credibility inflation is the expanding confidence in the fiat financial system to always deliver a higher payoff tomorrow than today. And through credibility inflation we ultimately destroy the currency structure by believing it can somehow deliver more than reality will allow.
Credibility inflation is the exact antithesis of price inflations like the 1970's. It is why we saw low consumer price inflation for the last 30 years relative to the massive monetary and financial product inflation. It is partly why we saw gold stagnant or falling for 20 years. Yet it is just as much a product of monetary inflation as regular price inflation is
"So a possible explanation that fits the known facts is that the USG had to have a higher oil price to defend the $IMFS if the rise in the price of gold had been made inevitable due to the partial withdrawal of support for the paper gold manipulation strategy by the Europeans (initiated through the Washington Agreement)."
Even though the dollar gold price had surged, the higher oil prices were allowing a percentage of those dollars to be converted back into gold at the old gold/oil rate.
As long as growth in the production of economic goods outstripped dollar price inflation, the dollar could be expanded to match the unrealized value held in oil.
==================================
Once Upon a Time
It is our obsessive compulsion to centrally control the price mechanism that sterilizes the vital signals that would otherwise be transmitted to billions of individual market participants keeping the monetary and physical planes connected.
[...]
So in the early 20s, along with raising interest rates and federal budget cuts, the US began a policy of gold "sterilization" to resist the natural price mechanism—inflation—that would have otherwise acted not only as a brake on the inflow of gold all through the 20s, but also as a spur on the struggling European economy:
Federal Reserve Sterilization of Gold Flows
When a country imported gold, its central bank could sterilize the effect of the gold inflow on the monetary base by selling securities on the open market…
Sterilization of gold flows shifted the burden of the adjustment of international prices to other gold standard countries. When a country sterilized gold imports, it precluded the gold flow from increasing the domestic price level and from mitigating the deflationary tendency in the rest of the world.
[...]
The flow of gold today is still sterilized by the paper gold trade within the LBMA bullion banking system that, by a recent LBMA survey, was around 250 times larger than the flow of new gold from the mines. That's a total turnover in the LBMA (sales plus purchases) of 5,400 tonnes every single day. That's the equivalent of every ounce of gold that has ever been mined in all of history changing hands in just the first three months of 2011. That's what the LBMA members, themselves, voluntarily reported. And that's a lot of paper gold that is still sterilizing the economically beneficial price mechanism that physical gold would otherwise be transmitting.
Yet things are changing, even today. That's what the rising price of gold since 2002 tells me. This is about much more than just a rising price. It's not just about a gold or even a commodity bull market. As FOA said, "it has everything to do with a changing world financial architecture." Gold's function in the monetary system is changing. And as FOA also said, "None of the other metals will play a part in this."
Hi Matt,
"FOFOA's post on it from a couple of years back"
To what are you referring? I second If you have any links or recommended reading you could direct me to on this topic it'd be greatly appreciated."
==============================
Michael H does not agree
"Credit money can default, but base money is here to stay."
JR
It could be that i misread one of FOFOAs posts (on hyperinflation it may have been) but the principle I took from it was that a default on credit money does not destroy the money itself. So that a shrinking economy can still have monetary inflation (ie the difference between economic deflation and monetary deflation).
So someone borrows some money from a bank to buy a car, loses their job and defaults on the repayment to the bank, entering bankruptcy. In that instance the loan agreement to the bank is broken but the money still exists with the seller of the vehicle. The assets shrunk but the money supply didn't.
I have given this some thought from the perspective of the banks ability to generate profit/pay dividends but could not clarify it in my mind, any links would be greatly appreciated!
costata,
”You appear to be assuming that the pice of oil "wants" to rise. What if its natural trend was to fall? How do you devalue the USD against oil when the price of oil wants to fall?”
“Raising the price of gold won't do the job. Oil would be falling in all currencies (relative to their exchange value in dollars) as well as gold.”
This scenario would mean that the gold:oil ratio would be falling, or said another way that gold would be getting more expensive in terms of oil. The question is, how much control would S.A. have over the gold:oil ratio in a case like this? Would they still pump if less gold was flowing their way?
I suppose this would revalue their gold reserves higher as well, as has been discussed would happen after the freegold transition. But here even their nominal (USD) revenues would be falling, which means there would be less surplus, if any, to save in gold! It’s a double-whammy.
This brings out another assumption I was making: that the value of gold and oil are related, though not necessarily at a fixed ratio.
I think ANOTHER agrees? “How do you get oil to rise? Today, we stop our CBs from selling gold!”
”More ominously if the price of gold alone rises it lays claim to the position of global oil currency for all of the currency issuers. The disaster that Another feared was imminent in the late 1990s.”
“So if gold was likely to rise anyway (post WAG) and oil was likely to fall (recession) you have to raise the price of oil as well in tandem with gold to obtain the devaluation you describe.”
I think I see what you are getting at. Let me paraphrase my understanding of your position so you can let me know if I have it right: Price of gold rises thanks to WAG. Price of oil must rise or else we face the end of the $IMFS. But the price of oil ‘wants’ to fall so the US invades Iraq, threatens Iran, and generally wreaks havoc on oil-producing nations to create uncertainty and increase the perceived precariousness of the oil supply, leading to the desired rise in the price of oil.
Back to assumptions. I am assuming the price of oil ‘wants’ to rise, because oil is getting harder to extract. No longer can you dig a hole in Texas and hit a gusher; you now need deep-water rigs, larger numbers of smaller fields, pumping water into the oil wells to maintain flow, etc.
I see the US’s actions in the ME as having two objectives: The first is to maintain the dollar-pricing of oil, by making an example out of Iraq and threatening Iran to keep it in line. The second is to keep the oil regimes US-friendly, by supporting them against possible popular uprisings, and keeping the Europe-ME or Asia-ME relations from becoming too cozy.
Your turn: you are assuming the price of oil ‘wants’ to fall. Why?
costata,
Can we discuss this bit in more detail:
”More ominously if the price of gold alone rises it lays claim to the position of global oil currency for all of the currency issuers. The disaster that Another feared was imminent in the late 1990s.”
This isn’t how I usually see “The disaster that Another feared” worded, so forgive me if I am not fully understanding. I thought ‘the disaster’ would have been if the price of gold continued falling?
If I’m a currency issuer, and gold is rising in price but oil is falling in currency terms, why would I be worried? Why would I use gold as a global oil currency when dollars are working so nicely?
That is, unless oil then refuses to sell for dollars and goes straight to gold pricing, but again, why would oil do that instead of just limiting the flow?
Matt,
"If I’m a currency issuer, and gold is rising in price but oil is falling in currency terms, why would I be worried? Why would I use gold as a global oil currency when dollars are working so nicely?"
Becxause "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"!
5/26/98 ANOTHER (THOUGHTS!)
Understand, all value judgments today are as subject to "exchange rate competition"! It is in "this exchange rate valuations" that the private citizen does denominate all net worth! A safe way to hold the wealth for your future, yes? You should ask a Korean or the Indonesian ?
One should grasp that "today, your wealth, is not what your currency say it is"! In this world, paper currency is for trade, only! It is for the buying, selling, earning and paying, not for knowing the value of your family holdings! Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"! Again, I ask, how can we know a true value for our assets, when they are known only in currency that finds it's worth, as in the exchange rate for another currency?"
Michael H,.
They needed the paper system to keep gold down while they got their new currency rolling. Until then, the battle was between the $ and gold and no one wanted to see the dollar lose and all paper burn. Now with the euro there is a currency that embraces rising gold, so rising gold does not mean a currency void.
If the price of gold alone rises...doesn't that sort sound like Freegold? A revaluation of gold with respect to goods and services, a reset of gold against the physical plane. See?
Freegold is a higher gold price when priced in STUFF, not currency. The physical plane. Yes, it will be a high currency price, but that’s not what it’s about. Freegold is about a high price of gold priced in oil. A high price of gold priced in silver. A high price of gold priced in houses, etc…
FOFOA comment
"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."
===================================
The world was not ready for Freegold, there was no euro to lubricate trade so they fought the natural market forces tending towards Freegold through the paper forward market tot keep gold in line with the physical plane (think gold to oil ratio) until the Euro came.
5/22/98 ANOTHER (THOUGHTS!)
If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will hoard all gold and buy any offered if this new European currency does not work" and "debt currencies fail". If this does come, no paper asset of world economic system will survive, nothing! Not a good thought, no? Thank You
6/4/98 ANOTHER ( THOUGHTS! )
The last small gold war ended in the early 1980s, as the choice was to use the US$ or go to a gold based economy. No other reserve currency existed, and gold lost the war as all continued to buy dollar reserves.
But by 1980, Europe was working with the BIS to implement a new "reserve currency".
The European plan was to support the $IMFS at least until a new fiat "reserve" currency could be established, one large enough to absorb the shock of a failing reserve currency, to avoid being forced back 100 years into a physical gold-based economy which would have been very traumatic. This effort took 20 years from 1980.
So the Euro came and gold started to rise. So The $USG needed high priced oil to keep pace. Do you see?
Sorry Michael didn't mean Matt.
That is, unless oil then refuses to sell for dollars and goes straight to gold pricing, but again, why would oil do that instead of just limiting the flow?
why...? what do you think?
I agree Matt,
It could be that i misread one of FOFOAs posts (on hyperinflation it may have been) but the principle I took from it was that a default on credit money does not destroy the money itself. So that a shrinking economy can still have monetary inflation (ie the difference between economic deflation and monetary deflation).
""Credit money can default, but base money is here to stay.""
JR - I understand the banks asset can default (borrowers libility) but what of the other side of the ledger? what is the mechanics of the banks liability being cancelled when the credit money is in use in the economy?
I assume it has something to do with the banks profit but I would love to clarify it.
JR,
”I thought ‘the disaster’ would have been if the price of gold continued falling?”
“insert the word paper? Why? Because the needed the paper system to keep gold down while they got their new currency rolling. Until then, the battle was between the $ and gold and no one wanted to see the dollar lose and all paper burm”
“They needed the paper system to keep gold down while they got their new currency rolling.”
“The world was not ready for Freegold, there was no euro to lubricate trade so they fought the natural market forces tending towards Freegold through the paper forward market tot keep gold in line with the physical plane (think gold to oil ratio) until the Euro came.“
Just to be clear, what I am discussing with costata is post-2000, post-WAG. So the Euro is already up and running, and the price of gold is rising. What costata is saying is, what if after all that, the price of oil still ‘wanted’ to fall?
” Becxause "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"!”
In this hypothetical, costata is saying that oil would judge currencies as more and more valuable with respect to oil.
”If the price of gold alone rises...doesn't that sort sound like Freegold?”
I addressed this in my comment. The price of gold would rise and the price of oil would fall – that is what costata was proposing. So oil revenues would drop in nominal terms, leaving less currency surplus for saving, and gold would get more expensive in currency terms so less of it would flow to oil. Would SA have been ready for that arrangement in 2000?
”Freegold is about a high price of gold priced in oil.”
”So the Euro came and gold started to rise. So The $USG needed high priced oil to keep pace.”
I’m not disputing that high priced oil is necessary for US policy post-2000. What I am questioning is costata’s proposal that the oil price wouldn’t rise in response to a rising gold price, but instead ‘wanted’ to fall, both in terms of currencies and in terms of gold.
JR, costata,
I can see that a rising price of gold priced in oil is not necessarily bad for SA, since it would revalue their gold reserves.
They would still be able to save their surplus in gold at the same value, even though the volume of gold that would flow to them would be less.
However, gold priced higher in oil coupled with gold priced lower in currencies would mean that the value of gold savings flow, and not just the volume, would decrease.
I am assuming the price of oil ‘wants’ to rise, because oil is getting harder to extract.
Ignore this stuff. We are talking about the pricing mechanism of a dying currency system, the $IMFS. The supply demand dynamics play out on a different time scale.
===============================
"Your turn: you are assuming the price of oil ‘wants’ to fall. Why?"
oil was likely to fall (recession)
Maybe some credibility deflation?
Michael H,
”More ominously if the price of gold alone rises it lays claim to the position of global oil currency for all of the currency issuers. The disaster that Another feared was imminent in the late 1990s.”
This isn’t how I usually see “The disaster that Another feared” worded, so forgive me if I am not fully understanding. I thought ‘the disaster’ would have been if the price of gold continued falling?
Which price of gold when?
JR,
”oil was likely to fall (recession)”
“Maybe some credibility deflation?”
What is ‘credibility deflation’? I would interpret the phrase to mean that the credibility that was built up in the $IMFS’s ability to deliver real goods and services at current prices was eroding. So, I would interpret ‘credibility deflation’ as ‘price inflation’ since the $-overhang would seek real values. Do you see it differently?
”I am assuming the price of oil ‘wants’ to rise, because oil is getting harder to extract. “
“Ignore this stuff. We are talking about the pricing mechanism of a dying currency system, the $IMFS. The supply demand dynamics play out on a different time scale.”
So we are looking at three forces: the economic business cycle (recession), the extraction costs, and the currency system. Why do rising extraction costs not lead to curtailed oil flow in the presence of falling demand, thus mitigating or negating the tendency of oil prices to fall, especially in light of reduced gold flow in the other direction?
If we ignore 'supply demand' forces, should we ignore the business cycle force as well?
” This isn’t how I usually see “The disaster that Another feared” worded, so forgive me if I am not fully understanding. I thought ‘the disaster’ would have been if the price of gold continued falling?
Which price of gold when?”
My interpretation of ‘the disaster’ would have been if the paper price of gold continued falling prior to the launch of the Euro. Which is why I wanted to discuss this part of costata’s response in more detail, since we are actually talking post-WAG, post-Euro:
”More ominously if the price of gold alone rises it lays claim to the position of global oil currency for all of the currency issuers. The disaster that Another feared was imminent in the late 1990s.”
“So if gold was likely to rise anyway (post WAG) and oil was likely to fall (recession) you have to raise the price of oil as well in tandem with gold to obtain the devaluation you describe.”
OBA,
I took the liberty. Hope you don't mind.
http://onebadadder.blogspot.com/
If you give me your email I will set you up as author.
Matt,
When and FI's balance sheet asset defaults its value falls to the recovery rate. Assuming the loss was larger than the risk reserves set aside, the equity account would take the hit.
Assuming the loss was larger than the equity account someone has to step in to recapitalize the balance sheet or the government steps in and the seizes the institution wiping out the bondholders first and wiring cash to guarantee the deposits to whomever takes over the assets and deposits for any amount the expected loss is greater than the institution's non deposit capital.
Deposits up to 250k are always made whole with cash from the government in the receivership process. So net, net the assets of the equity and bondholders vanish into the ether and base money is created to replace the value that would have been lost by depositors exposed to the defaulted asset through the FI.
Big bank failures = big forced base money substituion for credit on the other side of the ledger of the deposit.
Now, some argue that the derivatives holders are in front of the depositors in some cases which ups the scale of that potential transformation to levels that would change the nature of things instantly if the guarantee were triggered.
Hope that makes some sense.
HI Michael H,
Great thoughts and sorry to confuse mine with Costata. Here are a couple ideas I am pondering.
========================
What is ‘credibility deflation’? I would interpret the phrase to mean that the credibility that was built up in the $IMFS’s ability to deliver real goods and services at current prices was eroding.
Yay! The $IMFS is a system of debt.
I meant ignore the supply stuff for the purposes of looking at deflationary forces that are contractionary on economic activity and stuff like the price of oil, as that's no good when in such a time of credibility deflation gold is shooting up in price.
================================
Another:
Even though the dollar gold price had surged, the higher oil prices were allowing a percentage of those dollars to be converted back into gold at the old gold/oil rate.
As long as growth in the production of economic goods outstripped dollar price inflation, the dollar could be expanded to match the unrealized value held in oil.
===================================
FOFOA:
"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."
=================================
also you commented:
"So oil revenues would drop in nominal terms, leaving less currency surplus for saving, and gold would get more expensive in currency terms so less of it would flow to oil. Would SA have been ready for that arrangement in 2000?"
Is SA all that matters in this regard, and is 2000 all that matters too?
Cheers, J.R.
"The supply demand dynamics (of oil) play out on a different time scale."
JR, That's conjecture. For very good reasons, not only is the supply demand dynamic difficult, perhaps even impossible, to pin down, the timing of how PO, broadly defined, fully manifests is at least as difficult to know. And, however much we might want it to be otherwise, it is more than a little plausible that the currency issues under discussion are inextricable from PO supply demand dynamics.
Matt said:
”… the African trading block… we can envisage the world being broken up into trading blocks with their own currency system ala the Euro (or even based on the dominant currency for the region: Real in SA, Rand in Africa, Yuan in East Asia, etc) with gold being the valuation and settlement mechanism between each one.“
Gold is also the valuation and settlement mechanism inside each one too, is it not?
Try taking this trading block idea further, to its ultimate conclusion.
Can you see what I can?
Matt continues:
”As this process occurs, using the USD as the global reserve system becomes less and less of a realistic proposition. Yet another way that freegold will develop naturally as demand for the USD as global reserve currency is steadily superseded.“
Is it another way, or is it the way?
Is the $IMFS being supported to allow such international consolidation to have progressed as far as possible? Is the magnitude of the punctuation thus being reduced?
n.b.
these are two distinct topics, one for each of your quotes.
Blondie
I see optionalities, not certainties.
TF
Matt,
default on credit money does not destroy the money itself.
I don't think this is true. Here is how the bank balance sheet looks if you take out a loan and default.
Assets:
$100 Cash
Liabilities and Capital:
$100 Common shares
Now you take out a loan.
Assets:
$100 Cash
$50 Receivables (loan to Matt)
Liabilities and Capital:
$100 Common shares
$50 Liabilities (Matt's account)
You take the cash home:
Matt:
Assets:
$50 Cash
Bank:
Assets:
$50 Cash
$50 Receivables (loan to Matt)
Liabilities and Capital:
$100 Common shares
$0 Liabilities (Matt's account)
Finally, you phone in and say you will never come back. They write off the loan:
Matt:
Assets:
$50 Cash
Bank:
Assets:
$50 Cash
Liabilities and Capital:
$100 Common shares
-$50 Accrued capital gains/losses
Their shareholders' equity has shrunk by $50, and if they wind down the bank, their shareholders will receive only $50 of their initial capital of $100.
So by defaulting on your loan, you basically walked away with path of the 'savings' of their shareholders. The credit money that was created when you took out the loan, disappeared when they wrote down the bad loan.
Victor
This seems interesting :
Antifragility
I have great respect for Nassim Taleb.
TF
JR,
” "So oil revenues would drop in nominal terms, leaving less currency surplus for saving, and gold would get more expensive in currency terms so less of it would flow to oil. Would SA have been ready for that arrangement in 2000?"
“Is SA all that matters in this regard, and is 2000 all that matters too?”
‘Is SA all that matters’: no, not exactly. But around 2000 they were the swing producer, they were the ones that ‘mattered’ according to ANOTHER, and they were the ones who really like gold. So SA makes a useful proxy for oil in general, and it is reasonable to suggest that they have a large influence on the oil market.
Nowadays, costata has suggested that it is Russia who is the ‘swing producer’. So yes, maybe I should change the statement to read ‘oil’ instead of ‘SA’, and leave it more generic.
I chose the ‘2000’ year to mark roughly when gold started rising, and oil started rising, too. I believe that costata’s position was that, at this time, gold ‘wanted’ to rise thanks to the WAG, and oil ‘wanted’ to fall, but the trend of rising oil prices was put in place by USG actions in the ME etc. Again, I’m only paraphrasing and guessing at this position so we’ll have to wait until he can straighten me out.
Back your question. Would oil be ready *now*, for a falling $-oil price and a rising $-gold price? One difference between now and 2000, of course, is that oil is now near $100/bbl whereas then it was $15/bbl, so there could be room for oil to accept some oil-revenue downside in exchange for some reserve-revaluation upside.
The question is: under what conditions would oil be ready for that trade-off? It seems analogous to retirement after a life of hard work: the income declines but there are ample savings to live a rich life. When would oil be ready to start ‘cashing in their chips’?
If we assume that there will be ‘peak oil’, and oil flow will begin to wane in the next decade or two, then maybe that would be a good time for oil to ‘retire’. The question is: do the ‘oil planners’ believe that there will be a peak in oil, or not?
(And, if they did not believe that there will be a peak in oil, then why bother saving in gold, when oil will flow forever?)
ANOTHER: ”As long as growth in the production of economic goods outstripped dollar price inflation, the dollar could be expanded to match the unrealized value held in oil.”
Does this mean that: When dollar price inflation outstrips growth in the production of economic goods, the unrealized past value of oil will be realized in the future value of gold?
Hi Edwardo,
I agree:
JR, That's conjecture. For very good reasons, not only is the supply demand dynamic difficult, perhaps even impossible, to pin down, the timing of how PO, broadly defined, fully manifests is at least as difficult to know.
I'm not saying that's what is happening, I'm saying the idea was that with the PoG rising there would be an incentive on the part of the $IMFS to keep oil rising if it were too fall in a deflationary unwinding situation. A currency shock - big deflation - would present an incentive for the $IMFS to re-inflate. The supply demand stuff is separate for the purposes of looking at this idea we are discussing, not that they don't matter IRL or anything.
Hi Matt.
You are assuming that the loan you had for $50 remained in cash, and so was preserved.
What if it was invested as equity into a property deal, and then the property value fell, wiping out the equity? Or it was used to fund a business which then went bust?
Would those two scenarios not mean the $50 has gone for good?
When you spend/invest $50, you are just passing the money to someone else.
Yeah, I get the reverse argument from anti-gold bugs on some sites I like to visit to stir things up.
They say when you buy physical someone else is selling it to you, so net net it has no effect.
They have a point, so do you.
But I do feel if someone buys a property for $200,000, with a mortgage of say $180,000, and then the value drops to $150,000, someone has lost money!
If the property gets sold by the owner, he has lost real money, and if the bank foereclose and sell at a loss, they both lose.
Is that not the process that Another described, when the losses get papered over (well the banks' losses only of course). Is that not an example of credit money that would have evaporated being saved by new base money?
Or maybe there is a better example I just can't think of.
Please correct me if i'm wrong, but I thought that the disaster Another saw coming was that a group of central banks led by Germay's central bank had decided to stop selling gold. This would have caused POG to go to the moon, the dollar to implode.
I understood that the WAG was the compromise, allowing for a slower gradual rise of POG, while expanding paper gold.
Matt,
So someone borrows some money from a bank to buy a car, loses their job and defaults on the repayment to A (the) bank, entering bankruptcy. In that instance the loan agreement to A bank is written off (broken) but the money still exists with another bank in the system of the seller of the vehicle. The assets shrunk but the money supply in the system didn't.
So now there is bank credit money in the system which is unbacked by a performing loan. If this is happening on a large scale and goes unchecked what would we expect to see happening to bank balance sheets in the system?
A build up of liabilities right? Deposits at banks exceeding loans. This is the shrimp money (FDIC guarranteed).
Now factor in OBA's insight that short duration Treasuries are also (very near term) cash. This is the big money cash that is so far above the FDIC guarrantee it cannot take refuge in banks.
What responses would you expect from a CB that has as its primary function saving the banking system from imploding? Look at what they have done.
1. Dropped interest rats for depositors to virtually zero.
2. Guarranteed the supply of base money to replace the defaulted loans (in some channels explicitly in other cases via indirect means).
The list goes on.
Michael H,
If you don't mind I'll change your wording a little:
But the price of oil ‘wants’ to fall so the US invades Iraq, threatens Iran, and generally wreaks havoc on some oil-producing nations to create uncertainty and increase the influence of other oil producing countries without threatening (perceived precariousness of the) their oil supply, leading indirectly to the desired rise in the price of oil.
Your turn: you are assuming the price of oil ‘wants’ to fall. Why?
This is how the commodity oil responds to recessions. The price falls. It peaked at around $145 and fell off a cliff. Only finding solid support around $35. The V-shaped recovery in the price to $100 is the thing that requires a good explanation IMHO.
And when I say a good explanation I mean an explanation that doesn't involve reference to the monetary plane. An explanation from the physical/tangible plane.
What goods were so desperate to exchange "themselves" for oil that it pushed up the "price" as measured by the UoA from UoA $35 to UoA $100? Also bear in mind that the trading exchange only involves goods passing through the UoA in its role as MoE. The currency is not the final destination (or it would not be if the system wasn't completely corrupted).
costata,
"It peaked at around $145 and fell off a cliff. Only finding solid support around $35. The V-shaped recovery in the price to $100 is the thing that requires a good explanation IMHO."
What if, instead, what needs explaining is the huge cliff down to $35? What if the commodity price was relatively close to $100 throughout this period, but 'speculators' loading up and parking tankers of oil ran the price, and then the price crashed when all this inventory overhang was liquidated?
Michael H,
I thought ‘the disaster’ would have been if the price of gold continued falling?
The BIS put a floor under it at $280 but it was already too late. The price was below production cost and the physical supply (flow) was wholly inadequate to meet demand and/or cover the paper gold claims. It had to be met from stock - CB stock.
I could be completely misreading Another of course. But the "disaster" he feared was oil bidding for gold. In other words gold becominng the oil currency in the place of a failed US dollar.
This is all about international trade at the end of the day. That's what the Giants are attempting to protect at any cost to currencies, individuals and individual nations IMVHO.
If I’m a currency issuer, and gold is rising in price but oil is falling in currency terms, why would I be worried?
Why would you hold US dollar reserves to buy gold when gold is buying so much more oil?
Why would I use gold as a global oil currency when dollars are working so nicely?
In the scenario I presented dollars aren't working nicely.
That is, unless oil then refuses to sell for dollars and goes straight to gold pricing, but again, why would oil do that instead of just limiting the flow?
Forget what oil producers want. Think about what the buyers of oil want. The most oil for their money. If gold gives them more oil then logic demands that they exchange dollars for gold in their reserves.
Michael H,
In this hypothetical, costata is saying that oil would judge currencies as more and more valuable with respect to oil.
No he isn't Michael H. He is saying that in this hypothetical gold is rising against both oil and the dollar (the UoA and MoE for oil). Assume the currency price of oil is stable if it makes it easier to grasp the effect of a rising gold-oil ratio on the $IMFS.
So oil revenues would drop...
So you solve that revenue problem by pumping more oil to sustain your revenue. Having what effect on the price?
Think about oil absent OPEC. Price takers historically not price makers. Think about the ME. A one trick pony when it comes to exports. No oil sales no food to eat! Now factor OPEC back into this picture. How did it change the balance of power?
Did it give the ME power over the Anglo-American interests? Or did it create the "indissoluble partnership" that (from memory) King Faisal called it.
Now consider the SA gold as their insurance in the event that the "partnership" was dissolved as a result of the failure of the US dollar.
What if, instead, what needs explaining is the huge cliff down to $35? What if the commodity price was relatively close to $100 throughout this period,
In a recession oil would be more valuable. Is this the assertion?
... but 'speculators' loading up and parking tankers of oil ran the price, and then the price crashed when all this inventory overhang was liquidated?
Where are the bankruptcies from getting caught holding all of that inventory? Perhaps it was sold during the pump and then shorted to profit from the price collapse. If so, remarkable foresight on the part of those 'speculators' BTW.
Returning to something I said earlier:
Perhaps the price discovery mechanisms are so profoundly corrupted that the wrong price signals are being sent. If that's the case what do prices tell us? Perhaps they tell us more about currencies (and debt loads) than the resources that are priced in currencies.
PS. I don't recall describing Russia as a swing producer. If I did I would like to correct that now. I don't hold the view that they are a swing producer.
Costata,
I don't think you're right about this:
"the "disaster" he feared was oil bidding for gold. In other words gold becominng the oil currency in the place of a failed US dollar"
I believe that Another had complete confidence in the success of the Euro. I also don't think that the falling gold price was a big concern either.
Consider this:
ANOTHER (4/25/99; 13:59:43MDT - Msg ID:5139)
............"In many ways we did wish to see gold fall below $280us. It would have forced the BIS to openly buy to support price so as not to destroy the Euro package and drive producers into physical gold.".......
also this little bit regarding oil demand is quite interesting:
ANOTHER (03/20/99; 20:55:38MDT - Msg ID:3647)
...."Oil demand is broken from dollar default, not less requirement of oil for manufacturing need."....."My friend, the drive to save oil demand does also save world commerce! This move to Euro, it is done for benefit of all and the one world we share! The devaluation of present reserve currency does bring loss of IMF environment and asset impairment for some, however, it finds freedom for
production expansion in the home of many, many more!
"the demand for oil is as the demand of humans for things, define this demand and you will number the need for oil"
"
Also I know he had something to say about the wrecked price discovery of all real things. I'll see if I can find it.
Here's another bit about the $280 gold floor:
FOA (5/26/99; 20:00:20MDT - Msg ID:6766)
"At some point in time, the BIS would help deploy a new reserve currency that could be used to "settle" all paper gold trades that could not be closed, to the benefit of the paper gold holders. To further encourage / guarantee this "new market" the BIS would not allow gold to fall under
$280. With the successful launch of the Euro, the BIS / ECB will now allow the paper gold market to "implode" from it's own weight! As such, we arrive at today's point with gold
ownership, some ten times what it was during the 1980s. Most of this "dollar contract" gold cannot and will not be delivered, because "there was never enough gold to satisfy these contracts at present dollar prices"!
Yes, implode in time, but not extinguished overnight in a fire set by Germany??
Yes, implode ,,, in time,,,
FOA (5/31/99; 21:10:17MDT - Msg ID:6943)
"I think the $280 price was based on an old formula they used long ago.
I'll offer it later when I have more time. Also note that the Euro was
never to rise against the dollar until the dollar fell from it's own
weight. The Euro was to become the "fallback" reserve currency that
received the flight from a failing IMF / dollar system."
Bundesbank sinks deeper into debt saving Europe
Germany's Bundesbank has entirely exhausted its stock of private assets and run up a quarter of a trillion euros in liabilities propping up the eurozone system, testing the political limits of EMU solidarity in Germany
http://www.telegraph.co.uk/finance/financialcrisis/9055142/Bundesbank-sinks-deeper-into-debt-saving-Europe.html
Hi Wendy,
I agree Another had confidence that the Euro could perform the tasks expected of it. I should have added "before the Euro was launched" and perhaps added "and accepted".
My interpretation of his concerns is that if the paper gold market had collapsed before the Euro was ready then oil might bid for gold in the absence of an alternative to the dollar.
I misunderstood costata, I thought you were talking post Euro entry. My apologizies :)
No need for any apology Wendy. I should have been more precise.
costata,
here is my understanding of the oil price drop from $140 to $40 in 2008. Between fall 2007 and summer 2008, it was very popular among hedge funds to be long gold, oil, commodities and short banks.
Then, in summer 2008 this trade was shut down abruptly. Firstly, some countries made it impossible to short bank stocks, and so the hedge funds had to sell the other leg of the trade as well: gold, oil, etc. Secondly, at least from September 2008, the big banks were running out of cash and no longer allowed the hedge funds any leverage.
Although the spot oil price crashed to $40, the longer maturity contracts, say longer than 6 months, did not. They stayed around $80 if I recall correctly.
At that time, all storage facilities were full and everyone rented oil tankers, filled them up and anchored them in the next bay, just in order to capture the huge contango. At the end of 2009, the oil price was indeed back at $80.
enough,
Germany's Bundesbank has entirely exhausted its stock of private assets and run up a quarter of a trillion euros in liabilities propping up the eurozone system
Don't worry - they will be paid in gold, probably on day X+1 albeit at the new price rather than the old one.
Victor
comment
Nickelsaver: -
You do me an honour Sir -
That is GREAT!!
I'll flick you my email via your Blog.
At least the details will be readily available when (OK ...if) it devolves as expected.
Mucho Gracias Nickel.
Just a dumb question:
Why can MMT not work? Like Another wisely stated: Isn't it the receiver who determines the value of the received "tokens"?
And as FOFOA so wisely stated AFAIR roughly: Money is only a fog over the real wealth/physical capital.
I view it, that you can stir that fog around and pour as much additional fog into it however you want to, there is no natural law how that fog has to behave, it is just a human assumption/illusion and only by that the connection to the underlying physical plane happens to be.
e.g. I don't see why even -10% yields from CB to governments to infinity has to change the human assumption that this fog has "value" as long as people believe in it and confuse it with the physical plane underneath itself. Or have no other choice than to OBEY to it as serfs.
Can somebody help me on that one?
Greets, AD
P.S. According to FOFOAs HI explanation, I have the impression we are already in full blown HI, except it is happening in very slow motion from the point of human preception.
OBA,
Looking forward to your first post at the new blog* — perhaps it will be one to explain this curious phenomenon?
Sincerely,
DP :-)
* I would also like to take this opportunity to get in the first proposal for your new blog's theme tune. I hope you like it.
AD,
FOFOA addresses MMT in Moneyness.
Hi Gary,
But I do feel if someone buys a property for $200,000, with a mortgage of say $180,000, and then the value drops to $150,000, someone has lost money!
If the property gets sold by the owner, he has lost real money, and if the bank foereclose and sell at a loss, they both lose.
When you sell a house (or any other wealth asset) for less money than you paid for it, you are not taking money out of the system.
First you bought it for $200,000 - you passed that $200,000 of money to someone else and it is theirs [for the time being, until they themselves exchange it for some wealth asset].
Then you sold the house for $150,000 - someone else passed you $150,000 that was in the system already at the point it came to you (perhaps it was created immediately before as a loan to the buyer, or perhaps they actually had it in savings or from the proceeds of selling some other asset they owned... whatever.) If you can't find the $30,000 to repay the bank the shortfall of your loan, you go bankrupt... but this still doesn't make the $30,000 appear like magic from somewhere.
So, yes, a bad speculation resulted in a partially unpaid loan of bank credit money. Monetary deflation.
As you rightly say, the bank is short of $30,000 that is on its balance sheet as a receivable, but isn't going to become received after all. In the natural course of events, and if there were enough of these loans going sour, this might result in the bank(s) themselves becoming insolvent. They would not be able to honour all their own promises to repay their own creditors (depositors and other banks - which owe it to their own creditors, etc etc).
But fortunately for us, there is a lender of last resort in each zone of our global monetary system, who will buy the souring loans from the banks for close to face value using fresh base money (aka QE). The banker's credit money is swapped for base money, which becomes a permanent feature of the money supply. And then the credit money is allowed to serve out whatever time it has left on this earth, before the central bank takes it out back and adds it to the funeral pyre with all the others.
My point being that the crystalisation of reduced nominal value of the house, doesn't in itself mean money is removed from the system. That only happens because someone borrowed money to fund an ill-fated speculation. They bit off more than they could chew.
#Money≠Wealth ... a house (or gold) is a wealth asset. Money is not, it's an accounting unit. And today it accounts for value that a borrower promises to add to the world in the future.
Is that not the process that Another described, when the losses get papered over (well the banks' losses only of course). Is that not an example of credit money that would have evaporated being saved by new base money?
Yes - well done. ;) The banks are being saved, in order to ensure their creditors are saved. At least in nominal terms. If this didn't happen, those creditors would turn tail and abandon the debt-based international monetary and financial system (aka $IMFS). And we can't have that can we? Bartertown is cold at any time of year.
FOA: My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)
Deflation - it's got what nobody needs.
There's not enough music around here lately, it must be time for some cherry pie to (in the absence of Kim Kardashian's butt) cheer us up a little. I hope y'all like pie?
Sorry, no cream today. I don't feel like cream today, so I'm afraid you're not having any either.
DP,
Sorry mate wrong:
The banks are being saved, in order to ensure their creditors are saved.
:-) Good mor... evening!
I will welcome your more in-depth correction?
Hi Jeff,
thanks for the advice to Moneyness, I read it before and read it again, but still I have not found any real answer.
More or less the opposite, an indication that MMT worked quite well:
FOA (10/8/01; 08:04:08MT - usagold.com msg#113)
Gold on the trail.
...international political use, the cast is set for the world to find said fiats useful limits, then drop it from use; that is super price inflation as a result of fiat replacement. To this end we come.
So what we got here? Somebody ten years was screaming "The End is Near".
I think that the last ten years the US never got a better free ride than before. So appearently it worked even better since FOA anounced THE END.
Thanks anyway Jeff, maybe somebody else has a better idea.
Greets, AD
AD,
Just a hint: have you seen the new fangled insurance on debt that was "invented" since 2000 to mitigate the risk of holding debt?
That was brand new (CDS or credit default swaps only took off in 2002-2003 for example). The mathematical limit on those is now near.
So we need something new to insure the uninsurable. Maybe it will come. But what if it does not?
Hi Aquilus,
sure. Thats what I am saying. We just design CDCDCDSSS or IMFbonds or Eurobonds install an EFSF and afterwards an ESM or just a "solidarity-Hair-cut" here and there.
I see absolutely no technical limit, modern computer with 64bits can handle that;)
Greets, AD
Of course you will try. 2 pesky things though:
- that pesky CONFIDENCE,
- 2 to the 64th power, even followed by 2^128 is still a mathematical limit that can be reached (but won't because of that pesky, pesky word: confidence)
Or... we could all just dump our dollars to buy euros, which we'll take to the ECB to retire them in return for their gold. Like pre-71 dollars.
Wait. Did somebody just say Kim Kardashian's butt? Where? I love this blog.
Aquilus,
don't worry about about confidence.
Funny, really no joke, but just recently I had a discussion with a vice president of an international multi billion dollar company.
There is absolutely NO consciousness about the difference between money and value. Really absolutely not, not at all. We did not discuss that in these terms, I wouldnt dare to even mention that on the sideline, but still it showed up during the meeting in the way of his talking on certain issues.
Greets, AD
Hi Peter,
or everybody just buys swiss francs... Upps, as it has shown: no problem, just keep you finger on the printer.
I did not hear any swiss sheeple scream being slaughtered, not at all, they have been even happy since now they are allowed to work more.
Greets, AD
@costata,
I should be more specific, drawing a distinction between:
US/UK banks (who are not taking any losses because their CBs are simply buying any and all toxic sludge from them)
and
Eurozone banks (who are being offered loans through the LTRO, if they need more base money to keep themselves solvent ... they'll have to work their little bootys like the rest of us, to pay down their loans).
FMP? :)
Yup AD, just about the whole world thinks in nominal terms. Works for me if it works for them.
Still can't find Kim's butt.
Now I can't even find my own butt.
Oh no there it is.
AD,
Just one quick thing before mornings meetings he in US - of course, since corporations are not the ones that start the avalanche.
I deal with that every day here, but don't look at CEOs to be money theorists.
Do look at cash on sidelines from companies as one thing they DO understand: if credit lines get pulled by banks like in 2008 they need to self-fund for 6 months. That is just some of the money that OBA sees in short term bills. Some!
Anyone care to comment on this?
http://www.dailymail.co.uk/news/article-2095535/Bank-Englands-glittering-stash-156BN-gold-bars-stored-canteen-London.html
The UK has 4600 tonnes of gold? Not according to Wikipedia anyway.
http://en.wikipedia.org/wiki/Gold_reserve
What is the truth? How much of that is really UK gold? Is it a PR stunt? I mean it's a bit of an odd story isn't it?
Three-foot long keys are needed to unlock to the doors that guard the rooms holding the gold - but sadly not all of it belongs to us.
Some is deposited by foreign governments as well as our own.
AD,
How does MMT work on the physical plane, where we actually live?
FOFOA: Like I said earlier, the monetary plane, which includes all that nominal sovereign debt in Europe, is only connected to the physical plane by two things, the price of goods and services (CPI or the general price level, on which the ECB has a mandate) and the price of gold (which the ECB happily floats). I think we can all agree that the aggregate debt is doomed at today's prices. It is fictional, imaginary capital.
Hyperinflation is initiated when the physical plane stops bidding on the monetary plane with physical goods. Not when the monetary plane bids up the physical plane with lots of paper. The latter is the necessary reaction to the former.
In today's monetary plane, enormous amounts of wealth are held as "someone else's thoughts of value" not value itself. And as ANOTHER once said, "time moves the minds of people to change, and with this, the thoughts of value also change. In this day, as not in the past, the loss of paper value as a concept will destroy the very foundation of wealth that this economic system is built on. This drama has started and is well underway!"
Jeff,
thanks for the quote. What you quote we can call a thesis or a statement, yes?
Personally looking at human mankind I do not see that over all, actually more the opposite:
On one side socially more and more people are loosing the meaning of "value". Just ask somebody if he could or how he would distinguish between value and price.
Ask somebody after he received a fiat promise, if he now is really paid. People will stare at you moronically.
On the other side more and more legal actions are taken to force everybody into this ponzi scheme (thinking).
Just
Greets, AD
AD, you say 'On one side socially more and more people are loosing the meaning of "value".
Another way of saying it is that the monetary plane is getting farther and farther removed from the physical plane? How long can this continue? Which one is more likely to correct, will physical reality conform to the monetary plane or vice versa?
Jeff,
in "life on the ants farm" FOFOA described the "brain" of the superorganism. So the consequence would be when the monetary plane is completely out of sight, the physical plane will as well slowly die. MMTs says, no it wouldnt. I say, I don't know.
But what I think I know: Maybe one day the people will notice that, ask I said, MAYBE. But once that will be noticed and the promise bubble bursts there will never ever be a fiat promise around for generations: nope, no freegold.
I can remember old people going to the banking desk, taking out there money and paying it back in, just to check if it was there. And that was a generation without internet, without almost no questions ask, obedience... So image the social backlash this time, with a society completely nonviable on its own, compared to the earlier times.
Greets, AD
I can remember old people going to the banking desk, taking out there money and paying it back in, just to check if it was there
Now that's funny!
Right, FRB fans? %<];o)8
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