Sunday, February 19, 2012

Yo Warren B, you are so OG!


Tell me why are we, so blind to see
That the ones we hurt, are you and me

-Artis Leon Ivey Jr. (aka Coolio)

I'd like to sincerely thank Warren Buffet for so clearly making many of the points I've been trying to make lately in his most-recent submission to Fortune magazine. If anyone hasn't read it yet, it's called 'Why Stocks Beat Gold and Bonds' and you can read it here. Of course, with the King of Bonds himself ringing the closing bell on the bond market just last month, I'm guessing that Warren was aiming at gold more than at bonds with this piece. Bless his heart. Yo Warren B, you're so OG (but your aim ain't quite what it used to be)!

Alrightythen, let's just tear into this juicy carcass and have us a feast!

Warren B: Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire Hathaway (BRKA) we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power -- after taxes have been paid on nominal gains -- in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.

Indeed it is! And "saving" (unlike Warren's "investing") is the forgoing of consumption now in order to PRESERVE that purchasing power for a later date. The difference between a saver and an investor is that saving is the passive activity of most people while investing requires a tolerance for the risk of loss and active, specialized knowledge and focus. As I wrote in both Glimpsing the Hereafter and The Studebaker Effect:

"A saver is different from an investor or a trader/speculator. A saver is one who earns his capital doing whatever it is he does, and then aims to preserve that purchasing power until he needs it later. Investors and traders aim to earn more capital by putting their already-earned capital at risk in one way or another. This takes a certain amount of specialization and focus."

Warren B: From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.

Very good! Yes! Risk is the reasoned probability that you will lose purchasing power over a period of time. Listen up if you happen to be a Berkshire Hathaway investor reading this. I have been spending the last three years working out the reasoned probability that you will lose purchasing power in the near future with your BRKA investment. And over that same holding period, physical gold in your possession is "reasonably certain" to deliver a massive increase in purchasing power. Warren is correct, nonfluctuating assets can be laden with risk while at certain times, the very safest asset will be revalued. Again, as I wrote in both Glimpsing the Hereafter and The Studebaker Effect:

"Today the system is in transition, so you can throw your ideas about these differences out the window. There is no safe medium for simple preservation of purchasing power when the entire system shifts from the old normal to the new normal. When systems implode, the safest place to be pays off big time!"

Warren B: Investment possibilities are both many and varied. There are three major categories, however, and it's important to understand the characteristics of each. So let's survey the field.

Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as "safe." In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.

Yay! Warren and I agree again! Investments denominated in currency may be nominally safe—if you expect to have a million dollars after a given holding period, you WILL have a million dollars at that future time, but you may only be able to purchase a single roll of toilet paper with that million—but their risk in real terms (purchasing power terms) is HUGE… especially today! It almost seems like Warren has been reading some FOFOA. In any case, here are a few applicable posts that he might have studied:

Moneyness
Deflation or Hyperinflation?
Big Gap in Understanding Weakens Deflationist Argument
Just Another Hyperinflation Post - Part 1
Just Another Hyperinflation Post - Part 2
Just Another Hyperinflation Post - Part 3

Warren B: Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as "income."

Yup! Warren's been around for a long time, alright. And it just goes to show how tough it has been during our entire lifetime for a saver who simply wants to preserve her purchasing power. She has to chase a 4.3% yield every year just to stay even! Crazy, isn't it? What if there was a way to perfectly preserve your purchasing power over any time horizon without chasing a yield? To what percentage of the population do you think that would appeal? Better yet, to what percentage of Warren B's clients do you think that would appeal? Just sayin', what if?

Warren B: For taxpaying investors like you and me, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This investor's visible income tax would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. It's noteworthy that the implicit inflation "tax" was more than triple the explicit income tax that our investor probably thought of as his main burden. "In God We Trust" may be imprinted on our currency, but the hand that activates our government's printing press has been all too human.

Word. The one-time tax on nominal gains is bad enough, but the vanishing of savers' purchasing power through inflation is the real killer over long time-frames. But why you gotta conflate the issues of real income from an investment and simply protecting one's purchasing power with the least risk, OG? Is this part of your game? Why yes, I dare say I think it is!

Warren B: High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments -- and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.

Holla, G! Maybe the warning label should read – Nothing about this bond, packaging or color should be interpreted to mean safer? How 'bout this one for Berkshire Hathaway – Savers beware, we will try to do more than preserve your purchasing power at the risk of losing your purchasing power, but either way, I was in first, I'll be out first and I always get my cut?

Warren B: Under today's conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be. Accommodating this need, we primarily hold U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions. Our working level for liquidity is $20 billion; $10 billion is our absolute minimum.

I will only note here that, although the link leads to data about bonds, Warren specifically wrote bills which usually means a duration of one, three or six months. Since there is no FDIC protection for cash accounts with $20 billion, T-bills are the guaranteed cash equivalent. This, of course, brings to mind OBA's Time-Currency Theory referencing the subzero-bound $IRX as well as my conveyance of his theory over the years.

Warren B: Beyond the requirements that liquidity and regulators impose on us, we will purchase currency-related securities only if they offer the possibility of unusual gain -- either because a particular credit is mispriced, as can occur in periodic junk-bond debacles, or because rates rise to a level that offers the possibility of realizing substantial capital gains on high-grade bonds when rates fall. Though we've exploited both opportunities in the past -- and may do so again -- we are now 180 degrees removed from such prospects. Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: "Bonds promoted as offering risk-free returns are now priced to deliver return-free risk."

Ah, now here we start getting a glimpse of Warren's actual game! Notice the word "mispriced" in the above category. This is a key to Warren's strategy, which begins to expose the reasoning behind why he would choose to share this part of his shareholder newsletter with the general public. I realize he's talking about bonds here, but this principle applies to stocks as well (although not necessarily to gold).

Warren likes to buy and sell things that are "mispriced". That is, he knows better than the market the true value of things. And if they are "mispriced" he is, in fact, making money off of the mistakes of others if he turns out to be correct. Bear in mind that I'm not judging him on this issue per se, but simply exposing his game in a way that was most definitely concealed in this latest "newsletter".

Warren, like his lieutenant Charlie M, wants you in the same paper he likes to buy and sell so that he can capitalize on your "mispricing" mistakes. As I wrote in The Value of Gold, price and value are two different things, and that's Warren B's game:

"Probably the most common misconception is that price and value are the same thing. They are not. They are related but different. Price can be precisely known, but true value can only be estimated or guessed. And because price changes, price is always wrong while true value is always right, even though it is unknown. So price and value are always different. Value is always either higher or lower than price."

Warren will tell you that it's not just about capital gains. Warren LOVES yields, be they high rates of interest or dividends from stocks. But the thing about chasing yields is that the more people chasing, the lower the yield goes, and that's when Warren strikes. That's when things become mispriced. If he was only after yields, he would not want to let the world know what he's doing. But since he's publishing his drive-by on gold in Fortune magazine, I can only assume he's really after the capital gains that will come from the mispricing that will result from millions of people following his "advice".

Warren B: The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce -- it will remain lifeless forever -- but rather by the belief that others will desire it even more avidly in the future.

What Warren is referring to here are sometimes called "hard assets". They are durable, physical items that generally hold their value well because people always seem to want them. Like well-preserved classic cars, quality antique furniture or rare baseball cards, hard assets do not generate yields like stocks and bonds. And so Warren is invoking the greater fool theory with regard to hard assets (before even revealing to you the specific one he's targeting) to lay the foundation that YOU are the fool if you think these are a wise way to store your savings.

In fact, if you click on the greater fool link above, you'll find Warren's name right there in the last line. You might also want to click through and read the Keynesian beauty contest principle of stock investing. Warren tells us later just what beautiful stocks look like. They look like Coca-Cola and See's Candy. But if too many people chase those yields, they disappear and even great stocks like that can become mispriced. And that, my friends, is when OG sells!

For example, Berkshire just sold out of its entire position in ExxonMobil after the price surged 17%. Berkshire also sold off Johnson & Johnson and Kraft shares. Fine companies with lots of earnings, so why sell? As for Coca-Cola, that's one of Berkshire's biggest holdings right now! Just sayin'.

Warren B: The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

AMEN! Thank you brother. "If you own one ounce of gold for an eternity, you will still own one ounce at its end." Warren's words, not mine. But I'll bet you that I will be milking this quote for a long time to come!

Remember earlier I asked, "What if there was a way to perfectly preserve your purchasing power over any time horizon without chasing a yield? To what percentage of the population do you think that would appeal?" Well, what if physical gold, that singular hard asset that is also held by central banks (precisely BECAUSE it has the fewest industrial uses), was on its way to becoming the singular global reference point for purchasing power, instead of the dollar with everyone chasing a 5.7% annual yield making it harder and harder to catch?

"If you own one ounce of gold for an eternity, you will still own one ounce at its end." In other words, perfectly preserved purchasing power. See? Please read my post Reference Point Revolution for more on this transition that's already underway.

Here is what I am suggesting. That Warren Buffet is the one, regardless of his protestations to the contrary, who is practicing the greater fool theory and the Keynesian beauty contest principle of investing while we, my friends, are the ones who are smartly front running the network effect (aka demand-side economies of scale) and the focal point transformation of the biggest thing in a thousand years.

Warren B: What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while.

On the contrary, homey, it's that the dollar is so overvalued because of the sheer weight brought on by the fact that all dollar "wealth" has a counterparty, and that those counterparties in aggregate can't POSSIBLY perform to expectations in real terms, that a massive adjustment is not only inevitable, but long overdue. EVERYTHING is mispriced right now because the dollar is so massively overvalued at present. And while I can't speak for all gold investors, I'm not buying gold because I think the ranks will grow. In fact, I think the ranks will ABANDON "gold" at the worst time in all of history.

As I wrote in a recent comment, "My scenario… ALL TRADERS dump ALL gold, paper, physical, whatever, in my scenario. It has nothing to do with insiders. It has to do with traders and weak hands." But that's a difficult concept to wrap your head around. If you'd like to try, I wrote about it in my 2010 post, The Shoeshine Boy. The point here is that the true gold thesis is not "the belief that the ranks of the fearful will grow." That is simply Warren Buffet's unfortunate misunderstanding of the gold thesis.

Warren B: Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the "proof" delivered by the market, and the pool of buyers -- for a time -- expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: "What the wise man does in the beginning, the fool does in the end."

It is so incredibly striking to me that "the best of the best," the Oracle of Omaha himself, is still reciting these same tired old arguments. It simply defies logic that Warren Buffet is comparing gold to the housing and dot-com bubbles to save you out of the goodness of his heart. If he doesn't want you engaging in a "bubble", it's only because he wasn't there first. In fact, there are plenty of gold bugs who actually THINK gold will eventually be a bubble, and that's precisely why they're in it. But not me.

More than two years ago I debunked the ridiculous and shallow comparison of gold to past bubbles in Gold: The Ultimate Un-Bubble:

"And since gold production cannot be ramped up to meet demand like it can in bubblicious items, there is no reason for gold to fall back. Gold mining does not debase gold in the same way that dollars, tulips, homes, Dot Com IPO's or government bonds are debased through production. Mine production is taken from known reserves that are already valued, owned and traded, and all gold on the planet Earth is a fixed amount, the same fixed amount it was a million years ago. All we do is move it around, like poker chips on a table, to those savers that value it the most.

Furthermore, the price of gold is completely arbitrary. This means that gold can go as high as the people of Earth want to take it without EVER exceeding objective valuations by common metrics like earnings, interest or the sum value of its component elements. Gold IS the element. It cannot be broken down further, except perhaps by the LHC.

One of the most common criticisms of gold's use as an investment is that it cannot be valued the way stocks, bonds and real estate can. They are all commonly valued by their yields, and gold has no yield, therefore it cannot be fairly valued, or so the argument goes. But if we invert this argument then gold can never be OVERvalued either, whilst those other things can, and are... in a bubble!

The price of gold is arbitrary, ergo, there is no such thing as a gold bubble."


Of course that is not the whole story, it's only a teaser from the post. But the point is that if Warren Buffet is truly avoiding gold because he thinks it's a bubble like Pets.com or Miami condos, you should really question EVERYTHING that comes out of his mouth. Now I will admit that PAPER gold is a bubble, but physical gold? Never!

Warren B: Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.

Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

No, and neither can I imagine a saver with a regular job, a life to live, an aversion to risk and a desire to merely preserve his purchasing power wanting to own a bunch of oil and farming companies. Besides, if Exxon Mobil is so profitable, why did Warren just sell his entire stake in it? Could it be that even profitable companies become mispriced (overvalued) when everyone is chasing a yield?

Okay Warren, can I imagine an investor with $9.6 trillion buying all the gold in the world? Of course not. No choice could be more stupid if such a person could exist. As I have written many times, gold would be completely worthless if one person (or even just a few people) owned it all. Gold's greatest value comes from its widest distribution amongst savers, and the greater the value, the more efficiently gold performs its primary function. It is a virtuous and self-sustaining feedback loop. From Relativity: What is Physical Gold REALLY Worth?:

"One of the unique characteristics of gold that sets it apart from commodities is that its primary use - store of value - has no weight or mass requirements. In commodities, where industry is the primary user, weight is critical.

[…]

One ounce [of gold] could do just as good of a job as 100 ounces. In fact, one ounce would do a BETTER job than 100 ounces! The less gold it takes to store your value, the better it does its job. This particular “gold dynamic” sets it apart from all commodities.

One ounce would store your value more efficiently and stably than 100 ounces because A) your storage and security costs would be lower (efficiency), and B) if one ounce is worth $100,000 then that infers gold is being valued by many more people relative to when it was $1,000 per ounce. This wider distribution brings with it a more stable base of valuation and less relative volatility in price (stability).

Comparing this “gold dynamic” to any industrial or food commodity we can see a stark difference. What commodity could perform its job BETTER at a price 100x higher than today? Can you name one?"


And from a comment in 2009:

"Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now. A higher valuation denominated in hard assets, not just fiat currencies!"

And another comment from 2010:

"Just look at the BIS' own gold actions. Their owned gold hoard has shrunk from 194 tonnes to 120 tonnes over the last 6 years, as has the entire Eurosystem's hoard over the last decade (from 12,576 tonnes down to 10,833 tonnes). Most gold movements in Europe have either been lateral reshuffling or dishoarding and encouraging citizens and other entities to start hoarding physical gold themselves.

I have written this before... if you were King of the World with 35,000 tonnes of gold in a world of 160,000 tonnes, you would gladly - happily - reduce your "stash" to 10,000 tonnes if that reduction came with a 50x revaluation. Trying to get ALL the gold into your hoard is a fool's strategy."


Like I said, Warren, buying all the gold in the world would be about the dumbest thing such an investor could possibly do, kinda like a doctor owning an oil company and calling it savings.

Warren B: Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers -- whether jewelry and industrial users, frightened individuals, or speculators -- must continually absorb this additional supply to merely maintain an equilibrium at present prices.

Hahaha! B's worried about who's gonna buy up the annual physical gold production? How about who's gonna keep buying the annual paper production bearing dubious counterparties in the upper left-hand corner? I think it's Warren B who is worried about who's gonna keep buying the stuff he's into.

With well over $100T in cash, cash equivalents, debt and equity investments posing as savings for the risk-averse, I think it's more than safe to say that ANOTHER had it exactly right when he said that the paltry $160 billion flow of gold is (and has been for a long time) cornered. Heck, nearly a third of that is going to India alone, and they aren't even one of the surplus nations like Saudi Arabia, Germany or China!

Warren B: A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Fondle the cube? Alrightythen, no more Mr. Niceguy here either. Once again, Warren, why did you sell Exxon if it's so great and saving money is all about dividends and earnings rather than taking (OPM) money from the greater fool? What a hypocrite! Is it also possible that companies can be mismanaged, like, say, BAC?

Here are a few other "good companies" that Berkshire dumped since it (BRKA) took a 50% nose-dive in 2008 (actually late 2007 to early 2009): Nike, Comcast, Lowes, Home Depot. And in case you are still under the illusion that OG is all about solid, benevolent analysis rather than political monies for OG's pocket, his company is still the largest shareholder in Wells Fargo (NYSE: WFC) and "he has practically bought at any chance he gets." Nothing against Wells Fargo (I have an account there) but this, combined with his drive-by assault on gold (the hard asset preferred by those who actually produce stuff) should settle any debate about whether or not he carries a bias in his baggage.

Warren B: Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

"Pile A" does not compound. It simply remains. Remember? "If you own one ounce of gold for an eternity, you will still own one ounce at its end." That said, there's no guarantee that pile B will be worth more than pile A in 100 years. A lot can happen in 100 years, wars, hyperinflations, companies go bankrupt… If you were to be put into a deep sleep coma-like state for a century, and you had trillions in wealth, which pile would you pick to shuttle your wealth through 100 years?

Warren B: Our first two categories enjoy maximum popularity at peaks of fear: Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. We heard "cash is king" in late 2008, just when cash should have been deployed rather than held. Similarly, we heard "cash is trash" in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. On those occasions, investors who required a supportive crowd paid dearly for that comfort.

And finally, here's the argument that only Helen Keller could believe, that today's contrarian is staying as far away from gold as possible. Especially that physical gold. Look at the lines to buy gold at the dealers. They wrap around the block. You can't find a place to eat these days without having some dolt at the next table talking about gold. Heck, even the shoeshine boy can tell you what coins are best and where to buy. It's obviously a bubble. Yeah, right.

Warren B: My own preference -- and you knew this was coming -- is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola (KO), IBM (IBM), and our own See's Candy meet that double-barreled test. Certain other companies -- think of our regulated utilities, for example -- fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

By superior, he means that he views investing as superior to saving. He is, after all, an extraordinary investor. But most of his audience is, in fact, made up of savers. As far as savings go, for the near future (i.e., the transition period) gold will be far superior to Warren's investments as the transition brings REAL gains of tremendous value to those who hold the goods. And in the distant future, physical gold will be a far superior savings medium as it will be the very benchmark of purchasing power everywhere. In that future, owning companies will potentially bring you real returns whereas gold will not. But it will also carry risks and responsibilities. And if you carry gold from here into that future, you will be one of the fortunate few faced with that choice.

Warren B: Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Absolutely true! In fact, this is the Debtors & Savers Zone he is describing. The part of the pyramids occupied by everyone!


What's missing in his description is what the savers will trade amongst themselves to perfectly preserve their purchasing power during periods of deferred consumption. Sure, someone will own all those companies OG loves so much. And like I said, if you carry some of that physical gold from here into that future, it might just be you!

Warren B: Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).

Of course they will, Warren! No one at this blog is predicting the collapse of modern society. The gold thesis discussed here is about that which is mispriced (overvalued or undervalued) coming back in line with reality. The dollar is overvalued and physical gold is undervalued. I described it as a seesaw in The Studebaker Effect:

"Devaluations play out like a seesaw. There is a force (the crisis devaluation), a fulcrum (what is being devalued against), and a load (the beneficiary or the winner)."


That fulcrum is the physical plane of goods and services in aggregate. Everything is mispriced today, some things more than others. But if we look at how Warren's favorite investments, company stocks, carried through past devaluations, we find that while they obviously do much better than currency or currency-based investments like bonds, they don't do quite as well as hard assets and they don't even preserve purchasing power. Perhaps it's because an overvalued currency also tends to overvalue its economy.

Here's a bit from my post Greece is the Word on how Warren's equities might fare during the currency devaluation he expects:

"But what about the stock market? Someone emailed me saying,
"During a currency crisis in the western world, we may see a very powerful stock market rally as equities are a form of real asset. Better to own a piece of Procter and Gamble than a unit of currency that can devalue quickly. Look to the Argentina general equity market MERVAL index during the peso crisis. It shot up – although not as much as the 3:1 currency devaluation."

The writer answered his own point. The stock market shot up LESS than the currency devalued. So while the stock market in Argentina performed MUCH better than debt fixed to the value of the currency, it only chased - and lagged - actual inflation. (Actually, short term hyperinflation.)This is partly because the economy is usually in shambles at the time of a currency devaluation. So while you would expect real things like real companies to compensate for a falling currency, you must also weigh in any previous bubbling that might deflate and any economic factors that might reduce company profits.

But Argentina is still a good example for us to look at. In January of 2002 the currency devalued 3:1. At the same time the stock market rose in response to the devaluation and then stayed up (because the currency stayed down). But what is interesting about Argentina is that just prior to the devaluation, in December of 2001, inflation dipped into negative territory (deflation?) and the stock market dipped as well. Then they almost immediately exploded out of this head-fake in an unexpected devaluation. See the charts. The first is the MERVAL and the second is CPI:



Hmm... look familiar?

Bottom line: The stock market, because it represents equity not debt, will fare much better than the rest of the paper world. But the stock market does suffer from dilution, manipulation and bubbles. Expect the stock market to languish in economic chaos as it chases real inflation only to fall a little short.

But gold is different. The system desperately needs a counterweight, and gold is it. The counter is already in place, only the weight is yet to come. And once we have seen the reset in gold as it performs its phase transition from commodity to wealth reserve, it will then chase (hyper)inflation along with the rest of the "non-dollar" world, only it will be the ONE AND ONLY THING that will be immune to the economic mess that will still need to be worked out."


So what we can do is to place Warren's favs just to the left of the fulcrum on the seesaw. They won't devalue much in real terms, but they also won't fare even as well as boring old hard assets like antique furniture (I'm sure he'll just love this one):


Warren B: Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety -- but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we've examined. More important, it will be by far the safest.

And thus ends Warren B's drive-by assault on gold. What do you think? Did he hit his target?

So where is Warren coming from?

Try to imagine a bizarro world where we simultaneously encourage everyone to consume as much as possible through debt (because, ldo, consumption is the engine of the American economy) and also to save that same debt through ERISA and 401(k)s. What you end up with is a whole society of people deferring consumption (saving) on the one hand, and pulling into the present that very same future consumption they saved on the other. You end up with underwater homeowners with negative net-worths and hundreds of thousands sitting in their 401(k) or IRA.

With everyone chasing a yield, be it through interest rates on currency investments or dividends from equities, you eventually drive all those yields to zero. Luckily for the Warren Buffets of the world, most of that "savings" knows no better than to float around in Warren's world, where Warren not only gets his management cut, but he can also make amazing capital gains as those "savings" slosh around mispricing one thing after another.

Now think about that person, let's call him Bob, with $201K in debt and also a $200K pension or IRA through work. In essence, he could be almost debt-free were it not for his "savings". But then if that were the case, Warren wouldn't have that $200K sloshing around in Warren's world. This is, of course, only a mental exercise in how inane (or should I say insane?) the Western financial system really is.

Which camp do you think Bob is in? The Debtors or the Savers? And what would be the state of Warren's company valuations were it not for all this additional "savings" sloshing around? How about the yields available for real savers? Perhaps there would be some yields to be found were it not for Bob and his "savings"?

The point is that companies are not de facto good investments just because they make things. They can become overvalued when chased by too much money and that's when Warren sells. Warren talks a good talk about compounding dividends, but what he's really after is your money. Either you're with him (investing in BRKA) and he takes his cut while using your financial weight as his own, or you're against him out there on your own. And then he's looking for areas where you've mispriced something so that he can buy it from you or sell it to you.

I can tell you which camp OG is in. He's in the easy money camp (the debtors)! He's in debt to easy money:

Warren Buffett is on Squawkbox right now defending the bailout, which he wrote an op-ed about in today's New York Times.

Then he dropped this line, which sounds like an exaggeration: "If the government hadn't acted, I would be eating Thanksgiving dinner at McDonald's."

(Business Insider)

Perhaps he wasn't exaggerating:

A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.

Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money…

…It takes remarkable chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage.

Elsewhere in his letter he laments “atrocious sales practices” in the financial industry, holding up Berkshire subsidiary Clayton Homes as a model of lending rectitude.

Conveniently, he neglects to mention Wells Fargo’s toxic book of home equity loans, American Express’ exploding charge-offs, GE Capital’s awful balance sheet, Bank of America’s disastrous acquisitions of Countrywide and Merrill Lynch, and Goldman Sachs’ reckless trading practices.

And what of Moody’s, the credit-rating agency that enabled lending excesses Buffett criticizes, and in which he’s held a major stake for years? Recently Berkshire cut its stake to 16 percent from 20 percent. Publicly, however, the Oracle of Omaha has been silent.

(Reuters)

So maybe you are starting to see why Freegold is not such a welcome development for an OG like Warren B. But don't worry too much about Warren. He'll still be a multi-billionaire come Freegold. And if you follow him, at least you won't be broke (see the seesaw above). I suppose there might even be something altruistic about leaving the Freegold revaluation windfall for others. But that's not Warren's motivation.

Warren's power comes from keeping as much of other people's savings as possible in the stock market where he plays. It doesn't matter if it comes in through his company or on its own, just that it's in there. And that's why he wrote this piece trashing gold. Because when you buy a tube of gold coins and put it in your sock drawer, it's out of OG's reach.

Sincerely,
FOFOA





Power in the money, money in the power
Minute after minute, hour after hour
Everybody's runnin, but half of them ain't lookin
At what's goin on in the kitchen, but I dont know what's cookin

They say I gotta learn, but nobody's here to teach me,
If they can't understand it, how can they reach me?
I guess they can't; I guess they won't
I guess they front; that's why I know my life is outta luck, fool!

We've been spending most our lives
Living in a Gangster's Paradise

247 comments:

1 – 200 of 247   Newer›   Newest»
Aaron said...

Freegold? Anyone? Anyone? Bueller?

End of fractional reserve gold banking. A new global economy.

Anyone? Anyone? Bueller?

ephemeral_reality said...

Aristotle: There is a subtle but important distinction to be made between being "nothing of value" versus being no *thing* of value. .

Poetic and precise :)

That which does not exist beyond the consciousness of mankind can be a no *thing*. But not forever through, as monetary systems evolve just like living beings. We are living in the cusp of such an evolution.

Hawks5999 said...

"Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now."

"This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further."

Can you break down the nuance between these two statements? Because they sound like they are both saying the same thing to me. Sorry for being dense if it's really obvious.

One Bad Adder said...

OG: -

FOFOA, Just checked the definition of OG ...and the thought crossed my mind - I think it high time we saw FOFOA T's, 'n Mugs, 'n whatnot?

Good post (as usual) Squire.

Robert Mix said...

A great post FOFOA! Takin' on da' OG! LOL... Not many take on "The Warren" what with his cronies in the White House and CNBS... Typically when I see "Pillars of the Investment Community" say something, it is best to avoid or at least pay attention to their book...

I too like the idea of MANY people holding gold, but the among the ones I know (for the most part) do not listen. Yet another reason for each of us shrimps to buy gold when we can.

OBA's idea of FOFOA T-shirts and mugs, LOL and + $55,000 at the same time! I want one that says "Au: $100,000 / oz, bitchez!"

One Bad Adder said...

RM: -

My Crystal Ball sees WB wearing your FOFOA T-shirt on the cover of Fortune Magazine Caption - Yesterdays Man!

Eudemus said...

For the linguistically challenged: OG = Original gangster
not
OG = Old guy

AdvocatusDiaboli said...

everybody is just talking his book.
IMHO: Good to have two books.
And I guess even the heaviest Goldbug can agree that with 50%/50% you wouldnt loose too much either way of outcome, with at least the advantage of being more flexible when it comes to timing.

Gary said...

This was a great post. Buffet is a crook.

'And while I can't speak for all gold investors, I'm not buying gold because I think the ranks will grow. In fact, I think the ranks will ABANDON "gold" at the worst time in all of history.'

There are no ranks (not in the West anyway). This thing will happen one day and hardly anyone in the West will have a clue (as they have no clue now). The West is totally blind to where things are headed. Maybe more than blind, wilfully ignorant too? The human approach to a pile of crap is just to ignore it, in the vain hope it will go away.

PS....don't feed him, please starve him out ;)

poopyjim said...

Great piece FOFOA!

It is the opinion of this poster that Warren B. likely already has several tons of gold, but not enough to retain his status as a tier-1 oligarch post-transition. No one will sell him enough gold for that. Like many others with large pools of capital, they just can't move all that capital into physical gold, certainly not at the market price for us shrimps.

In other words, Warren B. is constipated at the "paper money" level on FOFOA's hourglass - from Just Another Hyperinflation Post - Part 3. He is jealous of us small fries because we can poo (into gold) and he can't! Furthermore because we have much less capital we can poo for an insanely cheap price - way better than his price (if he can even find a seller)! For once we have the advantage! In addition to retaining his power to manipulate markets and otherwise screw us with paper, he wants to poo before we do. That's why he wrote this article to try and keep us holding in our poo. But it won't work!

Laxatives. Get you some.

-poopyjim

p.s. apologies to Aristotle X_X

Peter said...

Pinchin off inches so hard these days I gave myself hemorrhoids

Nickelsaver said...

PJ,

Way to tie in your pseudonym in just the right pooportion.

Peter said...

Yeah - 1 inch at a time!

Edwardo said...

Bravo, FOFOA! The OG "earned"
that one.

Motley Fool said...

OG Warren doesn't invest in things he does not understand. It is clear he does not understand gold. :P

JMan1959 said...

I am laughing out loud, Fofoa,

Who else could meld Coolio and Warren Buffet into the same article? I love that song, with Stevie in the background. It should be the Freegold anthem, as it is prophetic:

As I walk through the valley of the shadow of death
(fiat system)
I take a look at my life and realize there's not much left (hyperinflation effect)

-Joel

Motley Fool said...

Hawks5999

It is the difference between the asset being evenly (or perhaps rather rationally) spread out over all possible owners, and a asset class that requires continual addition of capital just to remain on even keel.

Make sense?

In other words, if everyone has as much gold as they 'should have' then it is perfectly spread in that moment in time. If one person has it all, it is not a useful reference point for everyone, and so is without value.

The other encompasses the greater fool theory.

TF

JR said...

Hi Hawks5999,

Not sure exactly what you mean, here is a start.

"Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now."

In Freegold, gold works because it FLOWS. From debtors to savers, from savers looking to consume and producers looking to defer consumption, etc. Freegold "works" through the price arbitrage that occurs because gold is free flowing, and for gold to flow, its gotta be widely held/distributed.

See this comment from One Tin Soldier inked in The Return to Honest Money.

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

"This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further."

Buying gold is not an investment, its saving. You but it to preserve purchasing power, not to profit and earn additional purchasing power. It doesn't compound, you don't buy it with the hope you can sell it to a greater fool for a capital gain. "If you own one ounce of gold for an eternity, you will still own one ounce at its end."

AdvocatusDiaboli said...

What is the principle of "investing" (like WarrenB did great in the past)?
Looking at the "value" of something. And when looking at value, once always have to look at the "reprodution cost" of something. e.g. How much is a company really worth (=would cost), if I build it new from scratch.
I miss a little bit this aspect when looking at (free)gold: Sure here in Europe (and India) there is no way to determine that, I can not tell somebody "Hey, go dig my garden for some gold". I have to buy above available gold from somebody (=Freegold).
But there are still places you can apply this modell:
http://www.guardian.co.uk/world/video/2009/feb/11/zimbabwe-gold-panning-starvation-food
Unfortunately this is often neglected when talking about "Freegold" (which assumes you have to bid with FIAT for it from some "saver", who wants to spend his savings).
Greets, AD

One Bad Adder said...

AD: -
Having spent many an unproductive day in the persuit of Gold au-naturel - we of the west simply don't realise how good we've had it.
There will again come a time when even to eke out a gram via digging will be just reward for a days effort however, whilst we can ...and even at todays "high" prices, by far the easiest way to acquire the precious is via earning money and simply buying it.

KindofBlue said...

FOFOA

It's a murderous irony that when the Freegold revaluation is complete, gold will have delivered the best investment returns while on its main mission to preserve the purchasing power of savings. Early adopters are being handsomely rewarded.

ampmfix said...

This post is exactly the one I would use to convince a family member of switching his savings to gold.

Many thanks for this great post FOFOA. Will try to hit the jar asap...

Nickelsaver said...

FOFOA,

Just finished reading thru it all. You should have been a litigator. On the other hand, I suppose you are.

Woland said...

Was reading through the 2000 archives this AM, and
found something useful (al least for me) by FOA,
Msg ID 22690. "In effect, the disgorging of dollar reserves will show no negative accounting on ECB books, as gold prices more than make up for dollar
reserve destruction. In fact, once the Euro becomes the world reserve, there will be no need to hold dollars at all."

It made me think of gold not as a short position on a
dollar, but rather as a Credit Default Swap on dollar
failure, with the added benefit that the counter party
is not JPM or AIG, but the MARKETPLACE itself. When
the necessary CB's all are in the ECB position, the
old proposition that "China can't afford for the
dollar to fail" loses all meaning, as the dollars
escaping reserves, competing with offshore wealth, drive gold to its' new plateau.

burningfiat said...

Woland:
It made me think of gold not as a short position on a
dollar, but rather as a Credit Default Swap on dollar
failure, with the added benefit that the counter party
is not JPM or AIG, but the MARKETPLACE itself. When
the necessary CB's all are in the ECB position, the
old proposition that "China can't afford for the
dollar to fail" loses all meaning, as the dollars
escaping reserves, competing with offshore wealth, drive gold to its' new plateau.


Great recap of the situation, Woland!

Although, one thing that irritates me a bit in the FOA quote is the talk about the Euro becoming the "world reserve".
I thought gold was going to be the new reserve in Freegold?
I can see the Euro becoming the numero uno medium of exchange to hold in modest amount (month to month needs), owing to Europe's position in world trade, but not the "world reserve"? "World reserve" is going to be gold, right?

/Burning

victorthecleaner said...

FOFOA,

I am perfectly happy if you beat him for his stupid remarks about gold. I am not sure I agree with your interpretation of his motivation for writing this nonsense.

Question: Does the average return on equity (which is pretty exactly 6.5% annually in real terms) depend on whether the market is full of coerced investors with their government or employer sponsored 401(k)s?

I don't think so. The 6.5% that are found empirically, are very stable in the long run (time frames beyond 30 years, since the mid 1800s). But the effect that every worker is somehow guided into stock investments, is a recent development. The switch must have occurred during the 1970s and 1980s (Studebaker effect?).

I remember someone had a diagram showing the proportion of the US stock market that is owned by mutual funds and other 'professional investors' relative to the part that is owned by individuals. I remember that, for example, during the 1920s including the bubble that popped in 1929, most of the stock market was owned by individuals (who apparently liked to take the risk). But during the late 1990s, most of the stock market was in the hands of investment funds.

Nevertheless, the average return on equity was rather stable over the long run. So it seems not to depend on whether there are some inexperienced individuals in the market or whether it is those modern 'professionals' (who invest other people's money and therefore usually have goals other than obtaining the highest after-fee return for their clients).

The fact that the average return on equity has been so stable over more than 150 years and across many different countries, indicates that the compensation for assuming business risk that you can achieve after the transformation, may still be in the same order of magnitude (i.e. around 6.5% annually in real terms).

I am less certain about the outperformance that a genius investor such as Buffet can achieve. Does that depend on whether the market is full of inexperienced individuals or full of 'professionals' who manage other people's assets? Statistics about specific stock investment strategies (that very roughly resemble what Buffet has been doing) go back only to the 1960s, and so there is simply not enough data. If you assume that Buffet benefits as soon as there is enough volatility, then this should not matter either.

So I don't think Buffet's outperformance depends on all the pension plans being in stocks (and behaving like fools of course).

What else could it be? I guess it is just his mere size. When he started in the 1960s he could basically buy whatever he liked without running up the price and without interfering with politics in any way.

This changed during the Savings and Loan crisis in the early 1990 when he got involved in Salomon Brothers. Today, he is so big that he relies on 'political investments' such as lending $10bn to Goldman or his stake in Wells Fargo in order to maintain his performance. He basically cannot move anymore without becoming a politician, too.

Victor

Woland said...

Burningfiat:
If I correctly understand Freegold, there will still be a
need for a digital unit of international account for
invoicing and settlement of trade, whereby imbalances can be settled in gold. The Euro which
is internationally
more or less externally neutral with respect to imbalances, (though not internally) can serve this
function, whereas the dollar, with 5 or 6 trillion in
external claims outstanding, could not. Also, the US
gold belongs to the treasury, not the Fed, short of an act of congress. I may be missing something, but that is my understanding.

burningfiat said...

Woland:
there will still be a
need for a digital unit of international account for
invoicing and settlement of trade


You're sayng that the Euro could be used as an (international) Unit of Account!

But, that is not the same thing as "World reserve", right? A reserve is something you hold in rather large amounts for a rainy day...
The unit of account is something you use for bookkeeping your assets (gold for instance).

My question maybe boils down to: Was FOA right? Will the Euro be an international reserve asset (in size) under Freegold? Or will gold account for the main part of international reserves?

My uneducated guess is that gold will account for >90% of central bank reserves once $IMFS is replaced by Freegold.
And another guess: Other central banks (than ECB) will use their own currency as UoA, not the Euro.

/Burning

JR said...

On the "world reserve" Gold Trail three

"We must not confuse a currency's "total demise" or "falling out of use" with a "loss of identity". In our time there have been few major moneys that went away. Today, we have a whole world of national fiats "in use" and "not demised" that still carry their nations identity. They lose value at an incredible rate, are mismanaged to the highest degree, are laughed at and despised. But, still they are "in use" as they function for their governments and economies. Usually, they function along side whatever major reserve currency is in vogue. Today, the dollar, tomorrow the Euro. Make no mistake, the entire internal US sector can and will function as it's currency runs a price inflation just like these third world countries. We will adapt as they have by dropping our living standard accordingly and adopting the Euro as our second money.

[...]

So,,,,, once the Euro was functioning and morphing into it's new reserve roll, the ECB would,,,, like in the US's present roll,,,,, have no need for excess foreign cash reserves. However, some wealth structure would have to be present in the asset reserve category to replace those lost dollar values as they failed. That structure would be gold.

[...]

Every time the ECB doesn't "blink", ANOTHER economic nation block looks closer at the EuroZone as the backing economy for a new reserve currency. As each day passes with the EuroZone showing even marginal growth without the benefit of an American style trade deficit, the internal economic dynamics of the USA builds against it's dollar management policy. Eventually forcing the US into a full blown super inflation that has no limits.

[...]

Truly, most of the world likes the most conspicuous aspect of the euro that we describe as it's biggest weakness; it's management by several varied nation states. All supporting different thoughts, cultures, backgrounds and perceptions of government policy. Some compare it to the many nationalities in the US, but it's much more competitive than that. It's thought that this mixture will produce a more good for all management of a Euro world reserve currency. Truly, because gold plays no part in today's dollar management or the Euro, then political styling is all that's left.

JR said...

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".

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

5/3/98 ANOTHER (THOUGHTS!)

The urgent drive to create a new "reserve currency" began in the early 80s, after the last small "gold war". The road to making this new Euro did never include gold in large amounts, until the last few years! Even one year ago, the news would say, 5% or less. Today, we speak of a much greater amount! This is interesting, yes? The BIS did "hatch" this deal in a very late fashion! The future of the Euro was found to be "weak", as the Middle East oil imports onto the continent would continue in dollars! This was so, from the dollar being made strong in gold. Gold priced in dollars at near production cost offered a "no switch currency" position, for oil. This position has been unstable for the last year, and the alternative of a switch to gold was in progress! You have read my "Thoughts" before. Now the BIS does offer to "change the rules of engagement", a real reserve currency is offered!

Few do grasp what is happening and why! They think the holding of gold reserves by the Euro is of a little point, as to what good are gold reserves? One cannot use gold as Marks or Yen to intervene in currency market to support the Euro. My friend, the BIS has played the, as you say, "big poker hand"! The holding of large reserves by the ECB and the withholding of sales from the market will not only bring the end of the London paper gold market, it will, thru a high USD gold price, "make the dollar weak in gold"! From this position, the dollar will lose the "oil backing" from the Middle East! At first, all oil for Europe will be in Euro's, then all producers want "strong currency"!

There is more: Many say, how to defend Euro without much currency reserves? If gold go to many thousands US, what will be used to bid for Euro as defense? I say, these persons will find a problem on their computer screens! You see, the Euro will start as "nothing", no holdings of size, anywhere! The dollar is held as reserves as "the stars in heaven"! It is to say, "the dollar will bid for the Euro", not "the Euro will bid for the dollar"! All currencies will "flow into the Euro for trade". But, if the Euro becomes so strong, how to compete in world trade? It will be the price of oil that will make the "trading field" level! The soaring US$ price of gold will make even a 10% Euro reserve be as 100% today, in USD! Oil will become, very, very cheap in Euros and allow that economy to do well! Many other countries will see this and also want to join the new "world reserve currency" that has become"the new world oil currency"!

The politics of the ECB? It is as a "side show". We watch this new market, yes?

JR said...

6/14/98 ANOTHER (THOUGHTS!)

"Your question of Euro gold backing? The Euro will not be backed or fixed in gold. It will, as Michael Kosares (USAGOLD) notes, be the first "modern currency" to hold true "exchange reserves" in gold. It is important to understand that "exchange reserves" of gold are much more powerful a tool for currency defense than gold backing! In this system, gold must be traded in a "public physical market", in that currency, Euros! As such, the Euro can "devalue gold" (Euro price of gold falls) thereby making it strong in gold! In today's world, this will happen as a "strong Euro physical market" displaces and defaults "the old dollar settlement paper gold market"! The dollar will become"weak in gold"!


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

FOFOA from Synthesis:

The euro architects were not trying to force a reserve currency on the world. There is a big difference between creating a government product with sovereign-monopoly backing that everyone must use, and creating a product that the marketplace must freely choose. In this case, the marketplace consisted of sovereign nations that chose to give up the privilege of printing their own money in order to join in the benefits of the euro.

[...]

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.

[...]

The Yuan

The yuan will not be the next global reserve currency because it has not only NOT severed its link to the state, it is actually printed by Communists. Those who are predicting this are still viewing the world through $IMFS goggles that see the yuan currently undervalued. They think in dollar terms and conclude that whenever China finally agrees to let the yuan trade on foreign currency exchanges, they would like to buy it! Being undervalued (against other fiats only) they see the opportunity to make fiat profits when it rises. They view it as a "store of value par excellence" compared to other fiats.

Things are not always as they seem.

Conclusion

Freegold is our destination with or without the euro. Even on the outside chance that an SDR or a similar super-sovereign currency is accepted as the new global reserve currency, it would have to contain gold at Freegold valuations in order to be viable, accepted and trusted, in the same vein as Randy's comment about an EMF. So any way you cut it, the future comes to us with really high value gold by today's standards.


See that - the euro is a reserve currency for trade that is not also trying to be a wealth reserve. It solved the Triffin dilemma by not trying to be as good as gold - its juts a trade currency -check out Dilemma. The Euro is a product that the marketplace will freely choose to conduct trade (not to store wealth), because:

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

victorthecleaner said...

I think someone here (FOFOA?) said that one should read FOA's "the euro will become the reserve currency" as "the euro is the backup currency should the dollar fail" rather than "the euro is the new store of value".

Victor

Aquilus said...

Apparently the ECB rep is now joking about bringing the ECB gold reserves to the party at the fin min meeting on Greece. The article mentions the original source as FT.com, but it's probably behind the paywall. Here's the Google translation of the the source I could find:


“Before entering the building in Bruxelles where the summit is held, Asmussen was asked if he has in his briefcase all the ECB profits from exchanging the greek bonds without accepting any losses.” …

“Asmussen laughed and said that in his briefcase he only has the ECB gold reserves


Source: German representative at the ECB jokes about the bank's gold reserves

DP said...

A couple extracts from FT's Eurozone live blog tonight:


22.47: Reuters is now reporting that private sector negotiatiors have proposed accepting a bigger loss on their Greek bonds to help plug a funding gap. The story cites two senior eurozone sources.

Asked on Monday what private sector negotiatiors, represented by the Institute of International Finance, had proposed during a meeting in Brussels to help fund further debt relief for Greece, one source said “a higher haircut”, but declined to give further details.



22.06: As we wait for the press conference to get under way here are some thoughts from Peter Spiegel, our Brussels bureau chief, who has gotten hold of the Greek debt sustainability report. He’s working on a story that we’ll have up online soon. In the meantime here are some highlights of the “strictly confidential” report authored by experts from the European Commission, ECB, and IMF:

The report, dated Feb 15, is stunning for the dim view it takes of Greek efforts on structural reforms. The phrase “accident-prone” is repeated again and again. That may explain a lot of the heated rhetoric last week from Berlin and other AAA eurozone capitals.

The cost of that Greek inaction? If nothing changes, the authors argue: Greek “financing needs through 2020 would amount to perhaps €245bn”. That’s a lot more than the €130bn being discussed in tonight’s meeting.

Worryingly, the report raises the question whether the whole Greek bailout exercise may be self-defeating. That’s because the program’s two main goals may be in conflict. “There is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term”. And even then the prospects for Greece returning to market after end of new program “uncertain”.

If nothing changes with Greek implementation, the report forecasts that Greece’s debt to GDP ratio would peak at 178 per cent of GDP in 2015 and only come down to 160 per cent by 2020.

That has consequences and there’s more stress ahead. “With debt ratios so high in the next decade, smaller shocks would produce unsustainable dynamics, leaving the program highly accident-prone”.





(See also 13:20 regarding Aquilus' comment above. Among other tidbits of course.)

victorthecleaner said...

As I already said I am still waiting for the Europeans to create a precedent and to let a government go bankrupt and then stay in the Euro zone.

Victor

Aquilus said...

@victor

As in serve as an example to others to sign up to no more future deficits, then debase euro one time by monetizing existing bad debt?

Then weak countries get their debasement, strong countries can re-balance salaries/pensions, and EU future is sustainable.

/SleepingVillage/ said...

Aquilus!

“Before entering the building in Bruxelles where the summit is held, Asmussen was asked if he has in his briefcase all the ECB profits from exchanging the greek bonds without accepting any losses.” …

“Asmussen laughed and said that in his briefcase he only has the ECB gold reserves”

I like it. He's basically saying - Don't fuck with me or I'll drop a few thousand tons of gold on your ass! :)

Or in civilized speak - If you didn't like that, you're gonna really love what we have up our sleeve;)

Or maybe I'm out to lunch?

Aquilus said...

@Burning

I would like to think so, but there's this little thing called "confirmation bias" that tells me to be careful

RJPadavona said...

Hello VTC, Aquilus,

"I am still waiting for the Europeans to create a precedent and to let a government go bankrupt and then stay in the Euro zone."

Apparently, some in the media are starting to see things a little more clearly. I just saw this a few minutes ago:

http://www.youtube.com/watch?v=X88AQtTNEKc

Aquilus said...

To summarize the extent of media "clear headedness": "the sun shall rise in the east" would also qualify as a clairvoyant prediction at this time for them.

/sarc

RJPadavona said...

Hello Friends,

One thing people often forget about Grandaddy Warren B is that his father was Howard Buffett.

Howard was a US Congressman from Nebraska. He was literally the "Ron Paul" of his era. He was a strong opponent of America's interventionist foreign policy and a very outspoken supporter of the gold standard. Howard Buffett was even a personal friend of Murray Rothbard.

http://en.wikipedia.org/wiki/Howard_Buffett

So, there is no doubt than Warren B was taught the virtues of owning gold at a very young age.

PoopyJim mentioned earlier he thought Warren B had tons of gold already. Maybe so. He probably inherited a small portion of that from his father!

Here's a quote from Howard Buffett:

"I warn you that politicians of both parties will oppose the restoration of gold, although they may outwardly seemingly favor it, unless you are willing to surrender your children and your country to galloping inflation, war and slavery then this cause demands your support. for if human liberty is to survive in America, we must win the battle to restore honest money. There is no more important challenge facing us than this issue -- the restoration of your freedom to secure gold in exchange for the fruits of your labors."

And here's an excerpt from Warren B's Biography 'Buffett: The Making Of An American Capitalist':

"Convinced that Roosevelt was destroying the dollar, Howard gave gold coins to his children and bought pretty things for the house -- a crystal chandelier, sterling silver flatware, and oriental throw rugs -- all with a view that tangibles were better than dollars. He even stocked up on canned food and purchased a farm, intended to be the family's refuge from the hellfire of inflation."

Now maybe this had a psychological effect on Warren B and it caused him to think his dad was a crackpot. Or maybe he knows his dad was right, but just a little early to the dance?

Regardless, of Warren B's motives, I'd give anything to hear him say "I read FOFOA's post today and he is right. I've been leading you folks astray. I used to count in million$, but now I only count in One. The same One my daddy taught me to count in":

http://www.youtube.com/watch?v=8M4GRy9H_4w

Peace,

RJ Padavona

M said...

"there are plenty of gold bugs who actually THINK gold will eventually be a bubble, and that's precisely why they're in it. But not me. "

Thanks FOFOA.

I would say 90% of the Austrains and goldbugs out there believe this. It is this exact conundrum that led me to this blog.

somanyroadsinvesting said...

Great post. I am actually in the process of writing a post about Buffett's article. Thanks for all the insight.

M said...

THE PROBLEM WITH COMPARING STOCKS TO GOLD.

Studies say..that stocks have outperformed gold over the last 120 years.

^That is not a realistic statement. These studies always just look at the performance of an index of stocks like the DOW JONES or the S&P and compare it to gold. That is just wrong because they are not accounting for stocks that go bankrupt and leave the index. When General Motors went bankrupt, it left the DOW index and it was replaced by another company. Allot of money went to waste on that bankruptcy but it was not reflected in the index. The study does not account for movements like that. Gold on the other hand is gold, its the same all the time, its the exact same gold that you had 120 years ago.

somanyroadsinvesting said...

Yeah good pt. I think Zweig has totally discredited Jeremy Seigals claims in Stocks for the long run, survivorship bias etc.

Buffett is basically saying we are all screwed so just put it in stocks to have the best chance to break even. Seems pretty reckless and careless. So retirees should be whipping out the etrade accts. what law says that if they sell in 5 or ten yrs that they will exit at the same or higher p/e multiple. a strong case could be made that valuations will compress over the next ten yrs.

I really started to question Buffett around 2008 and some of the stuff he was saying. This article was kind of the last straw. He has become a complete cheerleader for the current corrupt monetary and govt system we operate under. I guess when you get so big you are the system. He is playing the greater fool that someone in the future will pay the same or higher p/e multiple on that same business. Why can’t it go down? Also is he assuming 1000% batting avg, no mistakes? Crazy, reckless, irresponsible.

Also he just cherry picked the time frame from 1965 when his partnership started. How is that a relevant time frame?

Aquilus said...

@M

AA meeting (Austrian Anonymous): "Hi, my name is Aquilus, and I'm an Austrian."

I confess however to not believing in the bubble theory, and not seeing any contradiction between FreeGold and Austrian economics as fiat debasing will not degrade the savings' purchasing power and therefore would not affect capital formation.

victorthecleaner said...

Aquilus,

then debase euro one time by monetizing existing bad debt?

Not necessarily. Only debase it enough in order to guarantee price stability, i.e. in order to prevent outright price deflation and a chain reaction from banking collapses. But not debase it in order to make life too easy for the easy-money crowd. If some need to go on a porridge diet for a while, then so be it. I don't want to live in Greece right now, that's for sure.

Victor

S said...

Buffet actions starting with the NYT letter up to the recent IBM buys make him anything but a non interested party. He is short S&P puts and a writer of CDS. The stuff he doesn't understand of course. Let us not forget it was non other than WFC that raised their dividend into the short ban to add extra pain to the financial shorts. It was also the company whose CFO left in a hurry over this past summer for what was rumored serious concern over accounting (quickly brushed under the rug). At this stage it is rote to call him a hypocrite. It is well documented. In fact, his actions with IBM to pump up the INDU (price weighted) along with BAC and GS make him more a "sovereign wealth fund." The role of the ratings agencies in the remarkably timed downgrades - the Vatican's word's not mine - make Moody's not a disinterested party in the conduct of US foreign policy. Buffet farmer son is the perfect foil as the next non executive chairman. Is anyone else starting to wonder if the "myth" matches up to reality? http://www.modernmythology.net/2011/08/vivisecting-verses-darpa-investigates.html

Aquilus said...

@victor

If I was not clear, yes, the main euro debasement is to protect the banking system-obviously after all this time here chez-FOFOA.

The only other incentive to more debasement past that is that cutting people's benefits directly sets governments and politicians as riot targets, whereas the same effect done through debasement can be excused as "no one could have seen this coming", and more over enable politicians in producer countries to show their magnanimity and get votes by re-balancing the purchasing power of people after debasement. In debtor countries: though s..t.

Michael said...

Casey Research quotes FOFOA in todays message (India's Gold)

Winters said...

@FOFOA - Another great post.

@RJPadavona - very interesting comments on Howard Buffet

Hawks5999 said...

Thanks JR and Motley Fool. It sounds a little like tomayto, tomahto, but I get the gist. This isn't coming from a naysayer on gold. It just sounds like "the more people that buy it, the more valuable it is." Which is sort of the essence of what OG WB is saying when he talks about needing an expanding pool of buyers.
I guess I can grasp it (and explain it) best and most succinctly not as an expanding pool of buyers, but an expanding pool of holders. That makes sense to me as the concept really congealed in my mind while dabbling in bitcoin.
Thanks again for the replies.

Max De Niro said...

Hawks5999,

You just need to shift your perception a little and look at it slightly differently.

The number of buyers is not the primary variable - it is a derivative of the primary variable, which is function.

As gold's function changes, the number of buyers now has a new relationship to this new function.

.=multiplied
where X=buyers
Now:
F($IMFS)=X.1/100.population

After transition:
F(Freegold)=X.50(?)/100.population

Here, the number of buyers can be seen to be an innate property of the differing function of gold.

The functions F($IMFS) and F(Freegold) are mutually exclusive functions, they cannot co-exist.

This is a paradigm shift, which is why so many people conflate cause and effect - monetary structure and number of buyers. This is always the case with paradigm shifts - peoples' minds are stuck in the rules of the old paradigm.

The mistake is to imply a linear extrapolation of the number of buyers, based on an extrapolation of current visible linear trends.

Motley Fool said...

Hey Hawks5999

I fear I did not express myself very clearly. This is a fine nuance that I am struggling to find words for. I shall try again though.

You are correct in noting that there is a similarity between the extra mine production annually and say extra shares being issued yearly, and that in both cases extra funds need to be deployed just to keep the price even. Gold and stocks are similar in this sense, although in general stocks expand a bit faster in volume. ;)

This is the related to the second sentence you quoted.

The first I shall try to explain by analogy.

There are in this world many people who think the BBM function of blackberry's is quite useful. Now imagine one person hoarded all the blackberry's in the world. In this case the BBM function is useless, even though it exists inherently in the blackberry's. Similarly gold is most functional as store of wealth when it's distribution is as wide as possible, as opposed to hoarded by a singular entity.

Perhaps this time I am more clear. :P

TF

One Bad Adder said...

Hmmm!-

I think the mere fact BUFOG is out shilling stocks says more about keeping them (or what's left of them) actually IN equities at this point.

Meanwhile - 74% net present value loss dead ahead for Greek Bondholders.
...and the Greek Parliament to enact legislation to force the issue.

We can well imagine BH's right across the Eurozone ...and dare I say the WORLD, are thinking long and hard about T-bills and GOLD this evening / morning.

Anand Srivastava said...

I found an interesting article.

It is about India and its gold from an Indian. He gives a lot of history of the importance of gold for India and the world.

He thinks that the USG is trying to raise the prices of gold :-).

The conclusion is that gold should be owned by the people not government.

http://2ndlook.wordpress.com/2007/11/10/india-the-worlds-richest-economy/

JR said...

Hi Hawk5999,

It just sounds like "the more people that buy it, the more valuable it is." Which is sort of the essence of what OG WB is saying when he talks about needing an expanding pool of buyers.

price and value are two different things

Here are some ideas about gold's current *price* and value. And maybe how there's already a larger pool of buyers such that no more expansion is needed.

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

Reference Point: Gold - Update #1

I thought it would be a good idea to keep an eye on how gold is acting as "a key reference point to allow people to assess the relations between different currencies" (to quote the head of the World Bank) throughout the coming year.

In order for the limited and stable quantity of above-ground physical gold to perform this important international function effectively, it will ultimately trade independent from the current network of bookkeeping derivatives that assume gold ownership through a counterparty's gold liability (receivables, futures, options, forwards, ETF shares, etc.). Such contractual obligations do not represent a stable and credible quantity like the physical gold itself does, and therefore they make a poor and distorted pricing benchmark.

Of course today this is not yet the case. When we say "the gold market" today we mean all of the above paper contracts plus the gold itself.

JR said...

Relativity: What is Physical Gold REALLY Worth?

So what we end up with today is a wide spectrum of “gold investment” options of relatively different qualitative values. On one end of the spectrum we have physical gold coins stuffed in the “gold toe” of your black socks in the back of your sock drawer. ;) And on the other end we have investments like GLD from which you cannot take delivery, and in fact, you are quite unclear on the legal definition of its “physical backing” and who actually owns that “physical” gold.

And in between these two there are many other options where your investment is actually someone else’s liability to you. Sometimes it is a weight-denominated liability. Sometimes it is a dollar-denominated liability fixed at par to the published trading price of gold. Sometimes it is a weight-denominated liability with the contractual option to settle in currency at the published price of that weight of gold left to the depository’s discretion. And other times it is strictly weight-denominated because the depository knows full well that, in a pinch, the legal system can and does only enforce currency settlements.

Think about this last one for a minute. Imagine you paid in advance for a new tractor from a tractor company. But before it finished building your tractor, the factory went out of business. When you later sue the factory owners in court, do you think the judge will award you a tractor? Can a judge force a defunct company to cough up a tractor it doesn’t have? Of course not. This is why the legal system can and does only enforce legal tender settlements.

Hopefully it is clear now that this wide spectrum of “gold investment” options casts a rather hazy cloud over the aggregate amount of “wealth” stored in gold from a weight-based frame of reference.

In other words, it would be quite incorrect to say Johnny has 25 ounces in gold, Davey has 75 ounces, Phil has 100 ounces and James has 200 ounces if only 20 ounces exist in the whole world. Instead it would be a little more correct to say, “Johnny, Davey, Phil and James combined have $480,000 total invested in gold.”

And if the four of them had all invested in perfectly equal “gold investment options”, with only 20 ounces existing in the world, we could deduce that gold was worth $24,000 per ounce! They each bought the same investment over and over that claimed gold was worth $1,200 per ounce until, combined, they owned 400 ounces. But since all the investments were equal, the 20 ounces of real physical gold would each be worth $24,000… to the banker.

But now let’s say that out of Johnny’s "25 ounces", 20 are in the same “investment option” as everyone else, and the other 5 are coins in his sock drawer. Let’s do a little math.

20 ounces exist in the whole world. 5 are in Johnny’s sock drawer and 15 are in the banker’s vault. Johnny paid $1,200 each for the 5 coins in his drawer and also for his other “20 coin receipts”. So we have $6,000 invested in gold in Johnny’s sock drawer and $474,000 total invested in gold through the banker, who has 15 ounces in the vault.

$474,000 divided by 15 equals $31,600 per ounce.

In this frame of reference, Johnny’s sock drawer is really worth $158,000 alone (5 x $31,600)! Johnny’s total investment is actually worth $182,000 even though his initial investment was only $30,000. And Phil, who initially invested four times as much as Johnny has, in reality, 35% LESS than Johnny. How? Why? Simply because of the total number of claims against gold in the banker’s vault! And so far, only the banker knows this true value!

JR said...

100:1

Gold is no longer held captive by a fixed parity with the dollar. Today it is trapped politically in parity with a price discovery futures market leveraged at 100:1. But free gold is where we are heading, without a doubt. It is where monetary evolution is taking us. It is where debt evolution is taking us. It is where global political evolution is taking us. It is both a market process and a political process, global in scale.

[...]


FOA (10/9/01; 10:05:48MT - usagold.com msg#117)

Lost in all the confusion is the distinction between investing in the price of gold and investing in gold itself. Perhaps 90% of all the investing in today's worldwide, dollar settled, gold market is done in this first way mentioned. Yes, the market is structured, contractually, to settle in gold. However, in practice, in norm, and in past legal precedent, it is accepted that paper gold trading is meant to only capture the price movements in gold while ceding, what could be, controlling physical trades and their price setting function to other market areas.

Obviously, this is the way it all started, years ago, with the physical trading and its fundamentals dominating the lesser paper trading. But the market evolved with the paper contractual trading becoming 100 or more times the size of the physical side. But everyone already knows all this, right?

What doesn't seem to be obvious is the "why" the paper market grew so large. It grew to dominate because world wide dollar expansion reached its "non hedged" peak. In other words, the dollar's timeline was ending as its ability to produce non price inflationary economic gains came into sight.

In order to push dollar holdings further, international players needed and purchased "paper financial hedges" to balance their risk. Within their total mix of derivative hedges were found "paper gold price hedges"; modern gold derivatives. The important thing to remember is that these positions are not and never will be used to demand physical gold. They are held to buffer financial and currency risk associated with holding any form of dollar based asset. To work these items don't need to really perform "dollar price movements" in the holders favor as much as they are present in the portfolio to act as insurance stickers.

In that truth, these paper gold positions act like FDIC insurance at our banks.


cont.

JR said...

cont. from 100:1

FOA (05/06/00; 16:45:21MT - usagold.com msg#20)
For Your Eyes Only!

By holding physical gold you are owning a super leveraged "derivative" that will be exchangeable against the value of real things at a par level lost to the minds of most investors. Today, physical gold purchased in dollar values is discounting its worth by perhaps 100 times. For us PGAs (physical gold advocates), that is a leverage worth "playing the physical game for"! (smile)

As the only real wealth money this earth has ever had, it's unthinkable what value physical gold would have had to attain to denominate our created holdings. This is where so many "gold advocates" completely sell themselves short in projecting gold's future price. They try to somehow reconcile gold's value with its cost of production. In fact, once man's drive to attach his official currency / fiat money to gold is broken (as it is about to be), all the gold "IN" the earth today could not represent human created things at 10 times its current price! Throw in the fact that the earth will not give up all its gold any time soon, present world gold holdings in reserve currency today must rise in value at least 100 times to match what assets now exist. On top of that add in the fact that dollar gold will go sky high just to equal past dollar creation (as the dollar fails) and one can see where physical gold is "the play" in modern times. Forget stocks, business valuations, land or currencies: physical gold is the wealth for the next generation.

[...]

From a Friend

Ref: "In other words, the current price of gold means that you are buying a slice of the world’s gold supply with a proportionately smaller slice of the world’s money. You can currently buy x% of the world’s gold with y% of the world’s money, where x is much bigger than y. When gold will become the unit of account of the world’s wealth, you will find yourself able to claim a much bigger slice of that wealth than you would have been able to do with fiat money before the collapse."

This means that CBs and gold-clearinghouse BIS must attach a much higher VALUE to the gold they exchange (redistribute) than the public (visible) goldprice(s).

Note the difference between Value and price. The price is for bookkeeping purposes. The Value is for wealth reserve purposes.


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

See that --^^-- "the difference between Value and price"

JR said...

Treasure Chest 2 – Game Changer

ANOTHER wrote:

Our history will read, that persons of simple life, will find they have made the greatest leverage investment ever seen and thought of it as only a small trade. When gold moves from "bottom to top of world currencies", many will find their assets in the "Estate Of Kings"

And here are a few FOA quotes on the hidden leverage in unambiguous physical gold ownership:

Today, physical gold advocates are the real gold bugs as they now possess the real leverage paper players only think they have!

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

Well, I can tell you that the further we travel this trail, the higher the eventual cash settlement of all gold paper will be and the less that settlement will be allowed to match any "free physical" price.

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

By holding physical gold you are owning a super leveraged
"derivative" that will be exchangeable against the value of real things at a par level lost to the minds of most investors. Today, physical gold purchased in dollar values is discounting its worth by perhaps 100 times. For us PGAs, that is a leverage worth "playing the physical game for"! (smile)

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

It is from here that we can understand the awesome leverage contained in holding but one ounce of gold. Here, on this ledge overlooking the entire golden valley, we can see this truth! Yet, it is a revelation to gold buyers as much as a curse on gold industry and leveraged paper investors. They spend their days, consuming their wealth, betting on a price that cannot represent gold until it fails. Destroying all they wait for.

From here, we understand why the current prices for gold do not have any bearing on the buying habits of the major players that walk this trail. As Another has said "The price you know, it be your price, not my price".

It is true, we are buying gold, not to trade for a paper value created today. Rather, to hold it beyond the paper destruction that must come tomorrow. Gamblers, traders and gold substitute players will all witness a colossal shift in world wealth that degrades their holdings. Even as their bet on half the process is proven as a folly very typical in human nature. Only unseeable as it exists.

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

The leverage today will be in a physical gold position, not any other form of gold ownership. By accumulating physical gold today, we are truly walking in the footsteps of giants; advancing with them as they work thru this singular, long term political move.


In this game of musical chairs, unambiguous, discrete pieces of physical gold are the chairs. Do you have your chair? Or do you own a claim ticket good for a portion of a chair? How will the newly revealed value be distributed? Will those that could potentially keep it for themselves hand over your fair share? Another wrote:

The BIS will not allow the distribution of all gold to settle claims.

And then FOA:

Somehow, the BIS and the major private gold holders know the total claims, as does Another. The Euro group is going to force those claims into real bids instead of just claims!

Again, what do you have? Do you have your chair, or do you have a claim check that's supposedly good for a chair?

Jeff said...

GLD inventory is up 31 tons in a month, and price is up. Who thinks the dip/puke is coming?

ChrisF said...

Victor,

On Feb 16 you said "I am pretty sure you will not get a contract for physical gold. They won't sign any such thing. They know why."

As discussed, I have been looking around for way out-of-the-money call options on physical. It seems you are correct. LBMA Market Makers' quotes for physical settlement are substantially higher priced, like the DEC2014, 4000$/oz strike, call option is around 3% versus 1% of current spot at some houses for cash settlement.
The very fact that this very wide price difference exists may illustrate that what you say and that "they do know why", and rather than not quote at all, they are simply pricing themselves out!
I found this very interesting and worth sharing.
This also illustrates JR's quotes above.

victorthecleaner said...

ChrisF,

the quotes you are mentioning are for settlement in US$ versus settlement in unallocated gold, aren't they?

I don't think you will find anyone who settles in allocated.

Victor

ChrisF said...

Victor,

My understanding and what I asked them to quote for was "settlement in bullion loco ... (my place)"
Since I have not taken their offer further I cannot confirm all the finer points of the offer, like the small print etc...
I assumed that I would be able to drive down to the local "loco" and pick all the stuff up! (dreaming?)
This equals allocated in my book.
It might be that their small print would give them an exit, but in view of the pricing I did not take it further.

I am not in W,Europe or N.America.

JR said...

Hi RLP,

In follow up to my comment that "The 240 billion turnover is big money looking for a currency hedge" from last thread, the above FOA quote seems to directly speak to the issue (and also to an issue oft discussed with Michael H. about oil and dollar's timeline ending as its ability to produce non price inflationary economic gains came into sight):

FOA (10/9/01; 10:05:48MT - usagold.com msg#117)

Lost in all the confusion is the distinction between investing in the price of gold and investing in gold itself. Perhaps 90% of all the investing in today's worldwide, dollar settled, gold market is done in this first way mentioned. Yes, the market is structured, contractually, to settle in gold. However, in practice, in norm, and in past legal precedent, it is accepted that paper gold trading is meant to only capture the price movements in gold while ceding, what could be, controlling physical trades and their price setting function to other market areas.

Obviously, this is the way it all started, years ago, with the physical trading and its fundamentals dominating the lesser paper trading. But the market evolved with the paper contractual trading becoming 100 or more times the size of the physical side. But everyone already knows all this, right?

What doesn't seem to be obvious is the "why" the paper market grew so large. It grew to dominate because world wide dollar expansion reached its "non hedged" peak. In other words, the dollar's timeline was ending as its ability to produce non price inflationary economic gains came into sight.

In order to push dollar holdings further, international players needed and purchased "paper financial hedges" to balance their risk. Within their total mix of derivative hedges were found "paper gold price hedges"; modern gold derivatives. The important thing to remember is that these positions are not and never will be used to demand physical gold. They are held to buffer financial and currency risk associated with holding any form of dollar based asset. To work these items don't need to really perform "dollar price movements" in the holders favor as much as they are present in the portfolio to act as insurance stickers.

In that truth, these paper gold positions act like FDIC insurance at our banks.

burningfiat said...

JR and VtC,

Thanks for your comments on "world reserve" Euro.

I think I'm aligning a bit with your interpretation, Victor.

Reasonable is also your interpretation of the scriptures JR, namely that the Euro is a reserve currency for trade.

What I'm thinking about here as an example, is a non-US, non-Euro-zone central bank with fairly balanced trade, and MTM gold (like almost all central banks, other than UK,US):
Freegold has just happened. Euro has devalued quite a bit (x10 or something) compared to gold. USA is in full-blown Hyper-inflation. This peripheral central bank with MTM gold now has the major part of its reserves held in gold, and maybe 10% left as other currency. Should this country's central bank rebalance its reserve-mix to acquire more Euro's?
Only enough to facilitate easy trade with Europe, I say. There is no need to hold larger amount Euro's than necessary to accommodate trade. For Long-term reserves/rainy day funds, gold is superior. The Euro will be loosing purchasing power at up to 2% per year according to ECB itself. Gold will be stable against other goods.

The US situation is perhaps a bit different, as we maybe looking at HI, so the Euro will be just dandy as secondary currency for USA (like US$ was for Argentina 10 years ago).

I don't know if I'm really disagreeing with A/FOA, or if it's just a matter of degree. A/FOA never put a percentage on future optimal holding of the Euro (how could they!), and I also have the sense that FOA's talk on this subject is mostly US-centric.

At the end of the day any central bank's (or other entity's) currency/gold reserve holding ratio should be dependent on how your needs are perceived to be distributed on the t-axis.

/Burning

burningfiat said...

BTW, regarding t-axis. Spend it while you can. You know your stupid descendants will be squandering the precious in a few generations anyway :-)

victorthecleaner said...

burningfiat,

for your personal investments/saving, I don't think there ever was a question. For third-party CBs (non-US non-Euro), I think a lot depends on how the oil producers react.

If they require gold, it will become very difficult for the Euro, too. If they switch to Euro, then many third party CBs may actually purchase a lot of Euros. If they stick with the US$ for much longer, well into the US$ crash (for whatever political or military reason), this would be a disaster for the ROW, and someone would have to actively break the BB system in order to stop this. Who will have the balls to do that?

Victor

burningfiat said...

Victor,

I can see that. As JR quoted Another above: After oil for Europe is traded in Euros, producers supposedly want "strong currency" thereafter and then also switches to Euro for other countries trading.

Sort of makes sense, but then again, why not sell oil in the local currency (NOK,SAR whatever) like with any other product, and then let the lovely Freegold market sort things out? Does oil always need a mega-currency to make the flow happen?

Almost needless to say, this oil-flow just needs to be balanced by other goods or gold flowing into the oil-producing contries, then all should be fine regardless of temporary mediums of exchange.

/Burning

ChrisF said...

Victor,

Sorry, re your earlier question on the quotes for call options, I may have been unclear.
It was not one MMaker giving 2 different quotes, one for bullion settlement and one for $ settlement.
The quotes came from different companies.

The high quote for bullion settlement came from a LBMA MM outfit that deals via their local company in physical in my location.

The low quote for $ settlement only came from a large bank that trades in anything for $ and not physical.

I did not want to imply that it is
one LBMA MM that is making such a distinction between bullion and $ settlement. That would make headline news!

JR said...

Burnignfiat,

Victor and me are saying the same thing. You appeare lost in semantics and nittery, step back and see the big picture -

from Dilemma - there are economies of scale or network effects at work

We need a fiat currency like the euro that structurally supports Freegold in order for gold to perform its highest and best role in the international monetary and financial system. The alternative is global economic chaos upon the denouement of the dollar. This is why I praise the euro.

And here we are today. The U.S. dollar has built up 88 years' or so worth of global "network value" that is now being challenged by network operator complacency and conflict of interest, as well as a new competitor that has eliminated the dollar's two fundamental flaws.

So here's the dilemma. What do you do if your use of the dollar in so many ways is the most important to the dollar's global network value? If you abandon it you will be hurt. Yet if you stick with the dollar you will be hurt badly in the end. So how do you minimize your own cost of switching currencies?

I have a reading assignment for all of you. It comes courtesy of the ECB and it should spark a lively discussion in the comments here. Perhaps it will even help add some network value to this blog.

This is paper #77 from the ECB's "Occasional Paper Series." It is titled:

OIL MARKET STRUCTURE, NETWORK EFFECTS AND THE CHOICE OF CURRENCY FOR OIL INVOICING

JR said...

The excerpt from the ECB paper linked above:

Why is crude oil predominantly invoiced in one currency? The next section attempts to answer this question.

Network effects arise when the utility a consumer derives from a particular good is dependent upon the number of other individuals also consuming that good. The network property of a good has the following four implications for the market for that good. First, a minimum level of agents using the good (critical mass) is necessary for the initial adoption of a network good. Second, the demand for network commodities is associated with a bandwagon effect, i.e. the more individuals use the good, the more incentive there will be for other individuals to use it as well. Third, network effects may give rise to multiple and unstable equilibria related to the interplay of information, expectations and coordination. Finally, there are two problems linked to network goods, which may result in market failures: excess inertia, i.e. resistance by individuals to using a “superior” network commodity, and excess momentum, i.e. a rush by individuals to an “inferior” network good. Treating money as a network good is a recent development in economics and has led to interesting results concerning the origin of money, fiat currency and monetary integration.

This section develops a model that captures network effects in the oil market, extending the models developed by Stenkula (2003) and Oomes (2003). The market consists of many buyers (B) and sellers (S) of crude oil. While the oil producers are sellers in this game, they have an incentive to invoice their oil contracts in the currency with which they will pay for their (non-oil) imports of goods and services from the rest of the world. In short, we will call these (non-oil) goods and services food.

Similarly, the rest of the world are buyers of oil and sellers of food. Both parties aim to minimize foreign exchange risk and costs associated with the use of a specific currency for trade. In an environment where buyers and sellers are matched randomly and are subject to cash-in-advance constraints, both types of agents may choose between two currencies, i.e. euro (e) or US dollars (d), as the invoicing currency for their contracts. Each contract is fully invoiced in a single currency. In addition, the price of each contract is assumed to be constant and normalised to one. At time t, the sellers sell oil to the buyers, while at time t + 1, the buyers of oil sell food to the oil sellers. Hence, all agents try to anticipate the currency they will need for purchases in the next period.

Depending on whether or not the currency they accept for payment for oil is the same as the currency they use for their imports, the oil producers (S) may incur three types of cost, related to the three functions of money – medium of exchange, unit of account and store of value.14

14 Note that, although for the remainder of the paper we refer to oil exporting countries, the analysis for oil companies is similar: they are either buyers or sellers of oil, or both; and they too incur costs when they invoice oil in one currency and have to record profits and pay taxes and dividends in another.

The theoretical literature on trade invoicing explains the almost universal use of the US dollar in international trade in crude oil by means of the fact that petroleum is a homogeneous good traded in organized exchanges. Apart from serving as a medium of exchange, the US dollar fulfills the function of a unit of account by providing price transparency in the oil market. Thirdly, the macroeconomic stability of the United States and the depth of the US financial markets explain the role of the US dollar as a store of value and the low liquidity costs associated with holding the currency.

burningfiat said...

Thanks JR,

I think the penny has dropped. A refresher on the network effect was what I needed to wrap my head around the need for oil-producers to converge on a single currency for trading...

/Burning

victorthecleaner said...

burningfiat,

I second JR. Apart from this, if one country, say Norway, would sell their oil for local currency, i.e. NOK, the NOK would become incredibly strong. So either the non-oil part of their economy would have to get used to a gradually deflating environment (don't know whether this would be possible - it would certainly be quite different from anything else we know) or they would have to expand their money supply a lot.

Then, when oil demand fluctuates, the NOK would go on a rollercoaster ride every time. Certainly very inconvenient for the non-oil part of their economy if not seriously damaging.

You can see the dependence on resource demand already with the Canadian and Australian dollars, and this is before Canada becomes a major oil exporter. Even for Canada, this must sometimes be annoying (2006-2008).

Victor

AdvocatusDiaboli said...

a little bit of OT:
just dropped quite a lot of Exxon stocks (as well as Kraft, really know joke, almost no US stocks left, except Coke). Warren, you know, it was time to, with >30% gain and shrinking yields, time to look for something new.

Now I am thinking: does it make sense to buy 1kg AU-coins? maybe some sucker will pay collector extra later or just best bang for the buck?
Thanks for thoughts, AD

JR said...

Some follow up food for thought on the idea of the Euro as the initial reserve currency idea in Freegold and where it may go from there.

Arch posted a speech by Bini Smaghi on “The reform of the international monetary system” in the comments to "Unambiguous Wealth 2 – The MF Global Chronicles," here is an excerpt:

An alternative view is that of a multi-polar currency system. The emergence of such a system would accompany the global rebalancing of economic power that is taking place. It would be a market-driven process rather than requiring an international agreement, framework or mechanism. And to be most conducive to global stability, the shift to a multi-currency system should ideally occur gradually.

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

I commented in response:

I got the sense Bini Smaghi's point echos A/FOA's message about the importance of trading partners and a multipolar system built around regional trade currencies linked together through a floating physical gold price. Sure for now as we transition from one reserve currency the Euro must be big enough to pick up the slack, but I've always understood that the process would continue to evolve as more currencies embraced the MTM structure and followed the Euro's path to stability:

"The world is heading towards a huge financial / currency crack up, but it won't work out with gold coming back into the money game. This very long term transition is playing on a move away from dollar domination with Europe preparing to suffer less than us by pulling in as many other political trading blocks as they can."

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

As in real war defense, of today, some countries hold a much lesser army, and depend on "the alliance" with other stronger nations to defend them. Such it is with the currencies! Many states hold but a few "digital currencies" as reserves for currency wars and see no need for "gold nuclear weapons". They sell off these weapons and do join "the currency alliance" of stronger nations. We see this in Europe, yes?"

5/21/98 ANOTHER (THOUGHTS!)"

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

Robert Mundell: The advent of the euro has demonstrated to one and all how successful a well-planned fixed exchange rate zone can be. ... The 11 countries of the
euro zone are now getting a better
monetary policy than they ever had
before. The creation of the euro zone therefore suggests a viable approach to the formation of other currency areas when prospective members can agree on a common inflation rate and a coordinated monetary policy.

[...]



More on these ideas here

DP said...

AD, for me it would be bullion every time. Numismatic premiums - thanks, but no thanks.

(To which the correct response would be: "yes, I can see now that you, sir, are indeed the non-numismatic type of... person. No offence." And none would be taken. Because I am.)

burningfiat said...

Victor,

As said above, I think I'm on the same page as you and JR now. If the Euro becomes the new oil trade-currency (which the network effect seem to suggest), it makes sense for bigger Euro-reserves for third-party central banks. I can also agree with that now.

Now let's put that aside for a moment and do a thought experiment on the NOK accommodating Norwegian oil trade after the Freegold transition.
The normal thing for Norges Bank would be to expand the money supply enough that price stability (1-2% inflation) is achieved in Norway. To control the new larger amounts of money all the Norwegian central bank (or private Norwegian super producers) would need to do, was basically to play in the new Freegold market.
Not enough NOK for foreigners to buy oil with? No problem just buy some more foreign gold with those (newly printed if needed) NOK.
Too many NOK coming home to roost, driving inflation up? Reign in the balance sheet if the oil trade is diminishing (maybe sell some central bank precious if necessary).
The trick is to divert the overflow/underflow of currency in/out of gold (the big battery FOFOA has likened it to) and away from everyday goods.
Well, grossly simplified example I guess, but I think the peripheral central bank (especially for surplus countries) balance sheet would be easier to control in the Freegold environment, than now under the $IMFS.

I could be wrong though, and you, JR, are welcome (as always) to smack my head with some quotes if deemed appropriate.

/Burning

JR said...

Buringfiat,

A thought experiment - all else equal, who can more easily "play in the new Freegold market" to manipulate a currency's value - an individual nation or a large trade currency of an alliance of nations from the same trading bloc that is "backed" by the collective gold reserves of the members of this currency system?

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

"The world is heading towards a huge financial / currency crack up, but it won't work out with gold coming back into the money game. This very long term transition is playing on a move away from dollar domination with Europe preparing to suffer less than us by pulling in as many other political trading blocks as they can."

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

As in real war defense, of today, some countries hold a much lesser army, and depend on "the alliance" with other stronger nations to defend them. Such it is with the currencies! Many states hold but a few "digital currencies" as reserves for currency wars and see no need for "gold nuclear weapons". They sell off these weapons and do join "the currency alliance" of stronger nations. We see this in Europe, yes?"

5/21/98 ANOTHER (THOUGHTS!)"

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

Robert Mundell: The advent of the euro has demonstrated to one and all how successful a well-planned fixed exchange rate zone can be... The 11 countries of the euro zone are now getting a better monetary policy than they ever had before. The creation of the euro zone therefore suggests a viable approach to the formation of other currency areas when prospective members can agree on a common inflation rate and a coordinated monetary policy.

JR said...

Yes burningfiat,

" but I think the peripheral central bank (especially for surplus countries) balance sheet would be easier to control in the Freegold environment, than now under the $IMFS"

Randy Strauss via Gold: The Ultimate Hedge Fund

[article] ...Even in light of all of this shifting by central banks into other currencies, the dollar still comprises 2/3 of global reserves and attempts to shift away from the dollar would destroy the value of central banks’ portfolios.


Randy's Comment: Although I should be well used to it by now, it still amazes me every time I see comments like the final remark here regarding any significant shift from dollars will lead to the destruction of central banks’ portfolios. It’s almost as if the commentator is trying to help indoctrinate a paralyzing fear as a means to prevent any such attempt on the part of the CBs, and to also create enough grass-roots doubt against such an attempt ever being made that we the people won’t perceive any benefit in trying to front-run with our own flight out of dollars and into gold...

It is an error in thought or judgement, however, to believe that a “destruction” of the dollar portion of the portfolio would therefore proportionately destroy the portfolio as a whole. That would only be the case if all other things remained unchanged, but life seldom works out so neatly as that. Sometimes an action can set forth an immediate chain reaction that literally changes EVERYTHING you thought you knew about the situation!...

In the world of the “new normal,” it is indeed possible (and someday soon desirable) to let the fuse be lit and allow the CB store of dollars be consumed. And to be sure, it is singularly the latent potential energy of the gold component that allows us to make this analogy with gunpowder. The natural chain reaction in the tiny open market for physical gold would immediately bring to bear massive “heat” and “pressure” upon its price… **POW** thus swelling the “volume” of its value relative to all other things. So even without radical changes to the quantity of physical holdings, a simple expansion in golden value will more than compensate the average portfolio of the central banks against the destruction of the dollar component.


cont.

JR said...

cont.

Still can’t wrap your head around it? Bear in mind that the gold price is not a simple one-to-one inverse relationship with the dollar. There is a great leverage lurking in there, but it has been largely masked by the artificial abundance of paper gold which weighs down upon the equilibrium price. And even so, since 2002 the dollar value has decline by just 20% on a trade-weighted basis, whereas the gold price has responded with a 300% gain. And the moreso that the public and private parties of the world rightly gravitate toward physical gold instead of the illusion of paper derivative gold as the solid foundation of their savings and diversifications, the moreso you will see this price leverage grow in favor of larger multiples of gold price gains against modest dollar losses....

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

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

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

When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold.

dieuwer said...

Regarding Exxon Mobile:

a) its dividend is a paltry 2.2%, less than the yield of a 10-year Treasury. Of course Buffet does not like that.
b) More importantly, the performance of XOM as measured in gold bullion has been poor since 2007. It dropped from about 8 shares per ounce to currently 20 shares per ounce.

The latter brings me to my investment thesis: Risk is not worth taking IF the reward is not outperforming bullion.
I can tell you that not many stocks have this treat.

Nick said...

Bravo FOFOA!

Much more articulate and accurate than my jumbled analysis :)

somanyroadsinvesting said...

I used to be a huge Buffett fan. Went to three annual meetings. A while back he really was a great investor. The problem is he became so big I think his thinking started to change.

You have to maintain the current system when you are that big within it. He talks about this inflation like it is some alien force from above. Then he says taxes wipe people out as well. So instead of writing a piece on what we should be changing to relieve this never ending erosion from inflation, he just takes that as a given and says buy stocks. Then on taxes, he wants to raise cap gains taxes now.

This from a person who gave most of his stock to charity so in turn pays no taxes. Which is great but its a global charity, therefore all the charity will not all go to the US vs the taxes.

I just don't get his rationale for knocking the guy that is just trying to stay even and keep is head above water. What if you don't want to worry about stocks, and follow conference calls etc. Its just so ridiculous on its face.

kobajashi said...

Dear readers of FOFOA,
does anybody know Keith Weiner?

I just read an article from him:

http://www.goldstandardinstitute.net/2012/01/gold-bonds-averting-financial-armageddon/

its about a way to convert existing bonds to "gold bonds" (bonds that will be payed in gold?
read an excerpt below ...

"The root cause of our monetary disease has its origins in the creation of the Fed and other central banks prior to World War I, and in the insane treaty signed in 1944 at Bretton Woods in which many nations agreed for their central banks to use the US dollar as if it were gold, and this paved the way for President Nixon to pound in the final nail in the coffin. He repudiated the gold obligations of the US government in 1971, thereby plunging the whole world into the regime of irredeemable paper.
The US dollar game is a check-kiting scheme. The Fed issues the dollar, which is its liability. The Fed buys the US Treasury bond, which is the asset to balance the liability. The only problem is that the bonds are payable only in the central bank’s paper scrip! Meanwhile, per Bretton Woods, the rest of the world’s central banks use the dollar as if it were gold. It is their reserve asset, and they pyramid credit in their local currencies on top of it.
It is not a bug, but a feature, that debt in this system must grow exponentially. There is no ultimate extinguisher of debt. In my paper on Inflation (http://keithweiner.posterous.com/inflation-an-expansion-of-counterfeit-credit), I define inflation as an expansion of counterfeit credit. I define deflation as a forcible contraction of counterfeit credit, and the inevitable consequence of inflation. Well, we have had many decades of rampant expansion of counterfeit credit. Now we will have deflation, and the harder the central banks try to fight it by forcing yet more expansion of counterfeit credit, the worse the problem becomes. With leverage everywhere in the system, it would not take many defaults to wipe out every financial institution. And there will be many defaults. One default will beget another and once it really begins in earnest there will be no stopping the cascade.
Another key problem is duration mismatch. Today, every bank and financial institution borrows short to lend long, many corporations borrow short to finance long-term projects, and every government is borrowing short to fund perpetual debts. Duration mismatch can cause runs on the banks and market crashes, because when depositors demand their money, banks must desperately sell any asset they can into a market that is suddenly “no bid”. In two papers (http://keithweiner.posterous.com/fractional-reserve-is-not-the-problem and http://keithweiner.posterous.com/falling-interest-rates-and-duration-mismatch), I cover duration mismatch in banks and corporations in more depth.
Most banks and economists have supported a policy of falling interest rates since they began to fall in 1981. But falling interest rates destroy capital, as I explain in that last paper, linked above. As the rate of interest falls, the real burden of the debt, incurred at higher rates, increases.
Related to this phenomenon is the fact that the average duration of bonds at every level has been falling for a long time (US Treasury duration began increasing post 2008, but I think this is an artifact of the Fed’s purchases in their so-called “Quantitative Easing”). Declining duration is an inevitable consequence of the need to constantly “roll” debts. Debts are never repaid, the debtor merely pays the interest and rolls the principal when due. As the duration gets shorter and shorter, the noose gets tighter and tighter. If there is to be a real payback of debt, even in nominal terms, we need to buy more time. At the US Treasury level, average duration is about 5 years. I doubt that’s long enough.

to cont.

kobajashi said...

cont.

And of course the motivation for building this broken system in the first place is the desire by nearly everyone to have a welfare state, without the corresponding crippling taxation. It has been long believed by most people a central bank is just the right kind of magic to let one have this cake and eat it too, without consequences. Well, the consequences are now becoming visible. See my papers (http://keithweiner.posterous.com/the-laffer-curve-and-austrian-economics and http://keithweiner.posterous.com/a-politically-incorrect-look-at-marginal-tax) discussing what raising taxes will do, especially in the bust phase like we have now.
In reality, stripped of the fancy nomenclature and the abstraction of a monetary system, the picture is as simple as it is bleak. Normally, people produce more than they consume. They save. A frontier farmer in the 19th century, for example, would dedicate some work to clearing a new field, or building a smokehouse, or putting a wall around a pasture so he could add to his herd. But for the past several decades, people have been tricked by distorted price signals (including bond prices, i.e. interest rates) into consuming more than they produce.
In any case, it is not possible to save in an irredeemable paper currency. Depositing money in a bank will just result in more buying of government bonds. Capital accumulation has long since turned to capital decumulation.
This would be bad enough, as capital is the leverage on human effort that allows us to have the present standard of living. We don’t work any harder than early people did 10,000 years ago, and yet we are vastly more productive due to our accumulated capital.
Now much of the capital is gone, and it cannot be brought back. It will soon be impossible to continue to paper over the losses. The purpose of this piece is not to propose how to save the dollar or the other paper currencies. They are past the point where saving them is possible. This paper is directed to avoiding the collapse of our civilization.
If we stay on the present course, I think the outcome will look more like 472 AD than 1929. We must solve three problems to avoid that kind of collapse:
1. Repayment of all debts in nominal terms
2. Keep bank accounts, pensions, annuities, corporate payrolls, annuities, etc. solvent, in nominal terms
3. Begin circulation of a proper currency before the collapse of the paper currencies, so that people have something they can use when paper no longer works
I propose a few simple steps first, and then a simple solution. All of this is designed to get gold to circulate once again as money. Today, we have gold “souvenir coins”. They are readily available, and have been for many years, but they do not circulate.
A gold standard is like a living organism. While having the right elements present and arranged in the right way is necessary, it is not sufficient. It must also be in constant motion. Gold, under the gold standard, was always flowing. Once the motion is stopped, restarting it is not easy. This applies to a corpse of a man as well as of a gold standard.
The first steps are:
1. Eliminate all capital “gains” taxes on gold and silver
2. Repeal all legal tender laws that force creditors to accept paper
3. Also repeal laws that nullify gold clauses in contracts
4. Open the mint to the (seigniorage) free coinage of gold and silver; let people bring in their metal and receive back an equal amount in coin form. These coins should not be denominated in paper currency units, but merely ounces or grams

kobajashi said...

cont.

Each of these items removes one obstacle for gold to circulate as money, along side the paper currencies. The capital “gains” tax will do its worst damage precisely when people need gold the most. At that point, the nominal price of gold in the paper currencies will be rising very rapidly. Any sale of bullion will result in a tax of virtually the entire amount, as the cost basis from even a few weeks prior will be much lower than the current price. This amounts, in the US, to a 28% confiscation of gold. This tax will force people to keep gold underground and not bring it to market. It will contribute to the acceleration of permanent backwardation.
It is important to realize that gold is not “going up”. Paper is going down. There is no gain for the holder of gold; he has simply not lost wealth due to the debasement of paper.
Current law forces creditors to accept paper as payment in full for all debts, and there are also laws that nullify gold clauses in contracts. Repeal them, and let creditors and borrowers negotiate something mutually agreeable.
Finally, the bid-ask spread on gold bullion coins such as the US gold eagle or the South African krugerrand is too wide. If the mint provided seigniorage-free coinage service, then people would bring in gold bars and other forms of bullion until the bid-ask spread narrowed appropriately. One of the attributes that gives gold its “moneyness” is its tight spread (even today, it is 10 to 30 cents per $1600 ounce!) But currently, this tight spread only applies to large bullion bars traded by the bullion banks and other sophisticated traders. This spread must be available to the average person.
As I said earlier, these steps are necessary. Gold certainly will not circulate under the current leftover regime from Roosevelt and Nixon. But it is not sufficient to address the debt problem.
Accordingly, I propose a simple additional step. The government should sell gold bonds. By this, I do not mean gold “backed” paper bonds. I mean bonds denominated in ounces of gold, which pay their coupon in ounces of gold and pay the principal amount in ounces of gold. Below, I explain how this will solve the three problems I described above.
Mechanically, it is straightforward. The government should set a rule that, to buy a gold bond, one does not bid dollars. One bids paper bonds! So to buy a 100-ounce gold bond, then one could bid for example $160,000 worth of paper bonds (assuming the price of gold is $1600 per ounce). The government retires the paper bond and in exchange replaces it with a newly-issued gold bond.
The government should start with a small tender, to ensure a high bid to cover ratio. And a series of small auctions will give the market time to accept the idea. It will also allow the development of gold bond market makers.
With gold bonds, it would be possible to sell long durations. With paper, there is no good reason to buy a 30-year bond (except to speculate on the next move by the central bank). The dollar is expected to fall considerably over a 30-year period. But with gold, there is no such debasement. The government could therefore exchange short-duration debt for long-duration debt.
At first, the price of the gold bonds would likely be set as a straight conversion of the gold price, perhaps adjusted for differing durations. For example, a 100 ounce gold bond of 30 years duration might be bid at $160,000 worth of 30-year paper bond.

kobajashi said...

cont.

But I think that the bid on gold bonds will rise far above “par”, for several reasons I will discuss below.
The nature of the dynamic will become clear to more and more people in due course. In the present regime, there is a common misconception that the yield on a bond is set by the market’s expectation of how much consumer prices will rise (the crude proxy for the loss of value for the dollar). But this is not true. Unlike in a gold standard, in an irredeemable paper standard, people are disenfranchised. They have no say over the rate of interest. The dollar system is a closed loop, and if you sell a bond then you either hold cash in a bank, which means the bank will buy a bond. Or you buy another asset. In which case the seller of that asset holds cash in a bank or buys a bond. This is one of the reasons why the rate of interest has been falling for 30 years despite huge debasement. All dollars eventually go into the Treasury bond.
The price of the paper bond today is set by a combination of central bank buying, and structural distortions in the system. But it is a self-referential price, in a game between the Treasury and the Fed. The price of the bond does not really come from the market. And this impacts every other bond in the universe, which all trade at varying spreads to the Treasury.
An alternative to paper bonds would be very attractive to those who want to save and earn income for the long term, pension funds, annuities, etc. Not only will the price of gold continue to rise (i.e. the value of the paper currency will continue to fall towards zero), but also a premium for gold bonds would develop and grow. The quality asset will be recognized to be worth more, and at the least people would price in whatever rate of the price of gold they expect to occur over the duration of the bond.
This dynamic—a rising price of gold, and a rising exchange value of gold bonds for paper bonds—will allow governments and other debtors to use the devaluation of paper as a means to repay their debts in nominal terms, but affordably in real terms.
This is impossible under paper bonds! This is because the process of debasement is a process of the Treasury borrowing more money. Debt goes up to debase the dollar. This path leads not to repayment of the debt cheaply, but to exponentially growing debt until a total default.



... and more (see the link)

grtz

Koba

JR said...

Hi Keithe I mean Koba,

You are what FOA and Aristotle would call a "Hard Money Socialist." The spam of your ideology may not get you too far, the Hard Money Socialists are an easy mark ;)

Apparently you don't know about:

FOFOA's dilemma: When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma.

The Return to Honest Money

victorthecleaner said...

This article is a nice example of how one can work terribly hard for a month and still completely miss the point:

4. Open the mint to the (seigniorage) free coinage of gold and silver; let people bring in their metal and receive back an equal amount in coin form. These coins should not be denominated in paper currency units, but merely ounces or grams

These coins will never circulate, but will be hoarded as a consequence of Gresham's law. Why is that? Because the price of gold in US$ is too low.

Why is that? Because you keep tying credit to gold and thus create a huge supply of paper gold which depresses its price. Then people hoard the real stuff and spend the paper.

If you propose instead to
* make bullion banking illegal
* make gold bonds illegal
* and then circulate coins denominated by weight

then we can start a serious discussion.

Victor

costata said...

FOFOA,

Love the Godwarren graphic. Nice to see you come out swinging on ole WB. Like somanyroads' I used to be a fan of Buffett but the gall of the man is breathtaking these days. Someone should explain the concept of a "zero sum game" to WB. Doh, of course he already gets that.

Speaking of gall.....

From kobajashi the spam Wiener's little self-promotion (with a minor correction from yours truly):

The first steps are:
1. Eliminate all capital “gains” taxes on gold and silver

2. Repeal all legal tender laws that force creditors to accept paper


2A. US government and world economy collapses within 7 days.

3. Also repeal laws that nullify gold clauses in contracts

4. Open the mint to the (seigniorage) free coinage of gold and silver; let people bring in their metal and receive back an equal amount in coin form. These coins should not be denominated in paper currency units, but merely ounces or grams


BTW Mr. Wiener a nod to Professor Antal Fekete for contributing point 4 to the debate would have been gracious.

FOFOA said...

Hawks5999 wrote:

"Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now."

"This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further."

Can you break down the nuance between these two statements? Because they sound like they are both saying the same thing to me. Sorry for being dense if it's really obvious."


1/4

Hello Hawks,

Great replies from Max, JR and others, by the way!

It's not really obvious, but I'll try to break it down even further for you. As JR pointed out, price and value are different things. Price is determined at the margin. Think stock to flow ratios with the ratio acting as a governor on the price in both directions.

Warren's stocks have relatively objective valuations through common metrics like earnings, operating cash flow and the sum value of their component parts. This is kind of like the NAV for GLD and PHYS. If the price falls too far below that valuation (it is undervalued), the stock to flow ratio will rise constricting the amount of flow (supply) at the margin where price is discovered. If the price is higher than the valuation (it is overvalued), the ratio will collapse flooding the market with shares.

Now compare that with gold which has no similar objective valuation. Of all the possible "unproductive assets" out there, gold has the highest stock to flow ratio because of its unique, singular properties. To think about it simply, price is determined at the margin—the flow—while value resides primarily with the stock(holders). Does this make any sense? If gold is as undervalued as I say it is, then we should expect the s/f ratio to explode, constricting the flow (supply) at the margin.

Can you see how viewing price and value from this angle puts the onus on the stock holders at least as much as on the pool of new buyers?

"Correlation does not imply causation" In light of this new perspective, we can see that price can converge with value through the actions of either the current stock holders or the pool of new buyers. And when valuation is of the relatively objective variety, as it is with OG's stocks, it is usually a combination of both.

But in the case of gold, where value is entirely subjective, this is not necessarily the case. In fact, I would even propose to you that, subjectively, those who already possess the physical gold value it higher than those who don't yet hold it. Ergo, the explosion of price to the level of value is more likely to be brought about by the existing stock holders exploding the stock to flow ratio toward infinity for a period of time than by a stampede of panicked savers driving the price higher and higher.

Cont…

FOFOA said...

2/4

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.

(Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up [to cease flowing] as the price rises.) Westerners should not be too upset with the CBs actions, they are buying you time!"


Me: "Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now."

"Gold the wealth reserve" means A) only physical gold, and B) in its widest distribution… "which requires a much higher valuation than it has right now." "Correlation does not imply causation." Gold in its most valuable role correlates with it being in wide distribution, but it is not necessarily caused by that. Are you starting to see yet? Perhaps gold's functional change will cause its widest distribution, not the other way around.

Today's "gold" encompasses many other things. Ask any investor what percentage they have in gold and whatever they tell you will likely include mining shares, GLD, silver, maybe some platinum, and possibly not even ANY discrete, unambiguous pieces of physical gold. This is an important concept to grasp, that "gold" today is a bastardized term and the $PoG does not have anything to do with "gold the wealth reserve—which means physical gold only."

People see the "paper gold market" working today and so they think that it can work all the way up. Like we'll go from $2,000 to $3,000 to $4,000 and so on all the way up to $55K. They think that as the pool of new buyers flood into today's "gold" the shorts (or the bullion banks) will simply have to cover their exposure and bid for any physical they need until the price gets high enough for them to get it.

In many ways today's "gold" does need an expanding pool of buyers. But here's the main difference between OG's stocks and physical gold. From my 2010 backwardation post:

Dollars bidding on MSFT stock set the value of that stock. If dollars are frantically bidding on MSFT (high velocity), the stock skyrockets. If dollars stop bidding for MSFT all at once (low velocity), the price falls to zero. This is true for everything in the world **except gold**.

Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero.


And from yet another angle we can put the onus on the existing stock holders rather than a pool of new buyers.

Cont…

FOFOA said...

3/4

In the post above you just heard OG talk about three major categories of investments which are, basically, stocks, bonds and "unproductive assets". Through the singular properties of gold (durability, fungibility, divisibility, lack of industrial uses, CBs have it, etc…) along with the focal point principle, we can go along with Warren and focus on only gold as the third major "competitor".

Now in just three weeks I've written posts about both the King of Bonds and the King of Stocks dissing bonds. That should tell you something about bonds, no? So let's say it's mainly between stocks and gold at this point. As I have pointed out, stocks are for investors and gold is for savers. Savers outnumber investors by a longshot, and previously it was bonds that did it for the savers.

So now we've got all these homeless savers that will need to choose between stocks and gold (or else sit tight in bonds waiting to be sheared like either the Greek debt holders or Zimbabwe pensioners). This bunch is NEVER going to choose today's "gold" (the $PoG) en masse. They will likely end up splitting the difference and going 50/50 in stocks and bonds (or cash) while a few put 5% in GLD.

So what I don't foresee is a stampede by those homeless savers into today's "gold". There may well be another mini-stampede like we had in August, but it will display many characteristics of a bubble, including the volatility and the downside, which savers don't like. Savers aren't looking for the next XX-bagger and they don't like beta, so they are a hard sell for both OG and the $PoG. Savers simply want a nonfluctuating asset… preferably in real terms.

So Freegold, newly stabilized at a plateau stasis of ~$55K in constant dollars, will be very appealing to them. Funny to think that they'll buy gold en mass at $55K but not while it's only $1700, but hey, c'est la vie. As KindofBlue wrote: "Early adopters [of the next reference point for purchasing power] are being handsomely rewarded."

But once you realize that gold's highest value and widest distribution are correlated but not necessarily causally related in the obvious direction, the question then becomes how we get from here to there.

As I said (because ANOTHER taught me), " Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero." So you see, there doesn't need to be a stampede into today's "gold" for real, physical gold to become "priceless". ANOTHER wrote, "Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies"."

So now I'm looking only at physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold (i.e., not for paper profits). And I'm wondering when physical gold will stop moving through paper currencies, at least at parity with today's "gold", the $PoG. And I think that can only happen when the $PoG goes too low. OBA has a neat theory about that.

Look at Buffet's piece above. He's shunning bonds but keeping his cash in bills. That's what the savers are doing while they decide where to deploy that cash. All the financial advisors across the land are advising savers to hold some cash, because they just know there will be some deals soon. And for the really big money, that means T-bills, just like the $20B Berkshire is holding. And when a trade gets that crowded it chases the yield right away, which is why the T-bills are heading to sub-zero yields.

Cont…

FOFOA said...

4/4

This is the rush out of future-dated debt into Here&Now cash (T-bills for the really big $$$). It's the bank run shoebox under-mattress effect en masse. This makes the dollar look (temporarily) strong and today's "gold" (the $PoG) look weak by comparison, gold bug protestations notwithstanding. So just imagine another quick run-up like July/Aug. to, say, $2,333 correlating with a big spike in the USDX/$IRX (price) and then a crash in the $PoG down to ~$1,000 or lower. How hated would today's "gold" be by the homeless savers then? That's some serious beta!

So that's why I said in the post, "ALL TRADERS dump ALL gold, paper, physical, whatever, in my scenario. It has nothing to do with insiders. It has to do with traders and weak hands." And at the same time… because the return is surprisingly shitty all of a sudden… "physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold" … "stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero."

This is when the stock to flow ratio explodes to infinity and physical gold goes into hiding, when the price (the $PoG aka today's "gold") gets too low to support parity between it and "gold the wealth reserve, which means physical gold only."

FOA predicted something like this as well:

FOA (06/12/00; 19:48:25MT - usagold.com msg#26)
Put your cards on the table!

The current paper gold world will die (burn) as its value to users erodes, not increases!

…Again, most everyone in the Western Gold bug game is running with the ball in the wrong direction.

…So who is in danger of being hurt as this unfolds?

That's right, the Western paper gold long! I'm not talking about just the US market! This is about the entire world gold market as we know it today. The real play will be for the ones that get out in front of the move by owning physical…

It seems every Gold bug sees only half the trade and has great faith that contract law will favor a short squeeze. Yet, none of them see where it is the long that will be dumping and forcing the discount!


The point is, there is no price discovery market for "gold the wealth reserve" that could even require an expanding pool of buyers. There's only the stock to flow ratio of physical gold (gold the wealth reserve) as a tiny component part of the wide $PoG basket, today's (bastardized) "gold", a ratio which is already very high and struggling to keep from going infinite (parabolic). [Any stock with "zero" flow has an "infinite" s/f ratio because in the function r=s/f, as f approaches zero, r approaches infinity.] A rising $PoG "stretches" the existing flow making it "larger" in currency terms and keeping it from falling to zero. But what if the $PoG suddenly dips below even the cost of mining gold? What is that cost today?

Once the flow of "gold the wealth reserve" (physical gold only) is credibly reestablished at the revalued Freegold price, the savers will eat it up like hotcakes! Ergo, "its widest distribution possible."

"Correlation does not imply causation."

Hope this helps!

Sincerely,
FOFOA

DP said...

@costata,

http://www.youtube.com/watch?v=b_TUL_vVDT0

victorthecleaner said...

FOFOA,

fantastic! Why don't you make this an official posting?

This is indeed how it could happen. Classic hyperinflation flight of capital: there is a lot of high velocity 'gold' in the Exter pyramid above the US$ cash level. Only the proper gold sits below the US$ level and supports the US$.

When people get scared, the 'gold' starts running for the exists in order to get into cash. 'Gold' collapses. But gold has always been carefully watching and stops supporting the US$ precisely when that happens. Similar to 2008 - just worse.

How much gold is (by chance) in the wrong hands who view it as sitting above the cash level in the pyramid and will dump it when that happens? Who will manage to scoop it? Is this the reason why people such as Turk and Sprott certainly read Another/FOA, but never talk about it? Why GoldMoney has been set up? Too much of a conspiracy theory probably, but in any case, these people will probably get some scoop by just quoting a bid but no ask when it happens. As a dealer, I would be thankful for any physical inventory I have at that point.

Victor

Reven said...

Hi everyone,

I understand the importance of physical gold in our possession (which I continue to hold), however, I'd like opinions on the Sprott Physical Gold Trust (symbol: PHYS). Do you think Sprott's trust will be negatively affected by the collapse in the paper gold market?

I am of the opinion that it is the least ugly house in a bad investment neighborhood (with liquidity being the obvious advantage it holds over pure physical). At the center of this opinion is the fact that the PHYS premium over the spot paper price freely floats (see: http://www.sprottphysicalgoldtrust.com/NetAssetValue.aspx ).

In my mind, this is as close to Free Gold as it gets (for now). Sprott appears to have designed his Trust to take full advantage of the coming collapse/failure of the paper gold pricing mechanism. I believe Mr. Sprott is in 100% agreement with Free Gold on that aspect of what awaits us. I appreciate that he is of this opinion, which gives me further confidence that the Trust will survive the coming chaos in paper. I watch the daily fluctuations in the PHYS premium as a valuable gauge of sentiment and expect this premium to literally shoot to the moon as Free Gold approaches.

However, the custodian of the PHYS trust is the Royal Canadian Mint. And the fact that Canada seems to have a very small official gold reserve is rather disconcerting (and should be to them as well). I fear any gold stored at the Canadian Mint will be held hostage or seized by Canada's Government if their currency were to ever collapse in value. Canada has ample supplies of oil and gold in the ground, but that will be of no use to them in a currency crisis. Will Canada print Gold IOUs based on gold in the ground in the process of being mined? What's going to happen to these countries like Canada and the UK who don't have enough physical gold? Will they collapse along with the US Dollar? And if so, what implications does this hold for physical gold. Surely all countries will need gold to keep global trade from imploding, no? My understanding is that under the new paradigm, gold will serve the vital function of balancing the trade deficit/surplus equation globally and thereby lead to a sustainable future for capitalism. If China continues to maintain their trade surplus, gold must flow from West to East, which will therefore devalue our currency until trade balances.

Any thoughts would be much valued on this subject.

kobajashi said...

JR, Victor and costata,


I think there is a misunderstanding here.

I don't have any relation with mister Keith Weiner.


Its just that i came across his articles and thought it was a little in line with FOFOA's thoughts but clearly i was wrong.

It's probebly because i am from Belgium and have sometimes trouble to see the diffrences very clearly.

If 1 thing is for sure, than i can say i fully follow the thoughts of Another, FOA and FOFOA sinds 2006 and have been acting accordenly.

Its just (because englisch is not my language) somethimes difficult to see the flaws in others thougts.


But that's the reason i am reading here ;-)



1 last question about the article... Don't you see them (for exaple here in europe)trying to give eurobonds witch are repayable in gold? Its (maybe) not because it won't work that they will not try it??
Or are you guys for sure they will not try that?


sorry for the bad englisch :-)


Greetz Koba

AdvocatusDiaboli said...

Hi FOFOA,
I really appreciate what you write, because it always gives new perspectives to think about.

Your thesis (if I understood well) about sharply dropping paper gold prices is mainly that somebody 1.) wants to get rid of it because having doubts AND/OR 2.) wants to take nominal gains.
BUT: Talking about the PRICE, it is always the last price occured on the last trade.
So during that dropping, who's buying and who's selling the paper gold?
1.) People who want to get rid of it (because afraid not to be able to take delivery, but why havnt they in the first place earlier?), will sell to people who want to cover their shorts. These parties will meet at a price where the shorts have covered there losses, yes? Will it be so low? How knows... if I where a bullion bank I would be happy just to cover my shorts with small nominal gains.
2.) Sellers just taken nominal gains will stop selling their paper, as soon no nominal gains are available, so dropping will also stop or at least slowed down.

I think physical will not be involved in this at all. But thanks if you can precise those issues a little bit more.
Greets, AD

JR said...

In my mind, this is as close to Free Gold as it gets (for now). Sprott appears to have designed his Trust to take full advantage of the coming collapse/failure of the paper gold pricing mechanism.

No, he designed his trust to take advantage of American HMS's love of paper gold. Its designed to make him goobs of money.

Who coulda knew?

JR said...

I watch the daily fluctuations in the PHYS premium as a valuable gauge of sentiment and expect this premium to literally shoot to the moon as Free Gold approaches.

You can only redeem 400 oz and larger

Jeff said...

AD, the paper price IS the physical price, for as long as the paper market functions. Who buys paper gold as the price falls? How about anyone who wants cheaper physical gold, for as long as delivery is being made? Remember, some Giants can force delivery on paper.

FOFOA: Point is, so what if everyone panics out of every kind of "gold" other than physical? As long as that liquidation is happening at a faster pace than the liquidation of physical, and remember there are some giants that are buying physical on the dips, that puts extreme pressure on the BBs. If the price drops that much, they've got to source the physical they sell at those lower prices for the price of paper gold to remain representative of the value of physical. If your assumption is that the CBs are still willing to support that connection with physical, as GATA's assumption is, then sure, they can handle it with CB backing. But I don't think the CBs are doing that. So I guess we'll see. If it drops to $1,400 I'd expect to see the biggest GLD puke ever, since that may be the only place for the BBs to get that kind of physical *IN SIZE* anymore. That's my thesis. The GLD puke has nothing to do with the AP's managing the NAV of GLD nor does it have anything to do with the sentiment of GLD investors. It has everything to do with the BB's (who are also APs) needing massive amounts of physical during the correction."

KJ said...

vtc wrote:

"How much gold is (by chance) in the wrong hands who view it as sitting above the cash level in the pyramid and will dump it when that happens? Who will manage to scoop it? Is this the reason why people such as Turk and Sprott certainly read Another/FOA, but never talk about it? Why GoldMoney has been set up? Too much of a conspiracy theory probably, but in any case, these people will probably get some scoop by just quoting a bid but no ask when it happens. As a dealer, I would be thankful for any physical inventory I have at that point."


pondered something similar. Funds like gld/phys and dealers like goldmoney all have minimum redemption requirements. Always wondered what % cannot redeem b/c they don't own enough shares/units. Enough small shrimps can comprise quite a few large shrimps. Also suspect there's many out there who believe they can redeem anytime but are unaware of the minimum redemption requirements. And in a panic, holders either want to redeem but find out they cannot and sell or outright sell as paper prices plummet. Of course, there's those that are in a position to redeem but do not and panic sell. Question is who'll be buying the shares/units? Will it be fair game for the smart money to load up on shares on the exchanges? Will Goldmoney and its 'owners' cash out those small shrimphs to take absolutely control of the physical gold?

Viewed rationally, no brainer if events play out as predicted and one can move swiftly and with sufficient resources to purchase sufficient shares/units, immediately redeem and take possession. Wouldn't bank on it though - the competition from players with big time $'s will likely be fierce and players that are most likely fully informed and connected. In addition to the time factor, a lot can happen from purchases of baskets to the redemption request and to actual delivery and possession.

KJ said...

Reven,

big unknown is termination risk.

http://sprottphysicalgoldtrust.com/documents/prospectus/SprottPhysicalGoldTrustProspectus-CAN.pdf

Page 79 of the prospectus and 'risk factors' starting at page 11 but specifically those at page 15 and 16. Notably:

risk factors:
i) The Mint may become a private enterprise, in which case its obligations will not constitute the unconditional
obligations of the Government of Canada.

ii) The Trust may terminate and liquidate at a time that is disadvantageous to unitholders.

termination:
iii) there are no outstanding units
iv) of course, manager bankruptcy/insolvency


don't know how things will play out but at the same time, not taking any chances, ergo, physical possession it is.

AdvocatusDiaboli said...

Jeff:
"AD, the paper price IS the physical price, for as long as the paper market functions. Who buys paper gold as the price falls? How about anyone who wants cheaper physical gold, for as long as delivery is being made? Remember, some Giants can force delivery on paper."

Sorry, but that is selfcontradicting. The last 400oz physical I bought, I just simply called my bank, lucky me: I got it for almost the same price as paper. Tested it and picked up that stuff personally three days later. Why should I buy paper gold? To get MF'ed? If somebody buys paper, it's because he wants also to sell paper (maybe something for OG WarrenB), not to take delivery, simple as that.
Greets, AD

Jeff said...

AD, good for you getting your 400 oz. But that's why I included the FOFOA quote. You aren't a giant, and size matters. If price takes a big nosedive, big trader will drink the paper gold holders milkshake.

FOFOA: And for those of you GLD fans that think you will simply hold onto your shares until the bitter end, I have a warning for you. These Giants don't need to over-bid your shares away from you. They can always buy them at the price of paper gold trading in London and New York. And there will come a point when you are watching the premium on physical coins jump from 5% over GLD to 50% on its way to 500% over the paper gold price. How long are you going to stubbornly hold onto your precious paper before you finally relinquish it to that last Giant's delivery "basket?"

AdvocatusDiaboli said...

Jeff,

the scenario you are describing: Who are the sellers of papers in that moment and why dont you think, that the shorts wouldnt be on the buyer side at that moment, but instead insist on some "giants" suddenly trying to break BB by taking delivery, while the BB are just watching?
Greets, AD

sirch said...

Wouldn't it be nice for the discussion here if there was a gold symbol that was analogous to $ or € and represented physical gold?

Unfortunately it's not safe to assume that the word "gold" will always mean physical gold metal. And it's a pain to always have to explicitly state "real physical gold."

Here are some symbols that seem to work in Blogger and with this font (Trebuchet MS).

₲ Ⓖ ⓖ Ǥ ǥ ɢ

To find / use these characters you can either:
• Copy and Paste
• Search among Unicode character sets
• Find them on a Mac in most word processor apps by going to 'Edit > Special Characters' and searching for 'G'.

The best symbol would be the one that the most amount of people – upon the first time seeing it – would be able to decipher. Probably something distinct from a normal G, but still recognizable as a G.

₲ seems custom-made, but that's because it is the symbol for Guarani, the currency of Paraguay (PYG). I don't know, that might just add to the confusion.

Example Definition:

$ = US Dollar
ɢ = Unambiguous Physical Gold

$1 = 1 US Dollar
1ɢ = 1 oz of Physical Gold

Example Usage:

$-price and ɢ-price
$-holders and ɢ-holders

The flow of ɢ
The $-price of ɢ
The ɢ-price of dollars

"Would you like to trade $10 for 10ɢ?"
"I'd take ɢ over GLD any day."

Biju said...

AD,

I am not a giant but I can tell an example of me buying paper Gold.

I bought around 20oz of Kitco pool account Gold from kitco.com during 2007. This I did because I thought paper Gold(pool account) is same as physical and I can easily sell the Gold. I did not know about coin shops then, neither did I know about A/FO/FOA and their thesis that paper and physical will diverge in future.

When Gold crashed from $1030 to $700 in October 2008, I did not want to sell at loss, but wanted to get my physical. Lo and behold, Kitco sold no Gold **NOTHING** was on sale during October 2008.

I think this is what FOFOA is alluding - when paper crashes, lot of paper/futures buyers willd emand physical and it will cause paper price to crash and physical unavailable.

I had to wait 8 weeks (unlike normal 1 week) to get my Phil Harmonics from Kitco. I was really tensed then until I got the delivery and they were also not answering phones properly.

Biju said...

Question to wise minds here :
=============================

I am loaded more than 60% of my assets in Physical Gold.
I also understand the future implication of Physical price(upward revaluation) and Paper price(crash) diverging. But I have the sick feeling that when the waterfall actually happens and paper price crashes, would I be able to hold my water ? would I be able to rest and think clearly and not sell any Gold ?

I have been holding out any Real estate investment since 2007 and it looks like it is finding a bottom this spring 2012 in USA, should I diversify by selling 40 oz and put a 20% down payment on an investment house.

I am thinking along this lines, not because I think that Gold will underperform Real Estate, but I just want to escape a little bit of the FEAR and RESTLESSNESS, when paper price crashes.

JR said...

Hi sirch,

What about the scientists?

Their Au works pretty well for themselves as they science about in the real world of stuff, not paper.

Edwardo said...

Hello Biju,

FWIW, My experience (on the day of the Oct 08 low) at a local retail coin and bullion dealer was that there was plenty of supply to be had-at least for shrimps.

Biju said...

Thinking about the fear of paper Gold price crash, I remember FDR's famous words - "The only thing we have to fear is fear itself."

JR said...

Who are the sellers of paper? Probably the holders before they sold.

FOA

FOA (10/9/01; 10:05:48MT - usagold.com msg#117)
PIZZA,,,, Bronco's,,,,,, Tonne of Yellow Metal,,,, and USAGOLD: Ha Ha,,, a gold advocates dream come true (ssssmile)

[...]

What doesn't seem to be obvious is the "why for" the paper market grew so large. It grew to dominate because world wide dollar expansion reached its "non hedged" peak. In other words, the dollar's timeline was ending as its ability to produce non price inflationary economic gains came into
sight

In order to push dollar holdings further, international players needed and purchased "paper financial hedges" to balance their risk. Within their total mix of derivative hedges were found "paper gold price hedges"; modern gold derivatives. The important thing to remember is that these positions are not and never will be used to demand physical gold. They are held to buffer financial and currency risk associated with holding any form of dollar based asset. To work these items don't need to really perform "dollar price movements" in the holders favor as much as they are present in the portfolio to act as insurance stickers.

In that truth, these paper gold positions act like FDIC insurance at our banks. It can and will manage only a small determined portion of bank runs,,,,, not a full scale failure of the banking system. In a real full banking failure we would all get, perhaps, 80% of our covered $100,000 and 10% of the rest.

The same is true for these gold position's performance; real gold delivery along with true price performance, matching real bullion trading, would be only for the very few. For that matter, an actual functioning paper gold marketplace would be for the very few, too! But, in the same way a bank account owner understands the credibility of FDIC insurance when times are good; the international dollar asset owner will not grasp that modern paper gold hedges cannot be allowed to work until after a real serious price inflationary run begins.

For the first time in this portion of the dollar's timeline and our lifetimes, such an inflation is about to show its face!


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

Party Like It's MTM Time

Sidebar

As I noted here last Friday, during the dark of Thursday night, euro gold mysteriously levitated itself up a whopping €32.89 from Thursday's London PM fix of €1,184.16, which would have been a disappointing decline since the October MTM Party which marked gold at €1,206.39. This, of course, begs the question (once again) that was implied in this post as to how important "Snapshot Day" really is to young central bankers. (Evidence from Sept. '10 and April '11 seems to suggest that year-end and mid-year might be more important than the other two quarters.)

But this is neither here nor there which is why I put it in a silly little sidebar. It is simply a curious observation.

Biju said...

Edwardo,

When such furious crash occurs, I am hoping that FOFOA's blog will provide support and realtime updates to help us western minded Gold holders to pass the bridge safely to the other side.

JR said...

My point is not about entity in particular, but more he concept that when you think of holders of paper gold, think of **really big money** who uses it as a currency hedge.

Peter said...

sirch,

How about Ѡ ?

Looks a bit like two coins pinched together.

Or my ass as I bend over and show it to The Man.

Ѡ100 - wipe my ass with your $100

ephemeral_reality said...

kobajashi,

I've followed Keith for a while. He's a student of Prof. Fekete and his articles are not that different from Fekete's thoughts on Gold and Real Bills. He's essentially regurgitating Prof. Fekete's thoughts, but writing it from an American perspective.

JR is right to point out that Keith's articles does not address FOFOA's dilemma, which is a rootcause for a lot of problems. Read the Debtors and Savers post for a more clear explanation.

Prof. Fekete is distinctly different from the "American Austrians", in the sense that he applies the Austrian theory in a way that is consistent with reality. American Austrians (read: Ron Paul followers etc.) scream inflation, when the real threat is severe deflation.

FOFOA's Hyperinflation explanations are Tour De Force in terms of logic and pretty closely in line with Fekete's predictions.

I'd say spend a lot more time here on this blog and you'd be rewarded intellectually :)

AdvocatusDiaboli said...

Biju,

I think your storry proves best, that paper, physical and delivery have nothing to do with each other obligatorily. Still BB did not break.

Did some giant call you and ask if he can buy your paper in order to demand delivery with his bigger stake? No? I guess not.

Greets,AD

burningfiat said...

JR,

Thanks a lot for the Randy Strauss link.

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

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


That's just delicious. Somebody should send that link to central bankers, haha.


Peter, are you sure Ѡ is not your chin? Could also be omega, like in alpha and omega...

victorthecleaner said...

Reven,

I would be very careful with the Sprott trusts. If you want to trade before the grand reset, they are probably fine, in particular because they are legally based in Canada and because you can scalp their premium over NAV in the same fashion as their master does for his own hedge fund.

As an insurance or as savings to get safely to the other side of the transition, they are quite shaky.

One issue is that even though they are listed at the TSX, they are quoted in US$. So when the gold market blows up and this coincides with a dollar crisis, they have a good excuse in order to stop trading. As far as I remember, Sprott can even suspend redemptions. But you can redeem for physical only if you have more than one LGD bar, and so most people won't be able to do that even if it were possible. What happens to all those?

One might suspect that Sprott will try to pay the small people off in cash and keep the gold for his own hedge fund. This could be done as follows: US$ gets foreign exchange controls when the London gold market blows up. Sprott funds stop trading as they are quoted in US$. Sprott decides to wind down his trusts. The trusts are liquidated for cash, and the unit holders receive cash at the low crash-price of paper gold. Who is on the other side? The trust needs to sell the physical metal when they wind it down? Of course, Sprott's own hegde fund will be there and happily take all the physical for cash. So Sprott himself ends up with a huge amount of cheap physical that is stored outside the banking system at the Royal Canadian Mint.

If you are interested in the dangers of the Sprott trusts, google +"Kid Dynamite" +"Sprott", and enjoy the reading.

Victor

victorthecleaner said...

Koba,

no, there will be no eurobonds payable in gold. This would be precisely the opposite of what the euro zone wants. They want to separate gold as a store of value from the transactional currency. In the process, the price of gold relative to everything else will go through the roof and help them a lot.

Paying off debt in terms of gold not only contradicts this philosophy, it would also be a huge waste.

Will there be eurobonds in terms of paper currency? I doubt even that. Why would Germany agree to this? What is in it for them?

Victor

victorthecleaner said...

AD,

the BBs are not short gold, and so your idea of short covering plainly does not apply.

The right analogy is that of a run on the bank. People line up, withdraw everything from their accounts, and take possession of the tangible cash. In the process, the market value of credit collapses. Since the price of credit and the price of cash agrees as long as you can withdraw funds at the margin, the price of cash will *not* rise. What happens is that there will be rather a shortage of cash until the link between cash and bank accounts breaks.

Victor

ephemeral_reality said...

Biju,

Why would you have RESTLESSNESS and FEAR if your savings are held in the most excellent wealth reserve? FOFOA's advice that "Buy only as much gold as you understand" is a peaceful approach to take in terms of buying physical.

The portion that you want to save long term vs. the portion of your wealth that you wish to consume today is totally subjective and up to you. I would say, do what gives you the maximum peace of mind.

As the blogger Jesse says, Need less, Want Little, Love more . ;)

ephemeral_reality said...

Reven,

Please consider Prof. Fekete's article on 140 Years of Silver Volatility for discussion surrounding Sprott's funds.

What is the lesson from the 140-year volatility of silver? Wise investors should not touch the highs with a ten-foot pole. Even if the gold/silver price ratio
went to 16 today, there is no guarantee that it will not bounce back to 40 tomorrow. Prepare for supernova bullion prices, as Eric says? I’d say you had better prepare for the zig-zags before we get there. Beware of the fund manager, crying from his rooftop that the paper silver market is a joke, while down there under the roof he is selling paper silver at a 25% mark-up.

victorthecleaner said...

Reven,

finally, if you chose the Sprott fund because you believe you can get the physical delivered whenever you please, then why don't you take the physical right away?

Victor

Biju said...

AdvocatusDiaboli said :
Did some giant call you and ask if he can buy your paper in order to demand delivery with his bigger stake? No? I guess not.


But Kitco was ready to buy my pool Gold and give me cash. But they would not redeem that for physical Gold.

Also they were ready to buy any other physical Gold, but had nothing to sell.

Gary said...

Pointless comment, but what the hell.

Why is anyone still bothering to answer the troll? He just keeps disagreeing with everything anyone says, never makes a good point, and yet still some bother to try to reason with him.

Is it just me can see that?

Best to ignore him in my opinion, in the hope he will bugger off eventually.

Greetz!!

AdvocatusDiaboli said...

VtC&Biju,
the question is what kind of fine print you have on your "paper gold product".
Maybe Biju can tell from her experience.
I think, you can call it a bank run only if your paper note says: THIS IS x oz GOLD, 100% REDEEMABLE IN GOLD FROM xyz, NO OTHER SETTLEMENT. If it says anything else, I think that it is more appropriate to consider it a "short".
Too bad that these details have never been discussed, but maybe somebody knows.
Greets, AD

Peter said...

It can't be my chin. It hasn't got that big fat hair sticking out of it. Maybe its your mommas chin? :)

Gary,

How much did you learn from all the comments where the faithful shouted their agreements at each other?

JR said...

It is not my position that the Bullion Banks are exposed to net short positions like the silver crowd (and most of the gold bug community) believes. If you like to equate Bullion Banking with commercial banking, then think about it like this: The unallocated gold, the reserves, are analogous to physical cash in your local bank. The big difference being that more cash can be printed in a pinch. Would you say that your local bank has a net short position on dollars just because it has very little physical cash? Of course not. But it can operate with very little cash in reserves as long as the public is confident that cash will be there when they want it.

[...]

The problems with gold bullion banking in the 21st century are deep, wide and deadly. Bron posted a good quote yesterday: "Banks undertake risks on their books that they can only cover so long as they continue to have access to liquidity (funding, deposits, repos or central bank support). Bank capital is never enough to ensure performance without market liquidity for reserve assets. Banks are generally much less cautious about taking on risk, rely overmuch on incomplete models to price risk, and manage capital to optimise returns rather than ensure survival."

"Market liquidity." Now there's the real risk, isn't it? And therein lies the exchange rate exposure. A bank run on gold bullion in the 21st century will mean that all offers to exchange physical for paper have been withdrawn as zero supply confronts infinite demand. The price of physical will run to Freegold levels in the hidden backrooms and dark pools of real price discovery.


Via Email

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

See what Victor wrote:

the BBs are not short gold, and so your idea of short covering plainly does not apply.

The right analogy is that of a run on the bank. People line up, withdraw everything from their accounts, and take possession of the tangible cash. In the process, the market value of credit collapses. Since the price of credit and the price of cash agrees as long as you can withdraw funds at the margin, the price of cash will *not* rise. What happens is that there will be rather a shortage of cash until the link between cash and bank accounts breaks.

JR said...

More form
Via Email

The daily LBMA clearing turnover has dropped to 18 million ounces today. But even at today's lower amount, if the 3 to 5 estimate above holds, it is still likely to be more than global ANNUAL gold mine production that is traded (OTC) every single day. And what do you think is actually being traded as if it were simply another foreign currency?

Bullion Bank liabilities! BBs make money like any other bank, on their ability to issue "liabilities" as if they were real money, willy-nilly.

How many of these "BB liabilities" are outstanding at any given point in the 24 hr. cycle? And do you think these liabilities have any LESS of a claim on the BB physical reserves (unallocated gold) than any other? The answer is that all BB liabilities have an EQUAL claim. Whether you deposited 2 tonnes of physical yourself 30 years ago after your rich grandfather died or if you called in a currency exchange order last night. Equal ability to demand allocation.

Think about it this way. Think about Eurodollars. Think about European banks outside of the Federal Reserve System making dollar denominated loans or simply issuing dollar liabilities to FX traders. Sure they have a few physical dollars in reserve. But they don't have direct access to the Fed lending facilities. So if they find themselves short on reserves, they will have to go into the market to buy some dollars, just as you say. Which, in aggregate, could drive up the price of the dollar versus the euro. Which is why Ben arranged a $500B currency swap in 2009. To keep the dollar from spiking. Unfortunately, though, Mother Nature is not quite as accommodating as the Bernank.

JR said...

Yes Gary,

Ignore the troll indeed!!

But don't forget to make sure you are ignoring the troll because it is the troll who is ignoring the valid counter-arguments to his points.

In other words, ignore the troll, but don't forget to make sure you understand the counter-arguments to his points, or why the troll is wrong. And along those lines, there's nothing wrong with sharing your understanding of why the troll is wrong - you can even do it without acknowledging the troll or his sophistry - that way others benefit from your knowledge. Maybe you can even spark further conversation that can even help advance your own understanding (altruism and self-indulgence are not mutually exclusive).

victorthecleaner said...

FOFOA,

your explanation of the bank run was absolutely clear. I still have a question though.

Does not the US government still have two options?

1. They can either just wait and see and watch as the OTC gold market crashes as you describe above. Once the LBMA stops allocating and buys out all the remaining unallocated for cash, and the London gold market stays closed for a few days, the US$ is probably in serious trouble. They must be aware of this danger. Isn't this the worst that can happen to them?

2. Your explanation also provides a blue-print for averting the crash. They just need to watch the flow of physical gold in US$, i.e. weight times official London price. One indicator for trouble would be loss of contango, for example.

If there is a problem, the Fed can print money in order to buy **un**allocated gold. This prevents the London price from crashing, and so the flow remains little affected. We would see this if there is another deflationary shock similar to fall 2008 and the paper price of gold does not crash or, at least, is supported soon after the initial drop. This way, they could make sure that the commodity flow of gold (mining and recycling) is always sufficiently large in US$.

Even if there are too many allocation requests during calm times, they could use these tactics in order to stretch the existing flow. They just buy unallocated gold from the BBs. This raises the US$ price of gold and makes life a lot easier for the BBs because the commodity flow of gold becomes larger in US$ terms.

This way, nobody has to intervene in the daily operations of the BBs. The BBs still have no price exposure. But the USG goes long the paper whenever this is needed in order to expand the US$ value of the physical flow.

What will GATA say when they eventually figure out that the USG is long (paper) gold???

Finally, is this consistent with our observations?

Around 1999-2001, we have two estimates for the volume of outstanding unallocated gold: 14000 tonnes (I think either Another or FOA mention this figure somewhere) or 10000 tonnes (result of Another's back of the envelope calculation using COMEX and LBMA data). At US$ 300 per ounce, this was worth around US$ 115bn. At US$ 300 per ounce, the annually mined gold of 2600 tonnes is worth US$ 25bn.

Today, my highest estimate for the volume of outstanding unallocated was 5500 tonnes. In US$, this exposure is now worth more, namely US$ 310bn (at US$ 1750 per ounce), but in terms of weight, they have been able to wind down half of their unallocated exposure. The annual mine supply of 2600 tonnes stretches over US$ 145bn, i.e. it lasts a lot longer than the US$ 25bn that it was in 1999-2001.

Does this explain why we have been seeing such a uniform and steady rise of the US$ price of gold since 2001? Pretty exactly 19% annually? Inside a very nice trend channel?

The downside for the USG is that this increase in the US$ price of gold also makes oil more expensive in US$. Yes, this is consistent with the observations. The gold/oil ratio is still in the old trading range - oil has not yet been devalued in terms of gold as predicted by Another. Not yet.

And so the USG have chosen the slow death (of the economy because of expensive oil) rather than the sudden death (of the US$ because of a collapse of the London gold market).

Does this make sense to you?

Victor

Gary said...

Seems the Greek deal opens up a whole new can of worms (talk about stitch up!)....

The deal (assuming it gets done), gives their lenders the right to seize the gold held at the Bank of Greece if Greece don't keep up their repayments.

http://www.nytimes.com/2012/02/22/world/europe/euro-zone-leaders-agree-on-new-greek-bailout.html?_r=1

Where will this end, as I think Portugal, Spain, France are all heading the same way.(Maybe gold demands will be the final straw).

Let's hope for Greece's sake they can eventually default and keep their stash.

burningfiat said...

(Beat me too it Gary)

From http://www.nytimes.com/2012/02/22/world/europe/euro-zone-leaders-agree-on-new-greek-bailout.html?_r=1

h/t http://www.zerohedge.com/news/negative-salaries-negative-bailout-and-now-negative-gold-greece-just-became-banksters-paradise

Others are concerned that in the fine print of the 400-plus-page document — which Parliament members had a weekend to read and sign — Greece relinquished fundamental parts of its sovereignty to its foreign lenders, the European Commission, the European Central Bank and the International Monetary Fund.

“This is the first time ever that a European and probably an O.E.C.D. state abdicates its rights of immunity over all its assets to its lenders,” said Louka Katseli, an independent member of Parliament who previously represented the Socialist Party, using the abbreviation for the Organization for Economic Cooperation and Development. She was one of several independents who joined 43 lawmakers from the two largest parties in voting against the loan agreement.

Ms. Katseli, an economist who was labor minister in the government of George Papandreou until she left in a cabinet reshuffle last June, was also upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal, and that future bonds issued will be governed by English law and in Luxembourg courts, conditions more favorable to creditors.


Doesn't sound very Freegold-like to me. Kinda bearish for the freedom of the Greeks.

Seizures of gold reserves... Better default soon Greece, before they strip your country.


/Burning

Gary said...

JR,

I have to confess that I just think he's a total numpty having some fun winding up a blog, disagreeing with everything just for laughs. I'd take his 400oz bar and deposit it where the sun don't shine.

And I'm still reading FOFOA's archives, and yet to start on Another/FOA, which is what Mr Troll should be doing.

Aquilus said...

Gary,

You should answer with "last time I tried to do a LOCO swap London through my BB, it went through no problem, even though it was a minimum of 1 metric ton and I wanted 10"

/sarc

tripper said...

Just a little note on Greece and gold.

"Ms. Katseli, an economist [...], was also upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal[...]" source

If this is true, I can't imagine even the most corrupt european government to sign this.

What makes me scratch my head is, why would ECB let this happen? Last time I checked, Freegold was not here yet. Makes no sense for ECB to allow such plundering. (Note, I'm not sure what was the ECB's role in drafting this deal)

Reading such news, I'm more and more convinced that gold is the asset to own. On the other hand, I'm less and less convinced that Freegold will be 'embraced', more likely it will be resisted. I only hope that the 'solution' will not be of North Korean flavor (US is kinda heading this way, imo).

I guess this is my main gripe with the perspective presented by FOFOA. I think it underestimates TPTB (whether they be politicians, oligarchs or financial elites or whatever). I find the idea that Freegold is inevitable silly. Where I come from, people were sentenced to years in prison for owning gold (this was my grandfather's generation). Or maybe I'm just too pesimistic (probably this weather).

JR said...

Gary,

I feel ya and agree wholeheartedly.

I spent much of this summer dealing with a royal pain in my ASH. And I did so by largely ignoring him and simply dropping contradictory quotes and ideas when I would see him steer the conversation. As a sophist, he didn't want to engage fairly, so I surely didn't go to that trouble. For me, the key is you don't have to directly engage the trolls to point out how wrong they are or to provide alternative sources that present a different story then the one they are pushing.

I agree he is trying to wind people up and lead them astray. I think the key is to not engage him, but to keep your focus on what matters - his ideas, and their lack of sense. Ignore the troll personally and instead talk about the ideas, that's how you turn the tables on there efforts to disrupt things. Disruption and distraction are what trolls want - so instead, give them good conversation and more sharing of quality ideas and thoughts.

Laissez les bons temps rouler, J.R.

sirch said...

"Gold bids for dollars."

So to explain the climb in the $-price of gold –- it's not that $-holders will want gold that much more, it's that gold-holders will want dollars that much less?

Woah... That's a perspective that most $-holders never consider.

We don't think of Apple, Inc. as bidding for dollars with iPhones. We don't think of Honda as bidding for dollars with Accords. And we don't think of gold-vendors as bidding for dollars with Maples.

The masses are most familiar with the consumer experience – exchanging dollars for stuff – and the opposite experience is relatively rare – exchanging stuff for dollars (except, of course, labor for dollars -- but we don't really even think of it like that).

People don't think of the dollar as a two-way, transitory "medium of exchange" – they think of dollars as a one-way "unit of entitlement" to real goods and services.

We just assume that the $-holders have the power and that producers compete for our dollars.

It's a total paradigm shift to think about a gold-holder who doesn't want to take the risk of buying dollars with gold.

AdvocatusDiaboli said...

JR&Gary,
you know what your problem is?
You are completely uncapable to pose the right questions by yourself, completely caught up in your confirmation bias, worshipping some stuff literally.
And if somebody else poses a question that does not fit with your cult storry, you feel better in your parallel universe by calling him a troll. Which is okay, if it makes you feel better.
Greets, AD

Jeff said...

The question not answered in the NYTimes article is 'who are the creditors who can claim the greek gold'? Is it the ECB, or the private lenders? If private banks get their hands on that much gold, and fractionalize it.... freegold delayed until 2250.

sirch said...

JR,

Au. Right. That could work.

Except that 1 Au might seem to be 1 atom of gold. Hmm... maybe that will be worth something when Freegold hits ;)

Winters said...

@FOFOA
thank you for that post-within-a-few-comments. That was an interesting read and added a small extra brick of understanding.

@tripper
Forgive my ignorance, which country sent one to prison for years for owning gold? I'm aware of the US ban but I thought no one actually got sent to prison over it?

FOFOA's comments about the s/f ratio explosion triggering the super inflation of gold brought my mind back to India. To my mind, Freegold would be a traumatic experience for a culture so tied in with gold - for it would become too dangerous to wear anything much on your body. FOFOA wouldn't trust his sister with his stash - would an Indian woman feel safe walking down the street with a bangle valued at freegold prices? Gold of any substance would truly go into hiding for good and only see a bit of light in a quick change of hands from one locked box to another.

Apologies if this was discussed in India's Gold post - I'm only just now able to follow comments well with this email subscription process. It works quite well within gmail on the web and iPhone for keeping track of where you were.

Gary said...

Tripper,

I too have concerns that the freegold transition will not be bloodless, and may happen is stages, being fought every step of the way.

But I am convinced that the shambles of a financial system we have now will end, that is inevitable, and gold will be right at the centre of the new system. Maybe it will not be precisely freegold, but I am sure we will have physical-only prices, and that's why I'm going all-in (that and the fact that I trust nothing else).

Lisa said...

Perhaps I am confused, but when I saw the headline about Greece possibly losing its gold to creditors, my first thought was that this is line with prior comments made by FOFOA.

For example, in Euro Gold, FOFOA wrote:

"Quarterly Reflection

Over the latest quarterly cycle we have witnessed several curious advances in Europe. To name just a few, on May 24th the European Parliament's Committee on Economic and Monetary Affairs agreed unanimously to allow gold to be used as collateral in clearinghouses. [2] And then on June 7th the ECB encouraged investors to buy new Greek bonds to replace maturing securities with two separate unnamed European officials saying investors may be given collateral as one possible incentive to roll over the debt when it matures. [3] And finally, on "Snapshot's Eve", June 29th, we learned that China's SAFE (State Administration of Foreign Exchange) is actively doing all it can to transfer billions of its dollar-denominated holdings into euros. [4][5]

http://fofoa.blogspot.com/2011/07/euro-gold.html

Wouldn't the potential loss of its gold encourage Greece not to defaul on its new bond obligations? Isn't this exactly what the ECB has been trying to accomplish?

DP said...

Wooooo! That's fightin talk now, isn't it Gary?

Perhaps some suitably cutting Thoughts right back are in order!

"I think, you can call it a bank run only if your paper note says: THIS IS x oz GOLD, 100% REDEEMABLE IN GOLD FROM xyz, NO OTHER SETTLEMENT. If it says anything else, I think that it is more appropriate to consider it a "short". Too bad that these details have never been discussed, but maybe somebody knows."

Nighty-night

victorthecleaner said...

Lisa,

when I first saw the NYT piece mentioning using gold as the collateral, my initial reaction was that this was BS. So I am waiting for an independent confirmation.

Then, what we don't know is whether the ECB would get the gold, whether the other Euro governments would get it, or whether the private creditors would get it. It could just be wishful thinking by the US/UK/dollar group that made it into that NYT article after all.

Finally, it is pretty clear that Greece will eventually default on their bonds, and so putting down the gold would be a pointless waste.

Unless
1) it turns out that the gold was pledged at 20000 Euros per ounce, or
2) somebody presses the button before March 20, 2012.

Victor

victorthecleaner said...

The red button.

JR said...

Open Letter to Ron Paul

Honestly, the Eurozone is so far ahead of you DC guys on this it's not even funny. They mark their official gold reserves to the market price every quarter, and they just voted to make gold a system-wide acceptable collateral asset. [2]

"The European Parliament's Committee on Economic and Monetary Affairs Tuesday agreed unanimously to allow clearing houses to accept gold."

OMG! Can it be that a collateral asset that is consistently rising in free market value makes boatloads more sense than ones you have to prop up with quantitative easing and open market "print to purchase" operations??


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



Euro Gold

Quarterly Reflection

Over the latest quarterly cycle we have witnessed several curious advances in Europe. To name just a few, on May 24th the European Parliament's Committee on Economic and Monetary Affairs agreed unanimously to allow gold to be used as collateral in clearinghouses. [2] And then on June 7th the ECB encouraged investors to buy new Greek bonds to replace maturing securities with two separate unnamed European officials saying investors may be given collateral as one possible incentive to roll over the debt when it matures. [3] And finally, on "Snapshot's Eve", June 29th, we learned that China's SAFE (State Administration of Foreign Exchange) is actively doing all it can to transfer billions of its dollar-denominated holdings into euros. [4][5]

The monetary plane is changing. The signs are everywhere. Euro gold just broke EUR 1,100 today. Here's what it looks like in dollars:

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

Gary said...

JR,

But, but, what about this Fofoa comment?

'This is why Greece will never part with its gold at today's prices.'

I would be amazed if Greece ever gave up its gold before physical-only prices arrived. Perhaps that will be the trigger?

Greenie said...

"Now in just three weeks I've written posts about both the King of Bonds and the King of Stocks dissing bonds. That should tell you something about bonds, no? "


Very good point. The best time to buy houses was when 'king of real estate' Mr. Donald Trump was going from town to town asking everyone to buy houses (2006 to be precise) !!!

I am going to load up more 30 year treasuries tomorrow.

poopyjim said...

AD'S GREATEST HITZ:

I would not go so far to say that the Euro is "evil". It is just one of the most stupid designs, the regular dumbass socialist can come up with.
XD

Hey, my wife is once in a while in Iran, people seem to be okay, maybe the last place to be on earth? But....shit, I dont like moslems...so no option.
Sorry, I start to feel really sick.

This dude is droppin' some knowledge! Why are we quoting FOFOA?!?!

I give up, I really can not take that "Euro is different" jerking off crap any longer.
Byebye, and have fun with that Euro-MTM-BS, I wouldnt interrupt you any longer.

Oh you tease, you tease you!!

I'm tried of that Euro stuff. As long as we have Euro, there wouldnt be RPG and consequently no Freegold evolvement inside the Euro-Zone, because you will always have financial industry and government tempted to borrow/lend (and in the end nobody is RESPONSIBLE!!!) PERIOD.

Can we now stay with this new topic, I am happy it does not talk about Euros, yes?

^________________________^

Let's put it like that: I dont need to understand and you dont need to explain, watching the fires is just fine and warm.
O_O

Hi Anand,
from your blog entry and your name I assume that you are indian living in India. Is it true that indians save in gold (almost exclusively/traditionally, some estimates even about 20000m/t)?

So how does it feel to live in such a "Freegold" country? Have you been to many other of such bad horrible bankrupt IMFS-countries?

:/

But, as I said, just IMHO, maybe in the end after you hoarded enough gold, somebody finds a way to eat it or to build a kidney out of it. Dont get me wrong, I dont judge, I just question, maybe just once in a while I just judge a stupid answer.
:-o

http://youtu.be/5hfYJsQAhl0

ampmfix said...

Ahahaha, that was funny, thanks for the laughs poopyjim!

Peter said...

PJ,

You forgot to close with 'BGD'.

JR said...

Exactly Gary.

'This is why Greece will never part with its gold at today's prices.'

I dunno the details but AFAIK the collateral is not about confiscation, but more like a GELOC that Greece can use to refinance becuase the collateral is rising in price too, no?

I think its not denominated in weight or fixed currency price. AKA if Greece defaults down the road on whatever they owe outstanding at the time, they have gold in fiat pricing terms backing it up. Like if they default on 100 billion in 2016, they owe 100 billion, and its backed by the gold. So Greece could refinance its gold (a GELOC if no freegold yet) or sell it (if the freegold price is in effect) to make good on any defaulted amount. I do not think Greece pledged the gold at a fixed weight or a fixed price - I view it pretty much the exact opposite as Victor does above.

Think like a HELOC for gold - you borrow against the equity in your house, and its secured by your house. But if you can't repay and risk default, sure you could sell your house to pay off the principal, or you could also refinance (like maybe if you think your house will keep appreciating).

I think Lisa is right in that to provides Greece incentive to not default. But I don't think it is because they fear their gold being confiscated at current paper market pricing.

JR said...

Might promoting the use of gold as collateral boost its profile and assist the upward movement in its price, effectively letting the market do much of the heavy lifting (as opposed to revaluing it yourself?). As the $IMFS system of debt fails, good collateral becomes more important/precious/valued, and what better collateral is there?

Just a thought.

/SleepingVillage/ said...

Makes sense to me, JR. The people running this show are pretty crafty. I would be disappointed if they were not using deep psychological tactics on some kind of level. You might liken it to a 4 dimensional game of chess perhaps.

Which is why I like to read into some of the words they drop at times.

Which is why I need winter hobby and shows I probably dropped too much acid...

Reven said...

Why is marking gold to market so important? We all know what the paper price of the US gold hoard is. If the US started to mark to market, what would change?

victorthecleaner said...

Reven,

let me play JR:

5/3/98 ANOTHER (THOUGHTS!)

[...] Mr. Kosares, Your friend thinks much of this gold owned by the USA. It could be used to back the dollar up to 25%, no? Many come to this thinking and hold a secure thought, that as last resort, this gold will save the day! I think, many persons never gained the understanding that the American gold is kept by the “Treasury”, not the maker of your money, “The Federal Reserve”. It is there for good reason, as the present world currency system is not a function of American law! If the US were to place gold in the hands of the US/CB as reserves for the dollar, the BIS could claim it! It is, as a point of contention and of no real use. I think not a war would come of this claim, if it should happen! As the world currencies are now, a “new dollar” would be needed if gold were used as reserves! The present dollar would then, truly be as “paper for the wall”

Victor

Robert Mix said...

Here's another version of Gangsta Paradise, sort of:

http://eipnetworks.com/AlgoreParadise.mp3

JR said...

Some context for the timeline sleuths out there (you have probably seen it anyway),

Trail Guide (8/26/2000; 21:44:27MT - usagold.com msg#: 35584)
Reply
Hello Henri,

Your post (Henri (08/26/00; 07:59:19MT - usagold.com msg#: 35549)----

-----------1) If $12 oil is incompatible with $320 gold, then $10 oil must have been extremely incompatible with $250 gold. To what extent was the recent explosion upward in oil prices a retaliation for continued downward manipulation of gold prices?----------------

Henri, most of this maneuvering took place prior to the Euro being secure. There was a lot at stake if the Euro fell apart at that time. Politically it went something like this:

a.(late 80s early to early 90s)

US and Europe worked together to bring gold prices down:
to make the dollar good in gold for oil and others
to allow some cheap physical purchases
to allow some long term contracts to be established
to allow the continued flow of oil at reasonable, economy supporting rates

paper gold had not inflated to anywhere near these current levels
so contracts were seen as supportable
so contracts and physical were seen on almost equal footing

b. (early 90s to mid 90s)

the supply of freegold on the official level was beginning to run short
so CBs sold openly mostly to each other to create gold selling impression
so mine forward selling was encouraged originally engaging mostly CB gold

major gold buyers were ready buyers with cash or lend able natural resources
so naked paper selling began to imitate CB supplied gold
so same naked paper selling supplied some mines forward sales contracts
so falling paper gold prices drew out old line/ non oil physical bullion in exchange for paper
so falling paper prices brought in cheap financiers to sell into this paper demand

market is flooded with new paper and begins to override it's original purpose
by now US knows the Euro will succeed and benefit from a rising physical gold price

c. (mid 90s to date)

US and Europe split,,,, BIS takes Euro side
US encourages London to join it in dollar support,,,, print more paper
Europe and BIS stand to enter the world physical markets if gold falls below $280 before Euro is born
Euro comes online
Oil gold buyers don't like paper gold inflation
Oil stands to raise dollar oil prices if gold markets stay below $280
Europe stands aside and watches knowing what rising oil will eventually do to US dollar / economy
Europe adopts policy of "Freegold" by quarterly marking to the market bullion prices
Europe and BIS stand aside and endorse a flood of paper gold
Eventual demise of dollar contract gold markets draws oil to Euro support
Oil and Europe force Washington Agreement
Oil begins to raise dollar oil prices in effort to crush paper gold markets with inflation induced physical gold demand

link

AdvocatusDiaboli said...

LOL, thanks Poopyjim for that great medley and that awesome YT clip.
Greets, AD
@JR: see, sometimes C&P can be educative AND funny.

Bjorn said...

@VTC
Re James Turk. I guess you know this but those who has not actually read all of the archives may take it as speculation on your part.So I´m taking the liberty of clarifying that we do know for a fact that Mr Turk knows about Another:

6/24/98 ANOTHER (THOUGHTS!)

6/24/98 Replies

From James Turk, Freemarket Gold & Money Newsletter: How did you come by the handle "ANOTHER"?

ANOTHER: Sir, It was found far in the past. The true value of gold was often taken from view, with purpose. Today, paper debt currency does price gold as little and value all other assets as much. History has proven that " your assets never offer a return as great as your paper money say it does". As such, in time real money does always bring a true gain. Many will find our wealth of the future has been with them always, in Another form, Gold!

Thank You

(About in the middle of page four of the Another archives)

DP said...

@Peter: I presume you meant this when you offered 'BGD'? :)

Peter said...

DP,

Remember, I'm a yes man.

Thooper to thee him, ain't it?

John Fry said...

http://www.sharelynx.com/chartstemp/GoldeWave.php

Interesting chart by Nick Laird done on a data set created by a friend of his.

Curious thing is that Nick (Sharefin) butted heads with ANOTHER back in 1998. See page four of ANOTHER archives.

Perhaps political will and a "natural" evolution will converge at the top number on the chart. Looks pretty familiar, huh?

And we have Jim Sinclair now with the 2015 timeline for a new arrangement. Hmmm.

matrixsentry said...

I found the discussion on PHYS as an alternative to physical gold in hand to be illuminating and I hope those with a choice choose wisely. The bottom line is that for PHYS to work in a wealth preservation mode through the transition to Freegold, you must trust others that have control of that gold to act in such a manner that is in your best interests and not theirs. This applies to Eric Sprott as well the government.

I as well as my colleagues at a major airline have a significant amount of money tied up in 401ks and Defined Contribution retirement plans. We have a substantial amount of money each month that is deposited in these accounts as deferred compensation. We cannot elect to receive this money as taxable pay and it amounts to 15% of total monthly pay. The only way to get this money is to retire from the company. It really is a sad state of affairs, but you can imagine how hard it is to convince the majority of 12,000 pilots that it would be in our best interests to modify our labor contract in order to stand these retirement plans down in favor of compensation today, rather than deferred until retirement.

So many of us have a substantial sum that cannot be protected in physical gold. I have the equivalent of over 200 ounces of gold in PHYS alone in DC retirement fund and nearly the equivalent of 100 ounces in my 401k. This is solely from the company contributions. I of course save in physical with my surplus taxable compensation. It makes me ill trying to figure out the best vehicle for this money to weather the transition. Looking at the diagram from the OG post that shows where equities lie in relation to the fulcrum (hard assets), it would seem that equities would be the best place to be to retain as much value as possible if you cannot be in physical. Certainly debt is out of the question!

I thought for some time that maybe gold equities might do well, but I am not so sure if the mines are ultimately going to be nationalized. Maybe some sector or in companies that are so essential that they will survive largely intact through economic dislocation?

Until I can figure it out I am stuck in PHYS and it is of course tracking the current dollar value performance of my pile of physical. I am trying to come to terms with nearly $600K worth of current purchasing power going up in smoke, but that it seems is not an easy task. Anybody have any ideas what might work within the confines of a standard full service brokerage account, I am all ears!

Gary said...

@JR,

Yes, I agree it brings gold into the financial arena, which the Americans will dislike no doubt.

But collateral:

collateral (definition)

'Assets pledged as security for a loan. In the event that a borrower defaults on the terms of a loan, the collateral may be sold, with the proceeds used to satisfy any remaining obligations. High-quality collateral reduces risk to the lender and results in a lower rate of interest on the loan.'

I do think it's a bit of a stretch to think the creditors won't seize the gold, and will allow Greece to refinance time and again. Most analysis of Greece's prospects indicates they are doomed to contraction, meaning no getting back on an even keel.

In a freegold scenario it's fine, but pre-freegold they would be getting a raw deal. So, let's see what actually happens, will the deal get signed, will they be able to wriggle out of the deal, or will they lose a big chunk of cheap gold?

DP said...

Gary,

Are we forgetting Austerityland's balance sheet?

For Greece:

their liabilities include loans they have taken on, as well as (growing, but getting back under control) hand-outs they've promised

their "light blue" assets include expected (albeit shrinking) tax receipts

their "green section" assets (system equity) include 111m/t of gold (note: not "gold")

I think as long as their assets at least equal their liabilities, they're technically solvent and therefore good for credit with at least one creditor somewhere or another. So really the fate of their gold seems like it's up to them rather than their creditors?

#GELOC

AdvocatusDiaboli said...

Re: Greece & Gold
I don't get it, what's the matter about that greek gold: The fiat debt will not be repaid, no matter before or after gold's "revaluation". Where you want to revalue gold to in order to "pay off" the debts (100,000€/oz)?
And even if you revalue it to debts=gold. Where do you think Greece will be in five years from now? Exactly where they are right now again (ECB and finanicial industry will make sure, that surplus debt from northern europe will be pumped somewhere, that's how the whole euro crap was designed to work in the first place).
Greets, AD

Motley Fool said...

AD

There seems to be a lot you don't get.

You are correct that either way the loans will be defaulted upon in all likelihood. The difference is in one scenario they still have their gold, in the other they do not.

A pretty huge difference if you ask me.

Further more, five years after FreeGold? Greece will thrive. ;)

TF

AdvocatusDiaboli said...

MF,
what do you mean: Greece can keep their gold (and buy more on credit like last year) and every five year we make a debt jubelee?
Is that's what freegold is about?
Damn, there's really a lot I have to learn about your freegold world.

Motley Fool said...

AD

No, and no...

and yes, it would seem you do have a lot to still contemplate....

but the leopard does not change his spots aka trolling troll is trolling. ^^

TF

JR said...

Gary,

We don't know the specific legal details yet. But here is a big idea.

I pledge an asset as security for a loan. Like a house. Down the road I run into difficulty and think I might risk defaulting on my loan.

But wait! The asset I pledged as security for the loan, like a house, is still mine. Suppose it concurrently appreciated in price.

Depending on the how the loan was structured, my asset, like a house, is likely only encumbered as to the amount of the original loan (if that). So I have equity than, if my asset is worth more than i have encumbered it?

So I can default and deal with that mess and likely have to forfeit my collateral, or I can go see if anybody else wants to extend me some more credit. Maybe from my existing lenders, maybe from some new lenders, yes?

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

Sorta like a home equity line of credit (often called a HELOC):

A home equity line of credit (often called HELOC and pronounced HEE-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in his/her house (akin to a second mortgage).

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

But for gold so its a GELOC

Think back to when house prices were actually rising. If you bought a house for $250K and it was suddenly worth $350K did that revaluation automatically appear on your bank's balance sheet as an additional $100K asset? Of course not! But you, as the homeowner, could put it on the bank's balance sheet with a HELOC or a second mortgage.

Maybe you could call this gold revaluation a GELOC to tide you DC spendaholics over until you can get your act together later this year. And that (soon to be) $400 billion "bridge loan" will not even be debt in the traditional sense, and it certainly won't be "debt subject to the debt limit" any more than Bernanke's QE is subject to limit.

Honestly, the Eurozone is so far ahead of you DC guys on this it's not even funny. They mark their official gold reserves to the market price every quarter, and they just voted to make gold a system-wide acceptable collateral asset. [2]

"The European Parliament's Committee on Economic and Monetary Affairs Tuesday agreed unanimously to allow clearing houses to accept gold."

OMG! Can it be that a collateral asset that is consistently rising in free market value makes boatloads more sense than ones you have to prop up with quantitative easing and open market "print to purchase" operations??


cont.

JR said...

And the analagy may assume too much because I don't know that Greece is specifically encumbering any particular allocated gold. I think they are saying, see, we have lots of gold lend us some money. And the lenders go OK and Greece pledges some gold in currency terms. Not by weight of gold or at a fixed currency price of gold.

At a floating price. Like the Eurosystem's gold :)

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

"I do think it's a bit of a stretch to think the creditors won't seize the gold, and will allow Greece to refinance time and again. "

We'll see what the terms are, but generally speaking if Greece makes its payments they basically have no rights. Who knows, maybe it will have some crazy legal encumbrance on the specifically allocated gold such that they have rights in terms of any subsequent re-financing of any equity in the "specifically allocated gold," but I am not sure that is what is going on.

I wonder if it might be "pledged" in currency terms at a floating price.

Does this make sense Gary? And more importantly, have you seen and details on the terms of the deal?

Clyde Frog said...

"that surplus debt from northern europe"

huh?

Peter said...

The fiat debt will not be repaid, no matter before or after gold's "revaluation".

Yes.

And even if you revalue it to debts=gold. Where do you think Greece will be in five years from now? Exactly where they are right now again

Ye... No. Ah, crap!

I miss being a yes man.

Jeff said...

If the GELOC is collateral for the loan, what happens if, for example, the value of collateral drops precipitously, as determined by the London Fix? Value of collateral now < loan amount. Call the loan?

Hmm.

DP said...

Jeff,

Is the borrower still current on the payments?

'Assets pledged as security for a loan. In the event that a borrower defaults on the terms of a loan, the collateral may be sold, with the proceeds used to satisfy any remaining obligations. High-quality collateral reduces risk to the lender and results in a lower rate of interest on the loan.' (Thanks, Gary.)

DP said...

JR: And more importantly, have you seen and details on the terms of the deal?

Quite.

Jeff said...

HI DP,

It really depends on terms. Many lines of credit can be called for various reasons, especially if the value of collateral drops.

DP said...

We watch and wait for these new credit terms together, yes?

Lisa said...

In some mortgages (or security agreements) and the related Promissory Note, there is a "catch-all" provision in the Default section, which allows a Creditor to declare a default if they "deem themselves insecure". I have successfully used this provision to declare a default and foreclose a mortgage of commercial property, based on the underlying financial circumstances of the borrower.

Having said that, a lot depends on the actions of the borrower - i.e. - do they fight the alelgation that this clause has been triggered? I would expect Greece to fight to save its gold

JR said...

Very true Lisa,

But I wonder if the relative bargaining power of the parties involved is a little different may occur in some creditor v. sophisticated credit entity negotiations.

This may be framed as Greece v their lenders, but is there really another entity calling the shots...

In July of 1998 the ECB and Eurosystem Freegold concept went public. The ECB would take in a small portion of the overall Eurosystem foreign exchange reserves as its own. Of those reserves held by the ECB itself, 15% would be gold. Furthermore, any change in the Eurosystem's consolidated foreign exchange reserves, consisting of 30% gold at that time, would be subject to the approval of the ECB.

ECB Press conference: Introductory statement

The Governing Council furthermore agreed that this initial transfer should be in gold in an amount equivalent to 15% of the sum I have just mentioned, with the remaining 85% being transferred in foreign currency assets. I should stress that the decision on the percentage of gold to be transferred to the ECB will have no implications for the consolidated gold holdings of the ESCB.

The precise modalities of the initial transfer will be finalised before the end of the year.

Before the end of the current year the Governing Council will also have to adopt an ECB Guideline pursuant to Article 31.3 of the Statute of the ESCB, which will subject all operations in foreign reserve assets remaining with the national central banks -including gold - to approval by the ECB.



Your Own, Personal, Freegold

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

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

In line with the Eurosystem’s harmonised accounting rules, gold, foreign exchange, securities holdings and financial instruments of the Eurosystem are revalued at market rates and prices as at the end of each quarter.


[...]

The ECB is simply the core of the Eurosystem. Actually, there are two systems. The ESCB or the 'European System of Central Banks' which is comprised of all the CBs in the EU, even those not using the euro as their currency. And then there's the Eurosystem which is comprised of all the CBs using the euro, with the ECB at its operational core.

The ConFinStat, put out weekly with quarterly MTM revaluation, is the balance sheet of the whole Eurosystem which includes all of the NCBs using the euro. It is not the balance sheet of the ECB.

Party Like It's MTM Time

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

So that's sorta why I suspect Greece pledges some gold in currency terms. Not by weight of gold or at a fixed currency price of gold. At a floating price. Like the Eurosystem's gold :)

Make sense?

JR said...

RPG Update #4

"There has been some confusion about the details and the relevance of this quarterly, system-wide or consolidated revaluation of reserves and the ECB's role as the system's aggregator. In the beginning, each participating country had to "buy in" to the system with a specified, euro-denominated value of foreign currency/gold reserves.

On April 18, 1998, eight months before the launch of the euro, ANOTHER explained that the idea of any gold being part of the initial buy-in had been a recent development. He wrote that it was initially discussed that gold would be only 5% of the buy-in, but that the BIS had decided that making gold 15% to 30% would render a euro that was stronger in oil.

[...]

It should be noted that this initial transfer was not a surrender of assets to a third party central bank, but instead it was a buy-in, a purchase of equity in the system itself. So while a country might have contributed 8% of the ECB's gold, that country now owned 8% of the interest in the system. And being part of a system, that country also agreed to all operations in foreign reserve assets, not just those transferred to the ECB, being centrally coordinated by the system aggregator, the ECB."


For example, central management by the ECB is evidence by Greece's CB being a signatory to the ECB's most recent statement on gold (aka WAG3 or the third central bank agreement on gold) - link

victorthecleaner said...

Mortymer called BS on our discussion about the Greek gold as collateral.

1. Is the Greek government at all allowed to pledge the gold without agreement by the ECB?

2. The current Greek PM is Lucas Papademos, former VP of the ECB and involved in founding the Euro. So the Greeks won't get screwed. If at all, then they might use the gold after the default.

So I conclude the word 'gold' is probably not mentioned once in the recent contracts with Greece. The NYT article is BS.

Regards,

Victor

victorthecleaner said...

If you allow me some advertising, in case you have issues with some hard money advocates, you are welcome to send them here:

Why the US cannot return to a gold standard

Enjoy,

Victor

JR said...

Of course the ECB controls the gold Victor, that's the whole reason why many think this is at a floating price if gold is used as collateral and not by weight or in a fixed price currency relationship.

Of course the Greeks won't get screwed and lose their gold on the cheap.

The ECB is the one promoting gold as collateral, so it would be entirely consistent that they keep doing it in the case of Greece. See the excerpt Lisa posted from Euro Gold

"Quarterly Reflection

Over the latest quarterly cycle we have witnessed several curious advances in Europe. To name just a few, on May 24th the European Parliament's Committee on Economic and Monetary Affairs agreed unanimously to allow gold to be used as collateral in clearinghouses. [2] And then on June 7th the ECB encouraged investors to buy new Greek bonds to replace maturing securities with two separate unnamed European officials saying investors may be given collateral as one possible incentive to roll over the debt when it matures. [3] And finally, on "Snapshot's Eve", June 29th, we learned that China's SAFE (State Administration of Foreign Exchange) is actively doing all it can to transfer billions of its dollar-denominated holdings into euros. [4][5]


We don't know for sure, but it all makes sense given the ECB's role.

DP said...

1. Is the Greek government at all allowed to pledge the gold without agreement by the ECB?

Firstly, I think I recall there was a representative of the ECB at the meeting on Monday. Mmmmm, yes - I'm sure I remember him joking about "having the ECB's gold in his briefcase".

Secondly, I don't suppose the Greeks wanted to put their gold on the line (except that it would facilitate an affordable rate of interest). Maybe they were told it would be necessary collateral.

JR said...

Hi Reven,

You asked "If the US started to mark to market, what would change?"

Victor' reply and great blog post "Currency Wars: Why The United States Cannot Return To A Gold Standard" help address the issue form the currency side - why the US's gold will never be linked back to the dollar. Here is FOFOA from Confiscation Anatomy - A Different View the US as a "golden outlaw."

Well, if the US ever put gold back on the table through another confiscation of its citizens' gold, the BIS would call in all of its outstanding claims in gold at the rate of $42 per ounce. And the BIS would not be alone. Other entities would have legal claims for gold at $20.67 per ounce, and others at $35 per ounce. How much gold was either confiscated or defaulted on without due process of law? Claims of perpetual entities never go away. If the US government ever exposed its own gold (or its citizens' gold through confiscation) to the light of day, it would expose itself to all kinds of claims and an international legal mess. Under international law, the US is still an OUTLAW when it comes to gold!

This is why gold is off the table. This is why we can never go back to a gold backed dollar. It is also why they cannot call in gold AGAIN under the same dollar that they did in 1933. To call in gold at a specific exchange rate now, the US would first have to back the dollar with gold at that rate and then call it in. That would expose the US gold to international legal challenges for redemption. If they simply called in the gold without backing the dollar, the US government would be exposed to thousands of internal law suits. These law suits would rightfully demand a retroactive reversal of 1933 before any new confiscation could take place. They would demand that US official gold be distributed to all citizens at $20 per ounce BEFORE it could be turned back in to the government.

The US government will never take this risk! It will never expose itself to this legal nightmare! The US is already a golden outlaw!


This would be a huge problem and a big risk for the U.S. if it were to ever try another gold confiscation, or another gold standard in which the U.S. tried to fix the price of gold, or any method of controlling gold other than Freegold for all.

FOFOA on Ender's chicken comments

JR said...

But the US has gold, owned by the Treasury. The issue above is linking it with the FED and the dollar.

FOFOA comments

The legal problems the US faces with regard to past gold history have only to do with controlling gold to avoid real meritocracy moving forward. This is why another confiscation or a new fixed dollar-gold standard are simply not in the cards. Both are attempts to control gold and end-run meritocracy. The world will not tolerate that again. Fool me once, shame on you; fool me twice shame on me.

We can't turn back the clock. But we can move forward. The world would not resist the US revaluing its gold. There is no reason to. FOA said the US would eventually mobilize its gold at a much higher price. That means revalued, at the floating Freegold price. The US will ultimately have to make a market for its own dollars by buying them up with physical Freegold from Fort Knox.

When the trade deficit is no longer possible, the US will have to import all that inflation it has been exporting if it wants to keep oil flowing in. Real goods going out (gold) and less real goods plus some inflation coming back in. That's the reverse of today's trade deficit.


[...]

By the way, that's post-hyperinflation I'm talking about. They may well lop 12 zeros off the dollar before making a market for it. Exchanging one trillion old dollars for one new dollar. But gold will still be at Freegold prices (e.g. 55,000 new dollars/ounce) and they will have to make a market for that new dollar or it will continue to plunge like the old one.

That's the choice. You can collapse your currency against the non-economic good gold, killing the paper gold market and driving up the price of physical in advance of hyperinflation by buying it up. This gives you some hope of avoiding the worst of hyperinflation by providing a real outlet for unwanted surplus dollars.

Or you can wait until your currency collapses against economic goods and then you will have to buy back your own currency with your gold, also at Freegold prices. Even if you start a new currency you will still have to make a market for it because your credibility will be shot by that point.

JR said...

So what might happen if the US treasury revalued its gold - not linking it to the FED and the dollar, just revalued its gold. FOFOA comment

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

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

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

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

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

JR said...

Open Letter to Ron Paul

Dear Dr. Paul,

I would like to share with you what I think is a brilliant opportunity for you to lead the revaluation of the US gold stockpile from its present book value of $42.22/oz. which, as you say in the video below, "makes no sense whatsoever." I think that when a rare opportunity like the one I’m about to describe presents itself, the least we can do is to give it fair consideration.

[...]

The gold certificates on the asset side of the Fed's balance sheet are not even paper certificates with fancy fonts and pictures. They are electronic book entries representing the dollar-denominated amount of $11 billion. They no more represent the US gold by weight than they are redeemable in that gold. They are a nominal dollar token accounting entry.

The Fed's "Fisher" was wrong [here] when he said, way back in 1997, that a revaluation of the gold would require selling off other assets to balance the Fed's books. Firstly, if Congress were to revalue Treasury's gold, that would not automatically revalue those "certificates". They have no market value because they are irredeemable, non-negotiable and obviously unmarketable! Secondly, even if it were to automatically affect the Fed balance sheet in some cartoon universe, selling off other assets is not the only way to balance a gold revaluation. The more logical way is for the Fed to issue new Fed liabilities, aka dollars, to the owner of that collateral that is rising in value.

Think back to when house prices were actually rising. If you bought a house for $250K and it was suddenly worth $350K did that revaluation automatically appear on your bank's balance sheet as an additional $100K asset? Of course not! But you, as the homeowner, could put it on the bank's balance sheet with a HELOC or a second mortgage.

Maybe you could call this gold revaluation a GELOC to tide you DC spendaholics over until you can get your act together later this year. And that (soon to be) $400 billion "bridge loan" will not even be debt in the traditional sense, and it certainly won't be "debt subject to the debt limit" any more than Bernanke's QE is subject to limit.

Honestly, the Eurozone is so far ahead of you DC guys on this it's not even funny. They mark their official gold reserves to the market price every quarter, and they just voted to make gold a system-wide acceptable collateral asset. [2]

"The European Parliament's Committee on Economic and Monetary Affairs Tuesday agreed unanimously to allow clearing houses to accept gold."

OMG! Can it be that a collateral asset that is consistently rising in free market value makes boatloads more sense than ones you have to prop up with quantitative easing and open market "print to purchase" operations??

JR said...

Opps, I linked a comment to Open Letter to Ron Paul above and not the post, here is the comment that further explains a possible US Treasury revaluation of the US gold:

There's no mechanism that would require monetization of the full value simply because it was being marked to market, any more than a homeowner in 2005 was forced spend his entire home equity. Furthermore, there are many ways the option of monetization could be used. Retiring debt is one way. More from It's the Flow Stupid:

"And then, if they let the value of the gold float, anytime the price rises, they could issue more fancy dollar-denominated gold certificates to the Fed and be credited with new dollars to spend. In fact, at a Freegold price of $55,000 per ounce, Congress could retire the entire US national debt without giving up a single ounce of gold, merely monetizing what it already has through the Federal Reserve. But what will really happen someday soon is the additional step of opening the vault and allowing that gold to FLOW again, but at a floating price. With this one move Congress wouldn't have to retire the entire national debt because credibility would be reestablished.

You see, the European gold reserves are far better, far more credible than the US gold reserve, simply because they engage in a two-way gold market, and have for decades. The US gold has been hoarded and locked away for more than 30 years, never deployed in case of emergency. The European CB's took a lot of flak for selling gold over the past two decades, but that action is precisely what makes them so much more credible (and valuable!) than the US gold hoard. Any trading partner knows full well that if all else fails, gold will be paid."


It should be fairly obvious that this post was not meant as a three page magic bullet. But it's not meant to be a trap either. I actually think it would be a step in the right direction. For a couple years now I have proffered that getting out in front of Freegold is the USG's only chance of avoiding the worst of what's coming. Of course, like anything else, it could, and probably would be abused by the spendthrifts in Congress. But I don't see how it could possibly make anything worse. Do you?

burningfiat said...

I don't understand what's going on with Greece putting its gold up for seizure by the creditors. Freegold valuation or not.

WTF. Greece is supposed to be a Sovereign Nation.
The proper thing for the Greek people is to declare a Sovereign default:

Since a sovereign government, by definition, controls its own affairs, it cannot be obliged to pay back its debt.[2] Nonetheless, governments may face severe pressure from lending countries. In the most extreme cases, a creditor nation may declare war on a debtor nation for failing to pay back debt, in order to enforce creditor's rights.

That means outside of a war declaration it should not be possible for lenders to a Sovereign to demand shit.
Has the European integration already come so far that Greece can't be considered a sovereign? Scary IMHO...

The Greek people needs a fresh start (free of insane interest rate / GDP expenses). The creditors (AKA banks) absolutely _needs_ to find out the hard way that the $IMFS is broken. The lesson: Gold - GOOOD. Sovereign debt - BAAAD.

/Burning

dieuwer said...

I would like to offer a very simple example of stock versus flow of gold: myself.
I am more than happy to buy gold coins from a coin shop/dealer at the advertised paper price. Thus, I am happy to bid with my dollars on gold.
HOWEVER, the gold coins I own I do not wish to sell at the current paper price. Only at an extreme mark up of say 10x at present conditions. Thus, the gold I own is NOT bidding for dollars.
Therefore, stock is increasing but flow decreasing. Exactly as predicted. Even in my micro-world ;)

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