Sunday, May 20, 2012

I'll Have ANOTHER Open Forum


On Saturday, I'll Have ANOTHER won the Preakness in Baltimore by a neck. Preakness is the second of three races that comprise the US Triple Crown. I'll Have ANOTHER also won the Kentucky Derby two weeks ago. If he wins the Belmont Stakes on June 9th, he'll be the first horse to win the US Triple Crown in 34 years. The last Triple Crown winner was "Affirmed" in 1978. Oh, and one other thing, the runner up in the first two races, Bodemeister, will not be competing at Belmont.





One of the musicians in this next video is one of the commenters here and a supporter. He wrote a song for the band called 'That Barbarous Relic' which he tells me is still in rehearsal. Here's a recent write-up in NPR Music. The band's new album, Safety Fifth, will be out June 12th.

594 comments:

1 – 200 of 594   Newer›   Newest»
Wendy said...

Thanks for the clean page FOFOA ;)

Wendy said...

That horse is only 3 years old, and has earned over 2 million bucks. I wonder if his Canadian owner hangs out here?

Robert LeRoy Parker said...

Jeff Christian says in the Martenson thread that average mining costs are $800-$1000. Any thoughts on the discrepancy?

And is there any info from the BIS that acknowledges the tier 1 capital conversation? I've only found that the WGC is lobbying them for the change.

adfadsf said...
This comment has been removed by a blog administrator.
Wendy said...

Oh brother, it's been a long time since we've seen a spammer here, hopefully it goes away.

Nickelsaver said...

The headlines in the dailies
Are the horses in a race
They lead you to believe
That life and death are commonplace
Some believe it
And I'm crying again

I heard some good intentions
And not all were second-hand
But bravado and pretension
Will not feed a hungry man
It's been said before
And I'm crying again

Very quietly
The world loses blood overnight
Without a fight
In the morning
The sickness will hide in the light
Out of sight

Running from a world
That they will never understand
The masses ride their passions
With the throttle in their hands
Nobody knows
What is waiting around the bend

Now and then
The criminal in my skin lets out a sigh
He'd like to think he's innocent
But he cannot tell a lie
Truth is like a knife
And I'm crying again

Robert LeRoy Parker said...

Here is exactly what Jeff Christian had to say as I was not correct above:

The average operating cost of production for gold in the world at present is around $670 per ounce. Full in costs, including discovery, finance, corporate overhead, interest rates, depreciation, etc., are around $800, maybe $850 per ounce. So, gold mining on average at present is returning about a 100% profit. There's a long way to go from current prices before production would be constrained.

Later on he added this about mining capital costs:

Someone mentioned capital costs, saying a geologist told him there were high, around $1,000. They are that high at a few poorly run mines. The average globally last year was around $150 per ounce. That’s not a guess over beers. That is the calculation derived from a thorough quantitative analysis of mines that account for something like 80% of global mine production. That’s the average. If there are a couple of companies with non-cash costs around $1,000, and there are, that average means there are a lot of mines with far lower capital and overhead expenses. Actually, the average is close to typical. The number of mines with $1,000 or so in capital costs are very few with relatively low production: The low production levels in terms of gold being produced at a given mine is what gives them a high per-ounce cost. If they were larger mines, the capital costs would be spread over more ounces and would be commensurately lower.

Robert LeRoy Parker said...

Here is a pdf from CPM group that graphs what Christian is saying. Starts around slide 34.

costata said...

RLP,

I don't have time to read that PDF at the moment but I will later. Thanks for the link.

The problem with estimating costs is that miners have some incentives to serve up BS to the shareholders and market. There is also the problem of over-optimistic projections and differences in methodology.

Whenever I see what look like low estimates a few questions cross my mind For example:

1. How are they treating credits on other metals from multi-metallic ore bodies?

2. Are they replacing the reserves they are depleting?

3. Are the grades stable or declining?

4. How are they treating capex?

I'm not saying Christian is wrong. I have neither the data or the expertise to make that judgement. I am saying that there are credible analysts (such as Murray Pollitt) who cast doubt on all miner cost estimates and expect the truth to be higher costs rather than lower.

Bron Suchecki said...

Further to making gold a bank capital Tier 1 asset, as Robert LeRoy Parker notes, this is being pushed by the World Gold Council

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

"The World Gold Council has been pursuing this goal over the past two years and it requested the LBMA to carry out a survey of turnover in order to strengthen its argument that the gold market is sufficiently deep and liquid to justify gold’s characterisation as both high quality and liquid."

The same WGC which first launched gold ETFs into the UK and US and the same which has bought into Bullion Vault.

Therefore when I see people say the ETFs don't have the metal, it just doesn't stack up as why would the WGC be so obviously supporting gold in some areas but allow a fake paper ETF to operate, sucking demand away from bidding up physical prices - which is in the interest of their gold mining owners?

As to the mining costs, I'm not sure why you see any conflict with Jeff Christian's numbers - they are very close to the numbers in the chart in the Hinde Capital blog?

Robert LeRoy Parker said...

Cash costs are the same but the capital costs appear to be different. Hinde's chart appears to average 4 majors while Christian's numbers are more comprehensive. Although I would have thought capital costs would be near the "typical" ,as Christian puts it, for large cap companies. So I'm not really sure...

The all in cost of extraction is the biggest discrepancy as Hinde chooses to emphasize that the "fully loaded cost... is potentially $1200-$1400/tr. oz." Christian emphasizes the number as an industry average of $800-$850.

Costata's points I think are fair about miners perhaps fudging their books to look better, but I am particularly wary of KWN guests including Davies these days. The success of his fund is also very dependent on a rising gold price so I'm not surprised to see him highlight and perhaps fudge anything that could lead to a potential shortfall in new supply.

DASK said...

Also of key interest is the marginal cost for new gold production. Anyone making that calculation now would likely be including some risk for windfall profits.

It's not in the pdf but grades are in fact declining across the board; i've seen some LCA data that shows an increase from about 200 to 250 L diesel/fuel oil per ounce produced on average at the big mines. I will have to see if I can dig it up again. This is a pretty good indirect measure of ore grade.

My take on the pdf is as follows. On page 32, from 2000-2008 we see the 'natural' downtrend in production when there aren't too many new mines coming into play. We lose about 1.5 MOz per year from existing mines. This means that if their projections are correct, gold production will increase net some 10 MOz per year to 2015, or some 15%. During that time, some 10000 tons will be added to the global stock. This will produce a small bump in the flow/stock ratio, but it looks like even optimistic projections show us currently on a plateau on decline from the peak flow/stock, with increasing risk and marginal costs on the flow side.

Robert LeRoy Parker said...

I suppose these concerns are somewhat moot from a hardcore freegold perspective. But the Chinese probably still prefer to accumulate at $1000/oz rather than $1500/oz. Can it get there? I sort of doubt it.

My guess is TPTB's willingness to let the price get anywhere close to the cost of production is still dictated by the health of the bullion banks and if MF/JPM is any indication, they're probably sicker than ever.

M said...

What is all the talk about the cost of mining gold ?

It doesnt mean much. You actually have to discover it first. What I do know is that gold reserves are being priced at around 1200 by the analysts. Even though gold has been above 1200 for years, they still mark reserves at 1200.

The mining shares are dogging it simply because the stock bugs in the west dont believe in the gold rally,

Dr. Peter T said...

ANOTHER: how much we all owe him, his genius, his eye-opening wisdom, his knowledge! Hasn't he, together with FOA and FOFOA, helped to transform our -and our offspring's- future? Inestimably grateful for having found ANOTHER!

costata said...

RLP,

I wouldn't bet on the BBs being in any way "sick". They had a near death experience in the late 90s and came through it. They have had over 10 years to clean up their exposure. Despite the hysterical claims from people like Ted Butler there is zero evidence the BBs are short (net) let alone naked short.

Bear in mind too that organisations like JPM operate with a kind of compartmentalized structure. Something akin to the flood chambers in a large ship. They will be structured to survive the loss of parts of their organisation without sinking the "ship".

In the same vein as Bron's comment about ETFs having the gold they claim to have (I agree FWIW). I think everyone needs to consider a different perspective on the turnover figures posted by the LBMA. If you view the paper gold trading as an extension of the FX market then those big numbers don't look so big.

Instead of focusing on how little gold the clearing members have relative to the paper turnover it is worth considering this question: How much do they need? I think it would be a big mistake to assume that most of the holders of that paper want physical gold rather than a short term currency hedge payable in currency.

Cheers

Anand Srivastava said...

That's a very good question costata. I would want to know how much of that Paper gold is actually representative of gold transactions, and not hedges. I would think it would be very small. But is it at least a 2-4 times the physical gold or does it really not matter.

I am not sure how much of that 22times is really real. I am hoping for 4-5 times, but maybe that is too optimistic.

Woland said...

FOA: " Lost in the confusion is the distinction between investing
in the price of gold, and investing in gold itself. Perhaps 90%
of all the investing in todays dollar settled, gold market is done
in the first way mentioned. Yes, the market is structured contrac-
tually 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.

"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 time line was ending as its' ability to produce non price
inflationary economic gains came into sight.

"In order to push dollar holdings FURTHER (to extend the $ time
line) international players needed and purchased "paper financial
hedges" to balance their risk. Within their "total mix" of
derivative hedges were found "paper gold hedges", modern gold
derivatives. The important thing to remember is that these
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. In order 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 truth, these paper gold positions act like the 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 positions performance; real gold
delivery along with true price performance, matching real bullion
trading, would be only for the very few."

I find it interesting that, if I am reading FOA correctly, the entire
panoply of derivatives, CDS, Interest rate swaps and currency
swaps, are ALL in the same way, merely "insurance stickers",
just as a poor quality credit with and insurance company
guarantee attached became AAA prior to 2008. They system
can only work so long as it mostly doesn't have to function.
When called to perform, it will shut down. Thoughts.....

JR said...

During Bretton Woods, foreigners held "good as gold" dollars, "the hard currency", as a hedge against their local currency risks. But once those paper gold derivatives we like to call FRNs grew too numerous, all bets were canceled, conversion denied, and those who still held the paper lost out in the immediate devaluation. The same thing happened 38 years earlier... and the same thing is happening 38 years later!

In the 1970's the liberated physical gold market proved to be an excellent hedge against both currency and default risk. Then in the 1980's we were treated to an amazing growth spurt in electronic exchange traded futures and new global exchanges trading these derivative hedges, ultimately netting more than 90 different futures and futures options exchanges worldwide.

In the early 90's, the dollar saw its match as the Euro was taking shape. To counter this threat it promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar system beyond its ability to serve as a real fiat money system. The whole dollar landscape become just a trading asset arena, evolving away from any meaningful currency use to trade for real goods. It can head in no other direction now because our local economy, the US economic base, cannot possibly service even a tiny fraction of the purchasing power currently held in dollars worldwide.


http://fofoa.blogspot.com/2010/01/gold-ultimate-hedge-fund.html

Woland said...

Hello JR. I would be interested to know whether you think that,
in a race between what I would call (1) a "major overt derivatives
failure" and (2) the cessation of foreign CB accumulation of dollars,
which FOFOA indicated in the last post to be the trigger for the
HI feedback loop, the former or latter has the greatest near term
shot at destabilizing the system. In 2008 it was the failure of
"insurance stickers" on CDO's which caused the failure of repo
in the shadow banking system as "insured" collateral became non
trustworthy when the insurance providers were called into doubt.
Any thoughts?

JR said...

Hi Woland,

I sorta thinks its one in the same. Some ideas:

Think about this. The hedges are now guiding the markets. What do you think will happen when they all of a sudden fail to function? The financial world today turns on dollar assets that are all hedged, not just pure bare holdings! Block the hedge markets from performing and the dollar itself is unseated.

Today's Fed policy of saving Wall Street at all costs is in direct opposition to the risk transferring dynamic of derivatives that has kept the dollar alive. Contradictory forces! Of course the alternative would have been almost as devastating, but that's the problem with Catch-22's.

The dollar's structural support system, its very skeleton, its integrated hedging operation has failed. It is no longer a matter of time, it is only a matter of recognition.

[...]

FOA: 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 need to be present in the portfolio to act as insurance stickers. In that truth, these paper gold positions act like FDIC insurance at our banks.

[...]

FOA: The record of derivative evolution meshes seamlessly with the recent need for supportive dollar currency measures; a strategy of maintaining a failing system that was ending earlier than expected. Truly, in 1990 no one was going to carry the dollar any further, waiting on the endless delays of Euro creation, without some way to hedge risk. We had hit the end of the dollar's timeline too early; we had missed the mark.

The US could not physically save the dollar then, neither with gold backing nor the production and sale of real goods. The only answer was to let the dollar kill itself while you create an illusion of risk dispersion in the form of derivative protection; a form of backing if you will. With this "illusion of risk dispersion" in hand, called a derivative hedge, the world currency system and its denominated assets, continued on. This "just in time risk management" was and is adopted into every present day currency that carried the dollar as reserve backing.

It's no wonder that Alan Greenspan has commented so often on the need to control derivatives yet has no workable plan to counter their function. Truly this dynamic was created to counter his function and few can understand this! In effect, the dollar was placed on a one way street that required it to be inflated into infinity. All as a means of protecting dollar originators; the US banking system. Dollar leverage, that is actually US liabilities, is now built up endlessly. This all points to a nonstop, end time need for an uncontrollable inflationary expansion by our fed.


http://fofoa.blogspot.com/2010/01/gold-ultimate-hedge-fund.html



Neat:


The dollar's structural support system, its very skeleton, its integrated hedging operation has failed. It is no longer a matter of time, it is only a matter of recognition.

JR said...


Structural Support

FOA 10/3/01 - Our recent American economic expansion has, all along, actually been the result of a worldly political "will" that supported dollar use and dollar credit expansion so as to buy time for Another currency block to be formed. Without that international support, this decades-long dollar derivative expansion could not have taken place. Further, nor would our long term dollar currency expansion produce the incredible illusion of paper wealth that built up within our recent internal American landscape.

The relatively small goods "price inflation" so many gold bugs looked for will be far surpassed and the "hyper price inflation" I have been saying is coming is now being "structurally" set free to run.

Why "structurally", why now?

For years now, "politically", the dollar system has had no support! Once again, for effect,
"Politically NO", "Structurally Yes"!

For another currency block to be built, over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained… Truly, the recent years of dollar value was just an illusion. An illusion of currency function and value, maintaining the purpose of holding the world financial and economic system together for a definite timeline. Politically, the world does not hate America; rather they hate the free lifestyle our dollar's illusion value brought us yesterday and today.


If our dollar is going to fall so fast and so far in value that it will be called "hyperinflation", then the dollar must be tremendously overvalued today, right? In fact, and these are FOA's words, "Dollars have no value at all except for our associating remembered trading value with them." A barrel of crude oil isn't worth $100 because a one hundred dollar bill has a value equal to a barrel of oil; rather we remember that a barrel of oil will trade for the same amount of natural gas that also relates to those same 100 units. Money is an associated value in our heads. It's not a physical item.

Yet for the last 30+ years, the fully fiat dollar, a purely symbolic token currency, has been behaving as if it actually is an item of value equal to the real goods and services the US has received through its perpetual trade deficit. Understanding how this was even possible is the only way to understand how it will end.

FOA 10/25/01 - I mean that our whole dollar landscape has now become just a trading asset arena: it's now evolving away from any meaningful currency use to trade for real goods. It can head in no other direction because our local economic structure, the USA economic base, cannot possibly service even a tiny fraction of the buying power currently held in dollars worldwide.

FOA 10/5/01 - The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollars timeline as we are already stretched to the leverage limit. They know that Greenspan has but one policy to use and that will be super printing. He is doing it now, right on que!


And here we find the key to the kingdom: "supporting foreign dollar settlement with CB storage."

JR said...

See how structural support, derivative hedge expansion, and the ultimate demise of the dollar are intertwined? The dollar collapsed in the aftermath of the second oil crisis in late 70s and the ROW supported it.

As FOFOA quoted FOA in "Inflation or Hyperinflation" (http://fofoa.blogspot.com/2012/05/inflation-or-hyperinflation.html) above:

Structural Support

FOA 10/3/01 - Our recent American economic expansion has, all along, actually been the result of a worldly political "will" that supported dollar use and dollar credit expansion so as to buy time for Another currency block to be formed. Without that international support, this decades-long dollar derivative expansion could not have taken place. Further, nor would our long term dollar currency expansion produce the incredible illusion of paper wealth that built up within our recent internal American landscape.

The relatively small goods "price inflation" so many gold bugs looked for will be far surpassed and the "hyper price inflation" I have been saying is coming is now being "structurally" set free to run.

Why "structurally", why now?

For years now, "politically", the dollar system has had no support! Once again, for effect,
"Politically NO", "Structurally Yes"!

For another currency block to be built, over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained…

Now that the Euro block is passing a point where the Euro currency is viable; this same past dollar support that built America's illusion wealth will now fall away.


====

The United States currently enjoys reserve currency status, which enables it to borrow cheaply, and which keeps capital circulating through our government bond markets,

"The point is that the premise rests on 90 years of history which only makes sense if viewed properly. It rests on 50 to 60 years of political support followed by 20 years of structural support from Europe and another 8 or 9 years of structural support from China. Today both political and structural support are gone, and the "solid foundation under any and every discussion" of monetary matters in America is what I am generously terming the "willy-nilly support" of the rest of the world. In other words, we have no say in the matter. Our fate is in their hands. Which kind of renders the premise invalid, doesn't it? "

e_r said...

Trying to expand on Anand's statement: I am not sure how much of that 22times is really real. I am hoping for 4-5 times, but maybe that is too optimistic.

Here's Victor over at Chris Martenson's thread:

I think one of the causes of the misunderstanding by Ted Butler and others is that gold and silver are traded over the counter (OTC) between the banks and bullion traders. This is commonly referred to as the 'London gold market', and many of these institutions are members of the London Bullion Market Association (LBMA). What is traded is actually not physical gold and physical silver, but rather two currencies. Each has cash (=allocated gold), credit money (=unallocated gold), swaps and forwards. The OTC market is many times bigger than COMEX, and so price discovery mainly happens in the OTC market, and the price is transmitted to the COMEX by arbitrage.

People whose background is commodities futures trading see the funny behaviour of the gold and silver COMEX and cry manpulation. What they complain about, however, is not manipulation but rather the arbitrage that transmits the OTC price to the COMEX. Note that gold and silver are the only underlyings of COMEX/NYMEX/CME futures that are traded as currencies OTC, and so, of course, corn or soybeans don't behave like that.


And here's Bron:

The OTC market is therefore best thought of like a network of free agents. But as described, because of no central exchange, you can't put your finger on exactly what the spot price was at any point in time. But then you can't put your finger on exactly what the price of cheese is either at any point in time because supermarkets and independent grocers and farmers markets all quote different cheese prices and do physical cheese deals at these various prices and don't report them on any central exchange nor settle them through centralised clearing houses. Yet you don't see anyone worrying about the lack of a reference spot cheese price and what the premium of physical cheese is to the cheese spot. It is a case of the shopkeeper saying "you don't like my cheese price, then buy from someone else". Somehow this system works. I think it is called a free market (which doesn't imply it isn't manipulated, BTW). Precious metals works the same in the OTC market.

So unallocated gold (which is essentially a parallel to credit in the regular economy) can collapse, therefore causing the spot price to fall -- and can also cause a Bullion Bank run (similiar to a bank run in the regular economy).

Question: is unallocated gold also similar to margin available on a brokerage account?

Bottom line is, there are a lot more claims on the physical, than the real physical. I don't know if Bron's comparison with a cheese market is fair, since there's probably not any unallocated cheese?

How much more claims on the physical? I suppose that is what Anand is asking? I don't know if anybody can give an exact answer for this, since network of free agents = opaque as hell.

As more and more claims on the physical increase, then the real physical becomes harder to obtain (as quickly as possible), therefore causing the mainstream pundits to think that the gold bubble is collapsing! in reality, the gold claims market is collapsing, but it is going to look very confusing for common people to understand these subtleties.

As Uncle Costata says, those who can be screwed will be screwed.

Clyde Frog said...

Question: is unallocated gold also similar to margin available on a brokerage account?

No. Your margin is the skin you have in the transaction already. There is no problem with the skin you have already put on the line — the problem is your ability to provide the further installments of skin you will have to put up if you want to keep the position open or, perish the thought, actually stand for delivery.

Bottom line is, there are a lot more claims on the physical, than the real physical. I don't know if Bron's comparison with a cheese market is fair, since there's probably not any unallocated cheese?

How many people to you know that speculate on cheese prices? There is a small chance you do happen to know a person or two I suppose... so, as a percentage of the people "in the market for cheese", what do you reckon?

JR said...

Physical gold, like physical dollars within the "private bank credit money" system, is also fractionally reserved within the gold banking system... what we like to call "paper gold". This in and of itself is not necessarily bad or dangerous. But there is still disagreement as to whether this "paper gold" system is fractional at 100:1... or at 10:1, to wit this post from Bron Suchecki at his Gold Chat Blog:

[...]

You see, when a Bullion Bank issues new paper gold, what we like to call a "naked short", it is constraining itself by making sure it has at least 10% reserves, according to Mr. Christian, in case someone decides to take delivery. Now in the case of a commercial bank, 10% reserves of physical cash may not be such a problem during a modern bank run because new cash can be printed relatively quickly. But with gold this is not the case. So even at 10% reserves, any bank run on the Bullion Banks would be a disaster.

But the real problem comes from what these Bullion Banks consider reserves. You and I obviously realize that the only reserves that will suffice in a bank run are actual physical pieces of gold. But these banks are presently relying on certain "paper gold" items as their "physical reserves".

[...]

The biggest problem is what stands in the way of this controlled revaluation. And that is the paper gold market that is already fractionally reserved at 100:1 if we define reserves strictly as physical gold in immediate possession.


http://fofoa.blogspot.com/2010/04/21st-century-bank-run.html

JR said...

http://fofoa.blogspot.com/2012/02/todays-quoteunquote-gold.html

As I have written on many occasions, I do not consider myself a "gold bug." So where necessary, I am going to broadly refer to three fundamental views as "the gold bug view," "the mainstream view," and "the FOFOA view."

[...]

I think Bron's "mainstream view" suffers a little from the same thing that all mainstream views suffer from – the 40-year commoditization of gold. This view holds that gold is more or less just like any other commodity rather than the systemically vital FX (foreign exchange) wealth reserve asset that it actually is. Last year Bron quoted Jeffrey Christian in a post written in defense of Christian's "100:1" comment. I think this quote that Bron used from Christian's CPM website really reveals the prevalence of this view of gold as just another commodity:

"This article may help to clarify the complex world of commodity banking, in which gold, silver, and other commodities are treated as assets, collateralized and traded against. When we explain these processes to clients, we often refer to the same mechanics as they are applied to deposits, loans, and assets by commercial banks in U.S. dollars and other currencies. Banks treat their metal deposits in much the same way as they do deposits denominated in money, as the reserve asset against which they lend additional money to borrowers."

So no big deal, because we're just talking about commodities here, not money, right? And thanks to this view, gold still trades precariously (without a safety net) inside a banking system similar to other FX currencies – dollar, yen, euro – with one notable exception. It is the only one without a backstop, a lender of last resort, a Central Bank. This would not be a problem without the expansionary force of fractional reserve lending, even at a conservative ratio.


[...]

Okay, now that you hopefully have a new view of the valley below, for now we can call it "the FOFOA view," let's take a look back at the two other views with which I started this post. The mainstream view is blind to how gold is different than all other commodities in that its lack of a real lender of last resort in a fractional reserve system, should the interbank lending market freeze up, could bring down the entire global monetary and financial system.

And then there is the gold bug view that suspects the Bullion Banks, at the behest and under the guidance of the CBs, must be gaming the system in order to skim physical gold that they eventually need to ship back to the CBs. But then the FOFOA view is that the system itself is, and always has been, the culprit. And that the bullion banking system must and will revert to a non-fractional, non-lending, 100% reserve banking system. Not the fiat banks. Just the Bullion Banks. The CBs demand this, as Another told us a long time ago, because physical gold is cornered by real wealth at these prices, and they (the CBs) will not give up any more of theirs.

Woland said...

Thanks, JR. In particular, I love, "The only answer was to let
the dollar kill itself while you create "an illusion of risk dispersion"
in the form of derivative protection. " So how's that risk
"dispersion thingy" working out?

JPM 78 Trillion total derivatives
Citi 56 " " "
BofA 53 " " "
GS 47 " " "

Grand total: 234 Trillion. If I'd been Ben, I guess I would have
saved them too, by any means necessary.

e_r said...

Clyde Frog,

Both fair points.

You say: the problem is your ability to provide the further installments of skin you will have to put up if you want to keep the position open or, perish the thought, actually stand for delivery.

I suppose then the question is: what % of unallocated gold cannot be converted to physical at all? This % is really the "no skin in the game" factor, since if unallocated gold default happens, whoever is holding this unallocated gold will not be paid in real terms.

I thought Bron must have had a good reason to compare gold market to cheese market, and I was just wondering what the reason was?

I think there is a lot more noise going on in the discussions concerning manipulation and Bron was probably alluding to those noises when he was making such a comparison.

JR,

Thanks for the links. 100:1 leverage if we consider the real deal?

Costata's comment: They have had over 10 years to clean up their exposure. Despite the hysterical claims from people like Ted Butler there is zero evidence the BBs are short (net) let alone naked short.

seemed to indicate he thinks the BBs have cleaned up their exposure. Costata - were you meaning they have simply ensured they are insulated from risks? Or are they really safe in terms of their balance sheet?

Woland & JR,

illusion of risk dispersion indeed. They created all sorts of fancy mathematical models to guarantee that risk is dispersed, except for the simple fact that the models are horribly wrong.

Anand Srivastava said...

e_r
Actually VtC had tried to answer how many more times hedged claims are being traded compared to physical. That number turned out to be 22. Now from JRs posting we know that much of those claims will never be claimed. So I am asking how much of these claims are actually meant to be claimed. I guess that would be very relevant to the question of how much gold will revalue.

Michael said...

ZH HAS AN ARTICLE UP in which the 'Geuro' is considered. It would be an internal currency to be used (abused) by the Greeks for internal use while continuing to do business with the euro in international trade. What I see here is a Freegold model. In this case gold is replaced by the Euro (as good as gold) and the Geuro has value only if it maintains good behavior.

http://www.zerohedge.com/news/forget-grexit-meet-geuro

This model leads the way. If the Euro continues to fulfill its duty to 'zee stabeeleetee' and maintain a market for gold at market price, perhaps we will see this emerge as the road to Freegold. Imagine if gold prices rise and if the Euro fights inflation. Would folks not use the Euro rather than gold for savings?
I could certainly see myself (eventually) saving in Euros...if the currency proved over time it could do both.

Michael said...

However...I seriously doubt in the short term that the Euro will be able to fight the temptation to inflate at least a wee bit...

JR said...

e_r,

Please read "The View: A Classic Bank Run" http://fofoa.blogspot.com/2011/02/view-classic-bank-run.html, you seem to be conflating net shorting / naked shorting (the mainstream goldbug view) with FOFOA's view.

As I have written on many occasions, I do not consider myself a "gold bug." So where necessary, I am going to broadly refer to three fundamental views as "the gold bug view," "the mainstream view," and "the FOFOA view." But unfortunately I cannot just lay these views out as simply as you would like. I need to lead you to my understanding. So here we go.

During our conversation, Bron wrote that the Bullion Banks are not, as he called it, "naked short" gold. He further explained his meaning, calling it "financially short" versus "physically short." They are not "financially short," in that they are not exposed to exchange rate risk, aka, any movement in the price of gold. Here Bron explains:

To clarify the distinction for our readers, let us consider a bullion bank with a physical ounce asset backing an unallocated ounce liability to its clients. If that bullion bank then lends that physical to a jewellery company who use it in their operations, then the bullion bank now has an ounce claim asset backing its unallocated ounce liability. From your point they are short “physical” but I would also note that the bullion bank is not short “financially”, that is they are not exposed to any movement in the price of gold.

Yes they are exposed to the risk the jeweller does not return the physical at the end of the lease. Probably more importantly, they are exposed to liquidity risk. I think this is the sense that you use “short” and is reflecting the issue of “maturity transformation” (see http://unqualified-reservations.blogspot.com/2008/09/maturity-transformation-considered.html for an excellent explanation of why this is a big problem).

My use of the word “short” is for situations where the bullion bank exchanges (or sells) the physical backing its unallocated ounce liabilities for cash. This creates a financial risk as there is a mismatch between the denominations of the liability (ounces) and the asset (dollars).


In other words, the bullion banks lend (rather than sell) "gold units" (be they real or paper) and as a result they now hold the claim or contract for repayment denominated in "gold units" (be they real or paper). I think Bron is trying to say two things at once here – that 1) "technically" they are not naked short, and 2) they have no "exchange rate risk," both satisfied by the stipulation that the gold units (real or paper credits) that they had lent are now being carried on the books as an asset (i.e., claim on repayment) for the same "gold units."


cont.

JR said...

cont.

Bron rightly elaborates that this condition exposes the banks to the standard counterparty risk of default, as well as "liquidity risk" from the maturity issue with lending short-term demand deposits (such as checking accounts and unallocated gold accounts) in exchange for longer-term assets (repayment over time like mortgages and mining finance). However, what he fails to acknowledge is this – there is no clearly defined lender of last resort to cover the risks. So the banks are IN FACT exposed to "exchange rate risk" as their ultimate recourse for filling the resulting permanent (default) or temporary (liquidity) hole in their books is to go into the open market to buy the replacement gold with cash.

If you think hard about a bank that finds itself in this position, you'll eventually agree it's just a matter of degree whether one is completely naked or just "semi-nude" – depending on the extent to which the market price is running away from him. And in this case, because they are chasing gold with cash, they in fact have "exchange rate risk" too, even though the denomination of their books imply that they do not. More in a moment.

Bron again:

The second part of FOFOA’s comment is that any delivery to GLD by a bullion bank of physical gold that was supporting/backing the bullion bank’s fractional unallocated liabilities is a “synthetic supply” that effectively suppresses price by “divert[ing] growing investment demand away from the tightening physical market.”

I would note that for this statement to be true the bullion bank(s) in question must be naked short. Not all Authorised Participants for GLD would have access to the physical to do this, nor would they all be willing to take on such a financial exposure


What Bron is describing here is classic, straight forward short selling – borrowing an item and then selling it, knowing that you will have to buy it back in order to return it to the lender. And he concludes that the only way GLD should be considered a "synthetic supply" is to the extent that the Bullion Banks outright shorted gold, borrowed it from their unallocated creditors and sold it into the market via GLD shares.

Now we're getting close to the point where I think a slightly different view of the gold inside the bullion banking system will reveal a different reality.


cont.

JR said...

I think Bron's "mainstream view" suffers a little from the same thing that all mainstream views suffer from – the 40-year commoditization of gold. This view holds that gold is more or less just like any other commodity rather than the systemically vital FX (foreign exchange) wealth reserve asset that it actually is. Last year Bron quoted Jeffrey Christian in a post written in defense of Christian's "100:1" comment. I think this quote that Bron used from Christian's CPM website really reveals the prevalence of this view of gold as just another commodity:

"This article may help to clarify the complex world of commodity banking, in which gold, silver, and other commodities are treated as assets, collateralized and traded against. When we explain these processes to clients, we often refer to the same mechanics as they are applied to deposits, loans, and assets by commercial banks in U.S. dollars and other currencies. Banks treat their metal deposits in much the same way as they do deposits denominated in money, as the reserve asset against which they lend additional money to borrowers."

So no big deal, because we're just talking about commodities here, not money, right? And thanks to this view, gold still trades precariously (without a safety net) inside a banking system similar to other FX currencies – dollar, yen, euro – with one notable exception. It is the only one without a backstop, a lender of last resort, a Central Bank. This would not be a problem without the expansionary force of fractional reserve lending, even at a conservative ratio. More in a moment.

[...]

Anyway, the rough view is that physical gold was lent by the CBs to the BBs and sold short for the specific purpose of suppressing the price of gold on behalf of the CB's supposed genetic disposition against gold. This would have left the BBs short tonnes of physical gold owed back to the CBs in a rising price environment which can be deadly to the shorts. The more detailed view is that the gold lent by the CBs to the BBs was then lent to the miners like Barrick, who sold it (through the BBs) into the market for financing purposes. While the BBs borrowed gold from the CBs and affected the sale of the gold, the exchange rate (or price) exposure would have been on the miners, not the BBs in this case.

My view is that this was an all-paper deal, all around. That the BBs lent their own "gold liabilities on paper," claims against their fractional physical reserves, to the miners… on paper! In reality they gave the miners dollar cash from the sale of these "paper claims" to the Western gold bug marketplace, and booked as an asset the miners' obligation to repay the loan back in physical gold units.

So the BB was short paper gold to the market and long future physical gold payments from the miners. Of course this has the same effect on the market price of gold as the gold bug view above, but it does shift the causal relationships around slightly.

JR said...

"illusion of risk dispersion indeed. They created all sorts of fancy mathematical models to guarantee that risk is dispersed, except for the simple fact that the models are horribly wrong."

Who created, and what was the underlying assumption that was wrong?

FOFOA identified the underlying assumption that was in error last post, the flase premise:

The United States currently enjoys reserve currency status, which enables it to borrow cheaply, and which keeps capital circulating through our government bond markets

That highlighted portion is the premise on which virtually everyone in America is operating, without even understanding what it really means. It is the miracle of the magical dollar theories laid as the solid foundation under any and every discussion. One of my readers, Michael, a medical doctor, was attending a conservative "Tea Party-ish" meeting in California yesterday. The meeting included US Senators and Representatives, and they were totally operating on the premise of the miracle of the magical dollar theories. You can read his interesting report here.

The point is that the premise rests on 90 years of history which only makes sense if viewed properly. It rests on 50 to 60 years of political support followed by 20 years of structural support from Europe and another 8 or 9 years of structural support from China. Today both political and structural support are gone, and the "solid foundation under any and every discussion" of monetary matters in America is what I am generously terming the "willy-nilly support" of the rest of the world. In other words, we have no say in the matter. Our fate is in their hands. Which kind of renders the premise invalid, doesn't it?

http://fofoa.blogspot.com/2012/05/inflation-or-hyperinflation.html

e_r said...

JR,

Who created, and what was the underlying assumption that was wrong?

I was talking about the commercial banks creating mathematical models of risk to show that they can securitize all sorts of crap loans and continue to have an AAA rating. It was also the arrogance on their part to assume that they can measure tail risks, when in reality it is impossible to measure tail risks (due to their non-linear nature).

Note that none of what I said above contests with what FOFOA had written about dollar structural support in the Inflation or Hyperinflation post. So I am not really sure why you posted that content. What's the point?

JR said...

So where did this silly derivative thing come from - form the people who gave it to the US.

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

6/4/98 ANOTHER ( THOUGHTS! )

The last small gold war ended in the early 1980s, as the choice was to use the US$ or go to a gold based economy. No other reserve currency existed, and gold lost the war as all continued to buy dollar reserves.


But by 1980, Europe was working with the BIS to implement a new "reserve currency".

The European plan was to support the $IMFS at least until a new fiat "reserve" currency could be established, one large enough to absorb the shock of a failing reserve currency, to avoid being forced back 100 years into a physical gold-based economy which would have been very traumatic. This effort took 20 years from 1980.


http://fofoa.blogspot.com/2010/03/synthesis.html

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

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!


http://fofoa.blogspot.com/2011/12/unambiguous-wealth-2-mf-global.html

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

See why? The BIS/ECB set it up, the paper gold dollar hedge system:

FOA: Truly, the evolution of this story will be how that war ended then and now the dollar's war with the Euro began! A very large part of that war strategy, employed by the ECB/BIS, was to let the dollar/IMF faction hang themselves by expanding and supporting the whole arena of this dollar paper gold market. Inflating the gold marketplace with so much "paper gold" that we would eventually have to bankrupt ourselves just to keep the dollar in the war game against the Euro.

http://fofoa.blogspot.com/2011/11/discussion-forum.html

JR said...

Aristotle (8/25/2000; 4:02:42MT - usagold.com msg#: 35502)
The evolution and confessions of an unrepentant Gold advocate...

Fortunately, my mother raised me right, and I still possessed the capacity to think for myself despite the heavy influences of the Goldbug dogma I had eagerly absorbed with gusto. As I came to realize how many pieces of their puzzle didn't fit, I came to see that the explanation was owing to the well-intentioned reason that much of the "standard Goldbug rhetoric" was based on idealism. Well, that's fine and all, and something worthy to strive for, but in the end, we all must live in a pragmatic world. Happily for the buggiest Goldbugs, this same pragmatism also renders equally null and void the successful implementations of any notions of an idealistic paper-only world as seen in the wildest dreams of Keynesians, governments, and many bankers. As things are, Gold has a very important role squarely in the middle of a pragmatic world, yet too few people give much "theoretical thought" to this middle ground. Arguments are always made from the merits of the lofty points on opposite ends of a pendulum's arc. Pointless for making meaningful progress, to be sure, but God bless the idealists, anyway...

After a period of slower talking and deeper thinking, I arrived at a position with a realistic eye on the middle ground giving me clearer monetary understanding as it works in the real world, and also how it COULD in fact (and should) be made to work immeasurably better. Simply put, my thoughts had evolved from their starting point, and I became comfortable with my own concepts of a unique kind of monetary idealism that existed at the nadir--the bottom of the pendulum's arc. ...

Keynes didn't call Gold itself a "barbarous relic," but he rightly called the Gold STANDARD a "barbarous relic," which is also precisely what the system of Gold derivatives and bullion banking of today has become--a relic of a clever scheme originally to offer life-support to a failing dollar-based international system at a time when the world had no other option. This patchwork scheme is no longer needed. On the other hand, freemarket physical Gold, as the pure and essential reserve/savings asset (unlent with no derivatives) is desperately needed in the modern world to indiscriminately bolster each of us alongside modern currencies which are now a permanent feature in the financial landscape. Simply put, Freemarket Gold is the only way for a man to safely coexist with his currency.

Gold. Get you some. ---Aristotle"

Clyde Frog said...

I suppose then the question is: what % of unallocated gold cannot be converted to physical at all? This % is really the "no skin in the game" factor, since if unallocated gold default happens, whoever is holding this unallocated gold will not be paid in real terms.

That percentage is the "ALL TRADERS dump ALL gold, paper, physical, whatever" contingent. They are leveraged long. The price goes against them. They run out of skin. They dump. Other leveraged longs run out of skin. They dump. Etc.

If the price falls low enough, some of those thick-skinned paper gold investors will choose to join the PGAs in taking delivery at some point I believe. Will they find willing physical sellers, at that plummeting paper price? At first, yes almost certainly. But for how long? Not forgetting that "converting" paper "gold" to physical GOLD, really means selling the paper and buying the physical. So there is further reinforcement of the downward spiral in "gold".

Is a better question: "what % of unallocated gold can be converted to physical?" After all, that which can't move into physical gold, can't present a problem in delivery of physical gold.

Perhaps a better question still is: "what % of unallocated gold will be converted to physical?" Plus its sister question, "will that be more than the available flow of physical gold that is available at the time?". The answer to that one telling us whether it's "game on", or "game over" for paper gold credibility. But, clearly, none of us can answer these questions with certainty today, in advance.

I do, however, have a something of a hunch there's much more money that can and will try to exchange into gold at some point, than there is gold flow available to achieve it ... at least at today's kind of paper price. Not least because there is an infinite amount of money available in the world, but a very finite amount of GOLD.

JR said...

e_r,

You are blaming the "banks" for what FOFOA has shown to be the flaw inherent to the system.

JR said...

So I am asking how much of these claims are actually meant to be claimed. I guess that would be very relevant to the question of how much gold will revalue.

Not really, paper gold is not meant to claim gold, but as an imperfect 'best" currency hedge midst a system without a good hedge.

All that money looking for a safe place to go...

Victory said...

Costata,

When you say 'Despite the hysterical claims from people like Ted Butler there is zero evidence the BBs are short (net) let alone naked short.'

Are you referring to a net short position via futures/options on the Comex and forwards/options on the LBMA?

Or otherwise stated are you excluding allocated vs. allocated from your definition of being net short. Do you think the BB are no longer net short via an unallocated exposure vs. allocated?

tx,

-v

Crack said...

... where are the links to Aristotle's 'shark speech' when you want em..?

Crack said...

1+1-2 = not net short

Edwardo said...

"I thought Bron must have had a good reason to compare gold market to cheese market, and I was just wondering what the reason was?"

Cheese melts at a much lower temperature than gold and it tastes better on pretty much anything. Sorry, I couldn't resist.

e_r said...

JR,

You are blaming the "banks" for what FOFOA has shown to be the flaw inherent to the system.

Has the "system" caused the banks to issue more loans than what can be meaningfully serviced?

e_r said...

JR,

Not really, paper gold is not meant to claim gold, but as an imperfect 'best" currency hedge midst a system without a good hedge.

Can unallocated gold become allocated gold? If yes, aren't some of the claims getting converted to real physical? By allocated I mean that there is an actual paper trail, title transfer on the gold etc.

JR said...

I was talking about the commercial banks creating mathematical models of risk to show that they can securitize all sorts of crap loans and continue to have an AAA rating.

So was the math wrong, or was the whole concept that these hedges actually hedged risk worng?

The US could not physically save the dollar then, neither with gold backing nor the production and sale of real goods. The only answer was to let the dollar kill itself while you create an illusion of risk dispersion in the form of derivative protection; a form of backing if you will. With this "illusion of risk dispersion" in hand, called a derivative hedge, the world currency system and its denominated assets, continued on.

===


Freegold simply offers a different way of controlling credit expansion that is more effective than the modern Austrian suggestions of making money harder and/or limiting or eliminating fractional reserve banking. There is no need for all that convolution, just separate the store of value so it cannot be fractionalized and then non-productive credit expansion will be as limp as a eunuch (which comes from this comment by yours truly). Snippet:

But debt itself is not the cause of our problems today. Today we have a situation where the vast majority of excess production value (excess capital) is enabling massive amounts of global malinvestment through new debt creation. That has peaked and is now contracting. But the problem is not the debt itself. The problem is the enabling effect of excess capital not having a viable alternative that floats against the currency. The problem is the lack of the adjustment mechanism of Freegold. There is no viable counterbalance against uncontrolled debt growth today. So we are only left with credit collapse and hyperinflation of the monetary base to clear the malinvestment from the system.


http://fofoa.blogspot.com/2011/05/return-to-honest-money.html

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

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

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


http://fofoa.blogspot.com/2010/10/one-tin-soldier.html?showComment=1287467132222#c5104027674453956488

JR said...

Dear reader, is all of this Goldman Sachs securitization and interest rate swap business making your head spin? SPVs, SIVs, SPEs, PPPs, PPIs, PFIs, SPCs, CDOs, CDSs, ABSs, MBSs... whew! I know it's making me dizzy. And I find that when my head starts to spin it is useful to fire up the old hooch still and cook it down into something more easily consumable.

[...]

I'll even take it a step further and say that a monetary and financial system that uses compounded interest cannot afford to compel all savings into the hands of debtors. It must have a means of hoarding wealth outside of the system in order to constrain the exponential growth function, or else the entire system will become retarded and then collapse. In return, this constraining function of "gold the wealth reserve" will restore intelligence to the human superorganism. Intelligence that has been sucked dry by Wall Street's systemic aggression against a free-floating physical gold price.

We are all like ants in an ant farm when we patronize Wall Street. Our contributions to society, should they exceed our day-to-day needs, are deployed by a system that does not care how they are deployed, just that they are deployed ASAP. If you would like to make a real contribution to the future of civilization then please buy physical gold and find a way to keep it close. Hoard your efforts outside of the system and watch as they receive a tremendous power boost just in time for deployment. You will be rewarded with the freedom to choose when and how your saved effort will be deployed and in so doing, you will help shape the future.


http://fofoa.blogspot.com/2010/04/life-in-ant-farm.html

JR said...

Under the $IMFS, securitized debt and sovereign debt is the proxy for gold.

The problem is not the math underlying the risk valuation models, its that these things aren't gold and don't store wealth like gold. But its the savers fault. they bale the whole thing by choosing to save in this paper.

Enter free gold, the alternative for savers. After the transition, savers will see the folly of their ways.

JR said...

On the history of the paper gold derivative market via http://fofoa.blogspot.com/2009/08/browns-bottom.html


FOA (5/8/99; 20:16:12MDT - Msg ID:5772)
BOE!

Many different factions are maneuvering gold these days, and each has their own agenda. The IMF / dollar faction, many years ago, went along with Europe in lowering the gold price in dollar terms. It made the dollar look stable and enforced its continued use as the "currency of settlement" for strategic commodities.

[...]

When Central Banks (mostly the European, at first) began to lease / lend gold, they were beginning what was to become "the master plan". The creation of a broad, liquid paper gold market that would ultimately undermine the dollar, in time. As I said above, initially it was offered as an "appeasement" for continued dollar use. However, even the IMF / dollar faction never expected the successful creation of another competing reserve currency, the Euro! Right up to its offering, the political money was on the side of a complete failure, 100% with ten to one odds.

Not only did they lose, the Euro even accepted a percentage of gold as Euro reserves. If that wasn't enough, the ECB also instituted a policy of "marking to the market" its gold reserves and effectively blocking any new sales or leases. These actions, as subtle and misunderstood as they were have had the effect of officially making gold money again. Yes, this new broadly traded paper gold market, standing side by side with the physical market has become a world currency.

The problem this creates for the IMF / dollar is that most, if not all of this new gold market is settled in dollars! Dollars that broke a contract with the world in 1971 and went off the "gold exchange standard" at $41 to the ounce. The same dollar reserve currency that is not supported when the gold price rises. If the ECB does nothing but stand firm by not allowing physical out of its vaults, the dollar will be trapped by gold. The US treasury cannot use gold as a backing reserve as the ECB does, because the BIS would claim it at $41 to settle trade imbalances. They have that authority and as such it leaves the US the only option of outright gold sales. However, with the dollar as "the" reserve currency, we can expect many nations to bid "aggressively" for any US gold. China, among others comes to mind! That is what America found when they tried to auction its gold in 1978. The Euro carries no such baggage.

This all leaves us in the present political situation, where the IMF entity, that was formed to replace the gold standard, is now trying to back the present paper gold with physical to prevent a run on the dollar. It is a futile effort as the ECB / BIS have grown the gold market into massive proportions by encouraging the many year expansion of holders through paper securities

JR said...

Can unallocated gold become allocated gold?

yeah, that's sorta the point. Unallocated > allocated, and there is only so much gold out there.

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

Think big paper holders like CBs - they know the oil-for-gold deal is dead but they still hold paper as a hedge, knowing they can't get physical for it. Some unallocated will get allocated, but most won't, and they knwo it:

FOA 10/25/01 - I mean that our whole dollar landscape has now become just a trading asset arena: it's now evolving away from any meaningful currency use to trade for real goods. It can head in no other direction because our local economic structure, the USA economic base, cannot possibly service even a tiny fraction of the buying power currently held in dollars worldwide.

[...]

FOFOA: Here's how fragile the dollar actually is. It is supremely overvalued because its SoV arena, its "trading asset arena" as FOA termed it, simply dwarfs the MoE arena where all currencies get their value.

[...]

FOA 7/16/01 - The American dollar has bought its makers a lifestyle that is at odds with this new thrust in money use. A reserve currency today must allow its value to be set solely upon its money function [MoE arena], not its function of retaining wealth [SoV arena]. Use trends today are forcing money creation policy and money values to be determined by wealth outside the official money realm. All the while the dollar holders are fighting to stop this from happening.


http://fofoa.blogspot.com/2012/05/inflation-or-hyperinflation.html

JR said...

Paper gold is held by big entities looking to buffer risk (aka paper hedge) not trying to convert to physical. That's what most the the LBMA is

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.

http://fofoa.blogspot.com/2010/03/1001.html



See that - paper gold is held like an insurance sticker. Insuance as to the SoV, not MoE role of the dollar.

Not wonder the point is not about a short squeeze in paper gold, its about longs dumping paper gold as it no longer performs its stated function (an insurance sticker).

Derivatives were built to keep the $SoV component going beyond the end of its timeline:

FOA: At first, the show is dull as investors keep right on buying into the dollar argument above: that an expanding fiat base builds non-inflationary growth. This is one reason traders still buy US long credit, not to mention chasing rising dollar exchange rates; they expect more of the last several decades of economic theory to keep right on going. It won't.

The dollar faction saw its match early in the 90s as the Euro was taking shape. To counter this threat, as I have outlined here in several ways, they promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar / IMF system beyond its ability to serve as a real fiat money system, today.

I mean; that our whole dollar landscape has now become just a trading asset arena: its now evolving away from any meaningful currency use to trade for real goods.


http://www.usagold.com/goldtrail/

jojo said...
This comment has been removed by the author.
Victory said...

Egon von Greyerz told King World News that a client went to move a significant amount of “allocated” gold from a Swiss bank, but the bank shocked the customer because they did not have the gold....

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/5/21_Greyerz_-_Customer_Shocked_Allocated_Gold_Not_in_Swiss_Bank.html

true story?

Woland said...

Jim Rickards told a similar story on KWN at least 9 months ago,
about a customer of a Swiss bank with 1 ton, fully allocated, who
wanted delivery.
He said,FWIW, that it took nearly a month, and threats from his lawyer
to expose the delayed response, before the bank made good on
the delivery. While I don't disbelieve the story, at KWN, you need to
understand that there is always a "story within a story" , that being
the gold/silver story from the Hard Money Socialist perspective. Just
my $.02, as Costata likes to put it.

Aaron said...

JR said...

You are blaming the "banks" for what FOFOA has shown to be the flaw inherent to the system.

e_r said...

JR,

Has the "system" caused the banks to issue more loans than what can be meaningfully serviced?

Hi e_r-

I can't tell you how many times I've wanted to blame the banks myself, but every time I try to run through the logic it *always* comes back to the savers as the first in line to blame -- after FOFOA's dilemma. Sure, if the banks were moral institutions that lived to keep us all out of trouble we could absolutely blame them. But it is the savers that chose to buy debt as their savings that enabled all of those loans. I realize this idea might not be intuitive on the surface, but Victor also found himself hitting the same conclusion over and over again no matter which angle he came at it from.

Just to offer one data point to ponder, if the pension funds (savers) hadn't bought CDOs hand over fist, the banks would never have made all of those loans. The banks made their money on fees selling the CDOs which more than covered their loses on the defaults.

Anyway, I certainly understand where you're coming from, but from my point of view, the savers are the first in line to blame after the flaw in our financial system à la FOFOA's dilemma.

Aaron said...

I should have written:

"...it *always* comes back to the savers as the first in line to blame as a result of FOFOA's dilemma.

KindofBlue said...

Aaron

The corollary error that saver's make is confusing savings with investment returns.
Typical pension planning assumes -- astonishingly, if one thinks about it -- that a return of apprx. 6.5% as an essential part of retirement/pension funding. That assumption might have made sense when the US economy was growing robustly after WWII, but not now. Of course, this can be overcome by simply forgoing current consumption and saving more... in gold.

JR said...

Or if you prefer, you can also throw some blame at the system the savers exist in - the $IMFS. There is no "viable alternative" for the excess capital of the savers, no counterbalance:

But the problem is not the debt itself. The problem is the enabling effect of excess capital not having a viable alternative that floats against the currency. The problem is the lack of the adjustment mechanism of Freegold. There is no viable counterbalance against uncontrolled debt growth today. So we are only left with credit collapse and hyperinflation of the monetary base to clear the malinvestment from the system.

http://fofoa.blogspot.com/2011/05/return-to-honest-money.html

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

You could make the case the savers were lured (entrapped!?!) by the false promises of Credibility Inflation (http://fofoa.blogspot.com/2010/08/credibility-inflation.html), fueled in part by Passive Inflation (http://fofoa.blogspot.com/2011/12/unambiguous-wealth.html)

Salting the Mine

Most simply stated, credibility inflation is the expanding confidence in the fiat financial system to always deliver a higher payoff tomorrow than today. And through credibility inflation we ultimately destroy the currency structure by believing it can somehow deliver more than reality will allow.

Aaron said...

I hear ya, KindofBlue-

And JR nailed it right after your comment. We could indeed make the case savers were lured -- because they don't (yet) have a "viable alternative that floats against the currency".

Lucky for them one day they will -- and lucky for us we figured it out before they did. ;-)

Woland said...

Hello JR. Just a note of thanks, because today you have
certainly put in a full days work, but it has been most
helpful, in conjunction with what I believe I already
understood, to make the whole picture of the role both
of paper gold, as well as the other derivative instruments
crystal clear. The excerpts from both FOFOA and the
archives couldn't have been chosen better. Cheers.

KindofBlue said...

Aaron/JR

For pensions my understanding is that the rules steer the investments -- which works -- right up until it doesn't. So I'll vote 'entrapped' for institutional money.

Biju said...

Talking about horse racing :
I don't think "I'll have another" will win the Triple Crown. Belmont is 1.5 miles - longer than Kentucky Derby or Preakness. This will favor a long distance runner over a sprinter.

I remember the "smarty jones" - few years ago and a "donkey" looking horse("Birdstone") won that and spoiled his Triple Crown hopes. "I'll have another" certainly looks like a stalker and it has a chance to win TC, but not very great.

Aaron said...

And the Mucca Pazza video is AWESOME!

RJPadavona said...

For anyone interested.....

OG Warren B, the grandfatherly face of the $IMFS was reading "The Panic of 1819" by Murray Rothbard at a young age.

Here's an excerpt from a letter written by Warren's father Howard to Murray Rothbard:

"Somewhere I had read that you wrote a book on the "Panic of 1819". If this is correct, I would like to know where I can buy a copy of it. I have a son who is a particularly avid reader of books about panics and similar phenomenon. I would like to present him with the book referred to."

Link to the full letter


RJP

e_r said...

Aaron,

But it is the savers that chose to buy debt as their savings that enabled all of those loans.

Does an ordinary saver really have a choice at all times? From 1933 until 1974, private gold ownership was banned in the United States. You can't blame the saver then, can you?

After 1974, it is true that the ordinary saver did have a choice in the United States to own gold.

But think of this scenario: what if our diligent saver's timeframe saving for retirement coincided with the 1980-1999, when gold price remained suppressed (for variety of reasons outside the saver's control)?

Yes, gold is wealth reserve par excellence, but for our diligent saver -- his current reality is that his savings (deferred consumption) will be consumed in the $IMFS system. Would you blame the person for playing along the system that they are a part of, and for which they don't get to make/change the rules at will?

I do 'get' the fact that the idea of saving has been thoroughly corrupted by the $IMFS. As KindofBlue rightly says, I think the distinction between saving and investing is blurred so much today that most people think of that to be one and the same thing.

if the pension funds (savers) hadn't bought CDOs hand over fist, the banks would never have made all of those loans.

I am not really sure how you can squarely blame the savers. Did the pension funds lobby the Congress to ensure complex derivatives market remain completely deregulated?

I understand that savers play a vital role in propping up the system, but I don't get the fact that you can easily say the entire line of causality lies with the savers. Sorry, I find that somewhat dishonest. It ignores some big elephants in the room (private bankers and politicians).

The fact that banks were insulated from the risk they were planning to take and the fact that they knew exactly how this securitization crap will blow up, tells me that there are other critical players in this causality.

costata said...

e_r, V,

I think the BBs are "safe" in terms of legal exposure and possibly flat in their trading positions taking into account the opacity of the off-exchange markets they also trade in. The partially visible part of their book (Comex etc) doesn't tell us anything about their exposure.

Were they insane to leverage so much paper gold on physical in the late 90s or were they simply over-confident because the CBs were backstopping them? Likewise the physical buying out of Asia. Perhaps it simply took them by surprise as it was intended to do.

Did they learn lessons from their experiences? I think there are indications that they did. The existence of GLD being one such indicator. It may not perform precisely the same services for them as the CBs did in the 90s but it provides liquidity to the APs if nothing else.

Michael said...

woo hoo
light switch clicked:

I'll even take it a step further and say that a monetary and financial system that uses compounded interest cannot afford to compel all savings into the hands of debtors. It must have a means of hoarding wealth outside of the system in order to constrain the exponential growth function, or else the entire system will become retarded and then collapse. In return, this constraining function of "gold the wealth reserve" will restore intelligence to the human superorganism. Intelligence that has been sucked dry by Wall Street's systemic aggression against a free-floating physical gold price.
I had not realized, after all this time...everyones savings are forced back into the system back into the hands of borrower because there is no other place for it to go,,,,except gold (or cash in the mattress)
No wonder banks lend to idiots...they have to after all the non-idiots have borrowed all they can service!

Jeff said...

KindofBlue,

Why do you say institutional money is trapped? It is playing the game according to the rules. Performance is measured in nominal terms, and in nominal terms it will continue to perform. Pensioners won't just accept that the G print to provide nominal performance, they will DEMAND it.

FOFOA: The hungry collective provides ample political backing and sufficient naiveté for "the [Western] Elite" to print the full face value of their bonds and dump that worthless paper on the public's front lawn. Furthermore, deflationists like Ackerman as well as practically all mainstream economists provide plenty of cover in the form of plausible deniability that hyperinflation would be the inevitable result."

So yes they will get screwed by their own ignorant greed, but that's what they demand. So shall it be.

FOFOA: There are four players to keep in mind; the debtors, the savers, the banks and the printer. They never print and give the money directly to the debtors to pay off their debt. Instead they print and give the money to either the creditors (banks) or the savers (e.g. pension funds) in exchange for the older bad debt which they then put on the public balance sheet to socialize the lost value.

So they "bail out" the banks and the savers nominally, which in turn (through currency debasement) actually bails out the debtors and screws the savers. The banks come out even because they only require nominal performance. But the retirees and pensioners that require real performance at the supermarket get screwed."

Aaron said...

e_r-

Please, don't get me wrong -- and I'm certainly not trying to be dishonest. I don't blame the savers as in "you jerks, you should have known better. Nasty savers.Didn't you bother to understand the $IMFS before you started contributing to your 401K?"

I blame the savers as it is they with surplus wealth to store that drive the dominating store of value. A government on its own cannot careen down the path of endless deficits and malinvestment without help from an opposing force within the same system. The USG needs savers willing to buy up the debt and it is those very savers that enable the financial system you see around us.

Is the system full of crooks, absolutely!

But once again for effect ;-)

I don't blame the savers as in "you jerks, you should have known better. Nasty savers." I blame the savers as in it is they with surplus wealth to store that drive the dominating store of value.

Jeff said...

Michael said: I had not realized, after all this time...everyones savings are forced back into the system back into the hands of borrower because there is no other place for it to go,,,,except gold (or cash in the mattress)

FOFOA: ...the investment landscape that followed has exploded in supernova fashion yielding nominal credits that number like the stars in the heavens. Today's savers have given their savings to every manner of counterparty who went on a spending spree, leaving only the illusion of a debt that is too big to even be serviced in real terms. We have spent the last 35 years exploring the Milky Way galaxy of investment options, pretending to be investors and traders, when all we really are is savers waiting, once again, to be sacrificed.

Michael said...

woo hoo
light switch clicked:

I'll even take it a step further and say that a monetary and financial system that uses compounded interest cannot afford to compel all savings into the hands of debtors. It must have a means of hoarding wealth outside of the system in order to constrain the exponential growth function, or else the entire system will become retarded and then collapse. In return, this constraining function of "gold the wealth reserve" will restore intelligence to the human superorganism. Intelligence that has been sucked dry by Wall Street's systemic aggression against a free-floating physical gold price.
I had not realized, after all this time...everyones savings are forced back into the system back into the hands of borrower because there is no other place for it to go,,,,except gold (or cash in the mattress)
No wonder banks lend to idiots...they have to after all the non-idiots have borrowed all they can service!

Michael said...

Jeff
congratulations on that 'time travel thing"
My contribution was published at 6:04, your answer was at 6:00

Michael said...

ah
it is I who have mysteriously published at 2 different time (I swear I did not double post), Jeff just got caught in the time portal...

Edwardo said...

It's silly to blame so called "savers" beyond a certain point because, on so many levels-see U.S. tax rates on physical gold- the field is badly skewed against those who would seek to own physical gold. And if one chooses to leave out the history of confiscation then one is engaging in a form of dishonesty because the specter of government theft still hangs over prospective gold owners the way the curse of The Bambino used to hang over the Boston Red Sox. And while gold confiscation by U.S. monetary authorities is likely, at this stage, nothing but chimera, that's not the point.

You see, except for rate periods in human history, it is a top down world my friends, (put another way we humans collectively behave in a herd-like fashion) which explains why it is that savers on the sub-continent save in gold while denizens of the U.S., and, for that matter, most places in the west, do not.

costata said...

Michael,

..everyones savings are forced back into the system back into the hands of borrower because there is no other place for it to go,,,,except gold (or cash in the mattress)

And the mattress cash gets forced out of the mattress by inflation or it lies there until it is worthless as a result of inflation.

I have been drafting a response to the comment from Aaron that kicked off this discussion. It is remarkable to me to see this discussion unfold along the lines it has.

FOFOA said...

Grexit? Don't bet on it!

Way back in 2007, imagining a hypothetical Italian exit from the euro, Barry Eichengreen wrote, "What government invested in its own survival would contemplate this option? The implication is that as soon as discussions of leaving the Eurozone become serious, it is those discussions, and not the area itself, that will end." LINK

And now, for any Greek politician still contemplating self-destruction, here's a bit of bitter reality to chew on from none other than the MSM (Reuters):

Birth of new Greek drachma would be pained, rushed
By Peter Apps

WASHINGTON (Reuters) - If or when policymakers finally decide Greece should leave the euro, the exit could happen so quickly that "new drachma" currency notes might not be printed in time.

In principle, some of the long-term consequences of Athens leaving the currency bloc are not unappealing. The euro zone would no longer have to worry about what has always been its weakest link. While a new Greek currency would almost certainly immediately crash in value as soon as it was issued, in doing so it would make the Greek economy much more competitive.

But the short-term effects would be brutal, both domestically and on the global economy. A post-euro Greece could find itself struggling to import food and fuel, with everyday life reduced to barter in goods and services and the government unable to pay workers in anything they would want to receive.

"It would be chaos," says Marios Efthymiopoulos, a visiting scholar at Johns Hopkins University Centre for Advanced International Studies and president of Thessaloniki-based think tank Global Strategy.

"The banks would collapse and you would have to nationalize them. You wouldn't be able to pay anyone except in coupons. There is only one (currency) printing press in Greece. It is in the museum in Athens and it doesn't work any more."

[…]

With life for the Greek people changing overnight with a euro exit, social turmoil would be inevitable. Whoever made the decision - if it were to be made in Athens at all - could certainly not count on being in power weeks or even days later.

"It would be truly revolutionary, in every sense of the word," says Tyson Barker, head of transatlantic relations at the Bertelsmann Foundation. "There are various ways it could be done ... but you could end up like Cuba with use of multiple currencies or with essentially a barter economy, at least in the early days."

Private companies and foreign states, including Britain and the United States, have detailed contingency plans for euro zone collapse. Greece, however, is in a more delicate position.

Had it become public knowledge that any Greek government was preparing to leave, the resulting panic could easily have made it a self-fulfilling prophecy.

Already this week, Greek savers - and smaller numbers elsewhere in the southern euro zone - have begun to take money from banks. Tourists are staying away, exporters are demanding cash up front.


Cont…

FOFOA said...

2/2

Should Grexit ever happen, it would have to begin within days or even hours of the decision being made at the top.

[…]

In theory, there is no provision under EU treaties for Europe's other states to unilaterally kick out a member. But in reality, analysts and officials say they could effectively freeze Greece out by closing its access to European Central Bank lending.

That might effectively force Greece to issue its own currency as it might not have any other way of paying workers or providing enough cash to keep the economy moving.

At that stage, Greece would likely also attempt to convert all local and perhaps also its international debt into the new and rapidly depreciating currency. Its international creditors, however, would cry foul. That would likely be the beginning of a debt restructuring that could last years. But historic debts would be the least of Greece's immediate problems.

Even the physical production of a new currency would be fraught with problems. Any foreign firm hired to print Greek notes would almost certainly require money up front. Any coupons or temporary notes produced locally might swiftly be forged, rendering them even more worthless.

As in some other non-euro zone states such as Montenegro, the euro might remain the principal currency for many transactions. But it would be in much shorter supply and be beyond government control or even influence, making it almost impossible to use for salaries or benefits payments.

Euro savings held in Greek banks would inevitably be redenominated in the new currency -- with its rapidly slumping value. Physical euro notes already in circulation, however, would retain their value or even become much more prized.

BORDER CLOSURES, TROOPS ON STREETS?

It would most likely be necessary to close borders to stop Greeks smuggling out euros to stash in banks elsewhere. But with hundreds of miles to cover, much of it in inaccessible mountain, wood and scrubland, security forces would be stretched thin.

Simultaneously, police would likely have to manage a dramatic spike in unrest and perhaps more political and criminal violence. Already, there have been isolated examples of Germans -- or those suspected of being German -- being assaulted in apparent anger over EU-enforced austerity.

Greece's leaders could decide to deploy the army onto the streets in an attempt to reassure the population and bring calm. But that could prove deeply divisive.

[…]

In easier times, it might have been possible to extricate Greece quietly and slowly. Dozens of countries have successfully left currency blocs since 1945, mainly colonial states breaking free of their former masters. But doing it under this much pressure and global market focus makes that impossible.

"An exit is technically feasible," said Lea at Control Risks. "But managerially, it is extremely difficult to do well. It requires a lot of planning and a lot of agreement. And given current circumstances, there is no chance of that."

Bron Suchecki said...

I used Cheese as a play on the Scretapefiles post http://screwtapefiles.blogspot.com.au/2012/04/screwtape-world-news-broadcast.html there is no deeper analogy between unallocated and cheese :)

As to what the fractional reserve ratio is for unallocated accounts, I think the best guess is 10:1, see http://goldchat.blogspot.com.au/2010/04/london-unallocated-fractional-fubar-or.html

I treat Jeff Christian's statement of a 10:1 ratio as trustworthy because that statement was made in 2000 in this doc http://www.cpmgroup.com/free_library1/HEDGING_AND_DERIVATIVES/Bullion_Banking_Explained_February_2000.pdf well before anyone felt the need to defend the banks.

You may consider 10:1 to way too high, but remember unallocated accounts are not just used by speculators and investors but by the industry, which means there is a fair bit of physical turnover/deliver ex-unallocated accounts so I think the physical reserves needed on hand for gold are a lot more than a bank would hold for fiat accounts re physical cash.

Also, to FOFOA's comment about bullion banking not having a lender of last resort, note that central banks can act in this way as they do hold physical. If a bank comes running to its CB saying we have a run on physical gold and can you lend us some to tide us over until we get some more from the flow of our maturing gold assets, do you think they will say NO and let the bank fail?

A CB will already lend a bank physical cash in exchange for illiquid paper assets, why not the same with gold?

The questions are then will

* the CB will baulk at giving away the country's reserves for assets that may not pay back gold and
* how much physical does the CB have to lend (ie what has actually be lent already, and I mean physically delivered type lent, not paper lending by CB against its physical which it kept)
* quality of the gold assets and who they are with (eg if BB has lent to a jeweller in the country, then the Govt can always take that physical if the BB doesn't repay)
* is this a real gold run by giants or just a temporary small goldbug thing

Finally, unallocated accounts have no obligation on the BB to deliver, therefore in the case of a full on gold run, the BB does not have to deliver and could only be forced to cash settle but this then realises a cash loss (assuming the BB can't find someone else to sell the unallocated gold to). ... but, could not the BB sell (or swap) it to its CB - remember the unallocated is backed by some gold paper asset.

Anyway, just some thoughts on future possibilities.

Desperado said...

Re: Grexit

I have no doubt that a grexit would be a very bad outcome for Greece, but those behind the €-putsch were so set on their power-grab that they refused to allow even consideration of a plan for an emergency exit. Basically, they chained the slaves together in the lower deck like a slaver on the way to the Americas 2 hundred years ago. And if the CB masters panic they will have no compunction whatever in throwing some or all of the slaves overboard.

But the CB masters will not blink. They could have dealt with this problem years ago but it would have put their power hegemony at risk, so they will continue holding their gun to the peoples head until the bitter end.

Thanks to Another and other "friends of the Euro" millions are going to die and untold suffering will be set loose across the continent. The PIIGS were already broke before the Euro was created and the CB's used this fact to force their politicians-on-a-string to do their bidding to get the Euro sailing in the first place.

So yes, Schengen and the other good things that the EU brought are at extreme risk now thanks to the arrogance of the "friends of the Euro". But the loss of these freedoms will be a small price to pay if it means that the world can finally break free of the shackles put on us by the millenium old ruling elites.

Anand Srivastava said...

Desperado: You are funny :-).

So it is Germany's fault that Greece was over spending. That the workers at Greece were being paid more than in Germany, and actually producing less.

You are actually on the wrong site. We may think that its bad for the people in Greece, but it is the Greek that brought it upon themselves.

If you have a welfare state, you will pay for it by going in a recession. There is no other way around it.

So the only option is for the Govt employees to go out of job, that is the only way the deficit will come down.

You can't be serious in saying Germany should pay the higher wages and lower productivity of Greeks by sending money from its harder working lesser earning employees.

FOFOA said...

Hi Bron,

You wrote: "If a bank comes running to its CB saying we have a run on physical gold and can you lend us some to tide us over until we get some more from the flow of our maturing gold assets, do you think they will say NO and let the bank fail?"

Good question! In the 1999 CBGA the European central banks expressly limited CB gold leases to amounts outstanding: "4.The signatories to this agreement have agreed not to expand their gold leasings…" In 2004 they reaffirmed this limit. But in 2009, they did not mention gold leasing.

It is my view that they ignored the previous leasing limit in 2009 because the financial crisis which began the previous year had caused instability of such magnitude that the European central bankers have been forced to "play it safe" – one does not dare rock the boat (if there remains any choice in deciding the matter) when the financial waters have become so turbulent and choppy.

I can see from your comment that you understand what I was getting at in the conclusion of The View: A Classic Bank Run, the difference between a bank's intentional physical leverage and what actually happens during a run. Me:

"Even a bank with a conservative leverage factor can experience a bank-busting, system-crashing run... This is how a classic bank run runs."

You wrote: "A CB will already lend a bank physical cash in exchange for illiquid paper assets, why not the same with gold?"

Well, for one thing, the CB can print cash but not gold. And since gold leasing doesn't deliver much of a windfall to central banks, would you agree that it's safe to assume that if the practice has resumed it is because of demand, or dare I say need, from the commercial banks?

Well apparently the Belgian central bank lent more than a third of its gold last year to commercial banks for the heaping windfall of 6 or 7 million euro. That's 84 tonnes of gold lent, with a lent value of $4.3B, and earned interest of 6 or 7 million euro. Here's the link, it's in Dutch. A translation from Bing: "For the loan… a fee of 6 million to 7 million euro have received. The stocks of gold be lent to commercial banks. It is not known whether the Belgian National Bank lend more gold than other central banks."

Now I don't want to go so far as to call the Bank of Belgium Geithner's lapdog, but I should point out that in their infinite wisdom, while earning two-tenths of a percent on their gold, they did quadruple their UST holdings which, as far as I can tell, puts them in first place for lapdog of the year.

So my questions are: Why do you think there was commercial bank (BB) demand to borrow (at least) 84 tonnes of CB gold when they are, by their own account, churning 2,700 tonnes per day in paper gold? And do you think that 37% of a small central bank's gold reserves are an exorbitant amount to be lending to the BBs? And lastly, do you think Belgium actually lent control of that physical, or did they only lend gold-denominated credits backed by their good name and wholesome stockpile?

Sincerely,
FOFOA

Blondie said...
This comment has been removed by the author.
Desperado said...

@Anand,

The German people are one of those below deck chained-together-slaves just as the Greeks are. The Germans are still paying their Solidaritätsteuer to the Ossi's today after more than 20 years. in 1990 Kohl gave the Ostmark 3:1 exchange with the Westmark and thereby massively diluted the wealth of the Wessies, Merkel would do something similar if she could get away with it. We'll see how much wealth she manages to steal from her citizens before she's done.

Anand, you seem to confuse the actions of the ruling elites and the desires of the people who have the misfortune of being dictated to by them. Sure, the Greeks voted for communists and socialists and partied while they could. But it was the actions of the ruling elites that have left them in these dire straights, not the actions of the people. If there had been an honest and transparent monetary system based on hard money, even gold, then things never could have gotten this rotten. The Greek people are not to blame for this, the CB's and their elite politician puppets are.

Did anyone else see that Warren Buffet has purchased 63 newspapers? Why? Perchance he wants to be able to help "determine" what it is that the muppets want? If Obama says he has to suspend the elections we can be certain that all 63 newspapers will claim that the action was necessary and desired by the Muppets. And when the EU shoves the stability and growth pack up the rear of all the European Muppets you can be certain that these 63 newspapers will also claim that it was necessary and desired. And if Obama outlaws and seizes the Muppet's gold we know where those 63 newspapers will stand. And they will be doubly important if Obama uses his internet kill switch.

AdvocatusDiaboli said...

Desperado,

Napoleon said about the Germans:
"There is no other well tempered and as well no other overcredulous nation than the germans.
No lie big enough can be thought of, that the germans would not swallow. Under a given slogan they will haunt their own people with most of the biggest bitterness than any real enemy can accomplish."

Well, looks like the last 200yrs nothing much has changed.
And Goethe (the famous Freemason) said (probably refering to the stupid germans as well):
"nobody is more of a slave, than the one beliefes to be free, without being it."

So as I said earlier, everybody in Germany continueing to work, refusing to realize being fooled, does not deserve any better other than to be raped down to the bones.

Greets, AD

One Bad Adder said...

JR - your handle on all things "A" does you credit Sire. BRAVO!

Desperado said...
This comment has been removed by the author.
Desperado said...

@AD,

I didn't know that Goethe was a Freemason, but I don't really know what that explains. I lived near Frankfurt for 3 years from 87-90 and still don't have a firm understanding of the Germans. But I do know that there are big differences between a Bavarian and a Prussian, and now we can throw in differences between Ossies and Wessies. It was always my opinion that letting the Stasi off unpunished was a grave mistake.

It is also my opinion that we may be facing one of Holmes's "dog that didn't bark" scenarios. No one talks about the Nordeuro any more. All eyes are focused on Greece and Spain. We know that any implementation of a new European currency has to be kept strictly secret or the Banksters will game the situation. In addition, it makes far more sense for Germany and the Nordics to implement a new currency than for the PIIGS.

Do you think that Germany+Austria+Holland could be secretly preparing for a Euro exit? It would make far more sense and would buy the PIIGS time without bankrupting Germany...

AdvocatusDiaboli said...

Desperado,
I guess the Stasi was not touched because they knew too much ("Eine Krähe hackt der anderen kein Auge aus"). We even have today a chancellor that was former secretary for propaganda and aggitation of the youth organisation of the Stasi, should tell you enough.
A "NorthEuro" will sooner or later run into the same problems.
The most clean solution would be if Germany leaves, but than Mrs.Merkel would need to tell their sheeple slaves that their pension fonds were worthless and a rip off in the favor of some friends (exporting industry, EUcrats, pension fonds...) from the very beginning. Will that happen? I guess not.
So my only very hope lies in Greece, Italy, Spain, Netherlands, France, Finnland....somebody with some balls to burn down the whole sh!t, because german people have no ball at all.
Greets, AD

Robert said...

Any chance Another and FOA were silenced? Or is that too conspiratorial?

Alien said...

AD, Desperado,

take a look at this video

http://www.youtube.com/watch?v=YqFywGwVKn0

Steinbrück, a real globalist!

AdvocatusDiaboli said...

Alien,
toll, jetzt hast Du mir endgültig den Tag versaut.
Besten Dank ;)
Gruß, AD

P.S.
Hier noch mal Steinbrücks dümmliches Gestammele warum wir denn den Euro so dringend brauchen...
http://www.youtube.com/watch?v=xJyRe-S0BEk

somanyroadsinvesting said...

Sometimes I dont know what to think about the whole Another, BB suppression system. There seems to be so much written and so much debate and at the end of the day how do we ever know for sure? The scary part I think that if it truly is happening for this long and by govts how would it ever end (in a reasonable time frame, under 10 yrs)?

Oh one quick comment on the Another and Gold Trail. I was finally able to read it all. Maybe will go back someday and skim selected parts. One observation; maybe i am overly sensitive but I didnt care for their supreme confidence in dispelling advice. Perhaps I worked at too many firms where it was the loudest and most cocksured guy that got his idea in the portfolio, don't know. But at times it came across like they were pushing. I much prefer, give me your ideas and theory, this is what i think etc. But to belittle at times anyone who has slightly different view turned me off some. Still think its very valuable learning material but I have it in better context now.

Jeff said...

A/FOA were not silenced, and they never belittled anyone. They were insulted, mocked, and scorned by a group of hard money socialists and conspiracy theorists (sound familiar?) for years, and eventually got tired of it.

FOA (11/12/01; 16:31:28MT - usagold.com msg#132)
There comes a time

There comes a time in all things when one must do nothing and simply wait. This is an ages old truth that crosses all the boundaries of life's endeavors; for everything is not always in the doing, but also in the watching. Any good farmer knows that he does not grow a crop; he only prepares his field so the growing he knows is coming can take nature's course.

My friends, we have crossed time and space, while plowing these fields of understanding, and the unfolding drama before us must now sprout its own life. For now, it is my time to watch the trail and let the crop develop. Indeed, it will and it will do so for all to see.

Enough has been said to prove our reasoning is true, especially when the fields become full and in a shade of physical green only our seeds will produce. And planted them, we did, by hand, one at a time, over many years.

Enough has also been said about myself as this story was never about me; perhaps too much untruth was also said by others?

I am going to travel for a while and watch the trail from a distance. It won't be long before the rains come and the ground begins to open; in that time I will return. Until then; this farmer will rest from this work.

Thank you USAGOLD and all the fine people that make this media the best gold site in the world! Another time, we WILL hike again.

Sir Douglas
Your Trail Guide

Michael said...

and thank you Sir Douglas, your efforts are still appreciated here

Michael said...

Desperado
for the record the slave trade was outlawed in 1807 in the USA and ended in 1808. Slavery itself of course went on another 57 years.

Dante_Eu said...

Thank you FOA wherever you are!

Desperado said...

@AD, Alien: As a Swiss Libertarian I have almost as much contempt for Steinbrucke as for Chuck Schumer. All of these globalists have gotten used to pissing all over my poor country of residence. But that is the fate of small countries and it is one reason why the elites of France and Germany were so geil auf der Euro, but along the way they have adopted all the worst traits of the US dollar emperors.

@Costata, Fofoa, JR:

What did you guys do to finally drive Victor the Cleaner away? This current thread about CB gold leases is where he really excels, and the last one about Gold being made tier 1 collateral would also have been a great area for him to show his knowledge. I know he was pissed when JR chased Mortimer away, but I don't recall any online spat between you guys and him. Was it something you guys wrote in your off-blog emails?

Alien said...

Desperado,

frag nicht. Die Übermacht eigenhändig war am Werk.D.h. Rauswurf explizit.

Gary said...

Good to see Fofoa slipping in a post in between the Eurowhingers' substantial blocks of Eurowhinging. At least when the EWers post together it's easy to scroll down to the relevant posts.

If I were a Eurowhinger, I wonder, would I waste my sad little life posting my whinging views on a site where EVERYONE else couldn't care less what I think, as they have other matters to consider. As a Eurowhinger would I continue to live in the Eurozone, or would I move to somewhere more pleasing (Russia and North Korea spring to mind).

I don't know, as I am not a Eurowhinger.

Michael said...

My random thought generator just kicked in:
if there are 8 trillion dollars out there in foreign hands just waiting to buy USA gold and the USG has 8200 tons then a price of $30,972/OZ would be required to price that gold to ensure all parties got their gold.
there are probably more than $8T out there

AdvocatusDiaboli said...

Michael,
how do you get to the idea:
a.) 8200t are for sale?
b.) 8200t are being sold/bought from whom for what to whom?

BTW: "Its the flow" is an interesting FOFOA post about thoughts about the flow, or to approach it from an other perspective: What is the marginal use of gold?
I say, you can only price tag each single trade of gold, but never ever price tag a complete huge stash (whereever it may be, except you are a HMS).
Greets, AD

Edwardo said...

Michael,

Slavery wasn't outlawed, international import and export of slaves was outlawed, which is a very big
difference.

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

AdvocatusDiaboli said...

Desperado,
interesting you just mentioned the facebook tax evader.
Fits perfectly with the topic, if some dumbshit wondering why somebody just dont leave this socialist totalitarian nanny EU-state: In Germany we do have this lovely thing called "Wegzugsbesteuerung", which actually says: "You can go, but your wealth is kept by us either way". So for me it makes no sence to leave. I will have to take the losses of >50% of my lifetime work either way. See, thats how you give currency value in a socialist state: You just take it from the people, voilà, null problemo with some resisting people "loosing" confidence in the currency.
Greets, AD

dojufitz said...

Talking about horses....my brother is a told me of a horse ages ago called 'Black Caviar'...i said i like the name.....it turns out this horse has the record now in Australia....it has never been beaten.....

its earnings so far $7,651,050
Bascially a money machine.....
Wait till she starts breeding.....what are people gonna pay?

Michael said...

AD I know it's the flow...
8200 tons is about the Ft Knox plus other depository totals (total USG gold)
Total amount might come into consideration if say...the USA had hyperinflation and was forced to part with gold. It is a rough valuation of gold in USD terms under certain conditions...
Edwardo
yes...slavery went on for 57 more years even after the 'import' of actual slaves stopped.

FOFOA said...

FYI – Lance Lewis reports "GLD puke indicator triggered today"
Updated chart

enough said...

Damn.....

I really thought I was going to be first to post it :-) way over 1% puke

JMan1959 said...

Rumblings on Zero Hedge that China wants a gold backed currency, very interesting. Didn't say whether they wanted a pegged price or floating, but an interesting development if true...

Robert LeRoy Parker said...

Hello Aristotle,

In a previous comment, you said:

This public OpEd piece is a good wake up call for our sleepy culture. It's good to be roused from bed. Gather up the last easy bits of your treasure seeking exploits... the next 24 months will bring reverberations through our (global) culture as profoundly as is yet possible in this largely jaded and detached age of ours. Even now, can you hear the distant pulsing of air beneath the dragon's wings?

Would you care to elaborate on the basis for your timeline?

Regards,
RLP

costata said...

Who needs a CB when you have GLD to supply your Liquidity?

Nice of the Belgians to lend a hand but I guess a promise won't cut it at times and you need the physical.

Michael,

While we are on the subject of puking, I too have been indisposed in a GLD-like manner but I haven't forgotten that interesting point you raised about compounding. I will try to complete my comment on that topic this week.

Cheers

Bron Suchecki said...

FOFOA

"Well, for one thing, the CB can print cash but not gold."

Yes and thus at some point a gold run cannot be stopped. I was just pointing out that CB reserves represent a

source of metal that may be used in an attempt to get over what BB and CB may see as a "temporary liquidity

problem" in the gold market.

"And since gold leasing doesn't deliver much of a windfall to central banks, would you agree that it's safe to

assume that if the practice has resumed it is because of demand, or dare I say need, from the commercial banks?"

Well I don't think the practise stopped completely. Some CBs (like Australia) have ceased leasing because of the

low rates, but other continue. If there was demand, significant demand, it would show up as rising lease rates.

There hasn't been any material change in them over the past year. I don't see the Belgium activity as significant.

"And lastly, do you think Belgium actually lent control of that physical, or did they only lend gold-denominated

credits backed by their good name and wholesome stockpile?"

Most likely credits and not physical. It is probable that the metal Belgium lent was held with the Bank of England,

so all that happened was a book entry to the BB. All the BB cares about in normal markets is intermediating between lender and borrower - it wouldn't matter to them about getting physical.

Robert said...

Dear Jeff,
Yes, I have seen FOA's farewell post. And I understand how someone might feel that way and might give up posting in a hostile environment. We have all experienced that feeling and responded the same way, haven't we? Yet most of us simply migrate elsewhere, perhaps posting in a different forum using a different alias. Yes, I understand the "sit back and wait" philosophy, but I also know that becomes more and more difficult when you see things start to develop as you predicted. It is odd for a prophet to completely disappear when the prophesies come true. To post only infrequently, okay, but to completely disappear???? That is not human nature.

It is not so far fetched to be a conspiracy theorist on the particular point considering how much is at stake, considering the circumstantial evidence that A/FOA were insiders at the highest level, and considering how much politically and economically currently rides on maintaining confidence in a broken system. Notwithstanding FOA's farewell post, I wonder whether these guys both met an untimely end, or whether they later came across some information that led them to change their minds.

If I was part of the Orwellian propaganda machine I would be watching FOFOA closely, and if I were FOFOA I would be looking over my shoulder more than the average person. Ideas are dangerous, and the ideas on this blog threaten the world as we know it.

Desperado said...

@AD,

"Wegzugsbesteuerung"

Wow! That would be like a capital-gains exit tax when someone leaves California for Nevada.

What about those tax agreements for Grenzgängers who live in Germany (and France) and work in Switzerland but pay taxes in Switzerland?

I love this statement: "In der Schweiz ist die Wegzugsbesteuerung gänzlich unbekannt - weder Kantone noch Bund haben jemals daran gedacht, dies in ihren Steuergesetzen aufzunehmen. Die Schweiz erhofft sich durch die ablehnenden Entscheide des EuGH, dass auch im Bezug mit der Schweiz aufgrund der Kapitalfreiheit eine Wegzugsbesteuerung nicht zulässig ist."

The real reason Switzerland doesn't have an exit tax is because they have no capital gains or inheritance taxes. Switzerland can be very repressive, but at least we have a whiff of financial freedom.

FOFOA said...

Hello Robert,

You wrote: "if I were FOFOA I would be looking over my shoulder… the ideas on this blog threaten the world as we know it."

Wow!! That's quite a statement! I had no idea I was such a revolutionary. I thought I was merely explaining what is actually happening around us. Not trying to change a thing or threaten anybody. So who could have known what a threat my ideas are? Who?? Yes, that's a question for you! They aren't even my ideas. I'd better go into witness protection or something, eh?

Thanks for alerting us all to how scary [your] reality really is!

I almost deleted this entire blog two years ago and went back to what I'd been doing for the previous several decades of my life, but for some reason I decided not to. I guess if I had, people like you would have thought I'd been rubbed out by TPTB or something, huh? And not just two years ago. I struggle constantly for a reason to keep doing this. The easy thing would be to stop, since the retarded conspiratorial nonsense that permeates every inbred cell of those who hang out too much on the internet is so completely inextricable. And yet I carry on. Who knew it was even possible?

I understand FOA's exit on a deeply personal level. In so many ways I envy him.

Sincerely,
FOFOA

Blondie said...

Bron said: "All the BB cares about in normal markets is intermediating between lender and borrower - it wouldn't matter to them about getting physical."

Do you see any reason why any CB gold leasing over the last couple of decades would have necessitated actual physical receipt of gold by a BB?

I see no reason why it would have. Another was clear that CBs were supplying only certificates. Another was also quite clear that CBs were subject to the BIS.

CB gold leases are the ultimate form of credit in our monetary system; credit for the ultimate reserve asset in the possession of the central bank. Whether or not these debts are ultimately extinguished in real or simply nominal terms would also be subject to the discretion of the BIS.

I wonder what percentage of allocated accounts are "filled" with this credit?

Without unequivocal evidence that CB gold leases actually involved physical delivery rather than CB gold denominated credit I am inclined to side with Another et al. rather than some of the other slightly more conspiratorial pundits.

AdvocatusDiaboli said...

@Desperado,
"Wow! That would be like a capital-gains exit tax when someone leaves California for Nevada."

no no no, maybe you are unlucky to loose everything in the US:
http://www.youtube.com/watch?v=eNLlKB_UjBw

but maybe this is just what FOFOA calls "retarded conspiratorial nonsense".
Greets, AD

FOFOA said...

AD, your nonsense is exactly what I call retarded conspiratorial nonsense. I just watched your video from Infowars (say no more) and it was obviously a bad department policy, a bad (dishonest) cop, and they ultimately returned the money to its owner. No point made! Other than the system's incentives are all fucked up. No shit!

My patience grows thin, and when that happens I simply put the comments on moderate so that I don't have to wake up to a bunch of bullshit comments from the likes of you.

Robert said...

Dear FOFOA,

I know that you are not advocating anything, that you are just telling it like it is. But yes, to answer your question, I absolutely believe that the truth is revolutionary. The whole world financial system is a house of mirrors, no? And when a critical mass of people see reality for what it is, there will be dramatic changes. A financial tsunami is coming, and you are correct about what you write on this blog -- it is inevitable.

When it happens, what will be the reaction? Will the world credit those who saw it coming and tried to warn everyone? Or will the transition be disorderly with plenty of people losing their heads and blaming the anonymous messenger for sowing seeds of fear, for undermining the system, and for destabilizing the system for personal gain? There is a reason why the phrase "shoot the messanger" is in the lexicon.

Do we live in a free country anymore? Do we believe in the rule of law? Do we as a people love the truth? Or are we a country that is run by large corporate and banking interests, where nobody is representing the people anymore, and where someone who threatens the system can be labeled an "enemy combatant" and thrown in jail, never to be heard from again? Maybe I am paranoid, but maybe that is because I have read the Patriot Act? Maybe because I have read about the plans for electronic surveillance of all email and phone communications?

Okay, okay. Maybe there is too much hyperbole in my internet posting paranoia and maybe I need to take a deep breath and relax. Maybe A/FOA were not "rubbed out" but maybe they were warned? Maybe they signed confidentiality agreements with their former employers and did not want to be accused of breaching these contracts? There are subtle ways to discourage people from talking.

I hope that nobody bothers you, and that in the long run you get the credit you deserve for showing people the truth. Sorry if my lack of faith in human nature is too far out there, like a movie script (The FOFOA Identity, The FOFOA Supremacy, The FOFOA Ultimatum)

AdvocatusDiaboli said...

FOFOA,
the video was not from Infowars (where a lot of stuff claimed, I would also consider retarded conspiratorial nonsense). So just because it was also posted on Infowars makes it nonsense?

Certain things in life do happen, we call those provable facts, to just refuse to notice them, does not really help to form a bigger picture of human superorganisms behaviour. Instead on purely relying on some predictions made by some anonymous on the internet 13yrs ago is a more reliable source?
Just Saying&Asking, Greets, AD

FOFOA said...

There's a world of difference between refusing to notice something and refusing to interpret it (and write about it) in a retarded conspiratorial way as you consistently do. Simply stating that I purely rely on none other than 13 year old anonymous sources doesn't make it so. You have been strawmanning me on my own blog for a long time AD and I have let you run wild like a buck naked native. It will not continue. If I tire of you enough, eventually, you may become #3 after Shelby and Art. But not yet.

Desperado said...

@Gary,

"Eurowhingers' substantial blocks of Eurowhinging"

whinger: "slang for someone who won't shut up. "

How typical for you that in a thread where the silencing/shout-down of Another and Foa is lamented you blatantly advocate censorship of others who a willing to see the ugly truth about the Euro.

@Robert:

"considering the circumstantial evidence that A/FOA were insiders at the highest level, and considering how much politically and economically currently rides on maintaining confidence in a broken system."

You're stealing my thunder!

DP said...

It's good to see "F-theory" abroad, roaming wild and... well, free.

It's even sweeter when the personality that is extoling the virtues of "F-theory", is an apparently repentant former vehement critic.

So far, it would seem, the best argument against "F-theory" is … "it's Utopian Idealism, therefore it won't happen"! Well, yes, I can't find a better argument against it than it's Utopian and Ideal either. But that doesn't mean I think the world isn't evolving there before our very eyes.

The sun is out. Let's pull up the patio furniture and cucumber sandwiches, as we watch Ash do the heavy lifting for us for a change.

Alien said...

Desperado,

Victor the cleaner ist hier http://www.chrismartenson.com/blog/harvey-organ-get-physical-gold-silver/73933?page=26#comments

Eine schöne interessante & informative Unterhaltung.

Motley Fool said...

intr.v. whinged, whing·ing, whing·es Chiefly British

To complain or protest, especially in an annoying or persistent manner.


In my mind we can add the qualifiers, that it is to complain unnecessarily and about things that are unlikely to change. To whinge then is to annoy those around you due to your dissatisfaction with reality.

"...the system's incentives are all fucked up. No Shit!"

Stop whinging about it.

:)

jojo said...
This comment has been removed by the author.
Beer Holiday said...
This comment has been removed by the author.
Michael H said...

FOFOA,

"I understand FOA's exit on a deeply personal level. In so many ways I envy him."

I had just re-read FOA's near-last, very angry post yesterday and thought 'I really hope FOFOA doesn't get to that point'.

I sincerely appreciate your work in starting and continuing this blog. I hope that you can deal with the negativity in a way that allows you to continue the work on this blog.

Jeff said...

Moderated or no comments would be better than losing the posts. My .02 cents.

Beer Holiday said...
This comment has been removed by the author.
Michael H said...

A further quote from the final page of the Gold Trail which is relevant to recent discussion:

FOA (11/5/01; 18:31:01MT - usagold.com msg#130)


Gold has always been the most political metal our world has ever known; political because it offers so much power to those that hold it in their hand. Many of the downtrodden look at government policies and say:

-----"they dictate our wealth and put us in debt so as to control us"! -------

Conversely; A simple person can control his controllers by staying out of debt and owning a wealth no government can dictate the value of: Gold Bullion!

GOLD:

-- value it with official contracts and currencies and your wealth is their power ,,,,,,,,,, keep it as your savings of ages,,, and your wealth becomes their master!

TrailGuide

DP said...

Yay Jeff! — +1

Moderated or no comments would be better than losing the posts. My .02 cents.

...

However, a live discussion does tend to spread out to more ears faster than a dead one. This discussion, of all discussions on the Interwebz, needs to get to as many ears as possible before it's too late for them. So moderated would be my preference, if/when we ever had to vote.

Beer Holiday said...

Please keep up the good work, FOFOA.

Maybe it's time for for people like me who this blog so much to make a donation.

somanyroadsinvesting said...

I must have missed these last few posts by FOA. Where are they? I did not see them in the Gold Trail. Thanks

Midnight Gardener said...

Thanks FOFOA,

After a long absence I came back in time for a very informative post; however, now I have even more catching up to do.

I noticed that KWN is taking a beating from some in the comments, but I still find value there from time to time.

Today John Embry revealed something that Egon von Greyerz did not mention in his interview, i.e. that the bars eventually received were minted in 2011, well after the account was secured.

That seems a bit fishy in that I was under the impression that allocated account holders were given bar numbers. OTOH, it kinda backs up the story about them not having the bars on hand when requested.

Thoughts anyone?

Crack said...

Embry: You want unsubstantiated and hyperbolic hearsay? Well I'll give it to ya!

This part was in an earlier draft of his article. It must be true - a friend of mine told me so!

somanyroadsinvesting said...

One observational comment on the Trail. Some people said they grew tired of the attacks etc. I can't help to think that if they changed their tone a bit then maybe people would have reacted softer. If you come out guns ablazing like u are the only person that knows anything and everyone else in the world is wrong its human nature to react negativley. What if they came out and said hey guys been thinking a lot about the gold mkt latley and this is what i came up with what do you think? I think the reaction would have been 180%. I think the best book I ever read was Dale Carnegie's How to Win Friends and Influence People. Written long time ago but human nature doesn't change. Anyway my 2 cents.

Oh yeah and if anyone cant point me to where these last few posts were by FOA would appreciate it.

Thank you.

JR said...

Go here SMRI - http://www.usagold.com/goldtrail/


Go Go Go FOA-linking Michael H:

A simple person can control his controllers by staying out of debt and owning a wealth
no government can dictate the value of: Gold Bullion!

JR said...

Yes Blondie,

" Another was clear that CBs were supplying only certificates. Another was also quite clear that CBs were subject to the BIS.

CB gold leases are the ultimate form of credit in our monetary system; credit for the ultimate reserve asset in the possession of the central bank. Whether or not these debts are ultimately extinguished in real or simply nominal terms would also be subject to the discretion of the BIS."


Another wrote:

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

Desperado said...

@Alien

Ich habe den ganzen Thread gelesen und Victor hat wirklich geglänzt. Deshalb habe ich mich gefragt, warum er diesen Blog verlassen hat. Schade.

AdvocatusDiaboli said...

"Another wrote:

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

Which/whose gold?
Their own BIS reserves? I guess not, they actually reduced their gold holdings.
Or the gold of other CB? Well, amazingly since 1999 most first/western world CB did reduce their gold holdings (whatever the reasoning might have been).
So what was "Another" talking about?
Greets, AD

Jeff said...

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

The key word in that sentence is ALL. You are just trolling now, AD.

AdvocatusDiaboli said...

Okay even so the keyword might be ALL:
If the CB dont corner the physical gold market any longer, they might as well sell ALL, because than their small stash is worthless in terms of currency management (if you still believe in that Euro-FG-stuff).
Greets, AD

JR said...

The BIS is a the CBs bank, it is the organization the CBs all own through which they clear international transactions.

The BIS set up the paper gold market, and its that market, ultimately backstopped by CB paper promises (remember, the CBs did not lend gold, only paper), that the BIS will ultimately decide whose claims get paid and whose do not (because there is way more paper than real physical gold).

JR said...

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?

AdvocatusDiaboli said...

nice C&P, still does not answer the specific question. Does not even touched the topic.

JR said...

Physical gold is different than modern currency. At the CB level, it rarely gets moved. This was a big reason for the creation of the BIS in the first place. If you think about the purpose of the BIS as a clearing system or gold broker for interbank sales, it makes perfect sense that most of the gold deposited with the BIS would be sight or unallocated.

The purpose is so that CBs can transfer gold around the world without having to physically ship it. Avoiding the cost and risk of physically shipping a heavy metal is an important service provided by the BIS. And it does this mostly in unallocated form. When the BIS physically moves gold, the risk is shared, i.e. the risk is on the BIS.

The BIS is owned by its customers, the CBs. They set it up and subscribed to it (bought in) so it could provide services like this. The BIS's own gold is still owned by the CBs because they own a proportional share of the BIS.


Say you want to give me a hundred dollars. You go into your bank and deposit a hundred dollar bill. Then you fund your Paypal account and send me $100. Then I send that $100 from my Paypal to my bank and I can walk in and take out that $100 bill. You’ve just sent me a $100 bill but no one actually physically shipped it across the ocean. It was an unallocated deposit in one location and an unallocated withdrawal in another. This is what the BIS does with gold.

Out of practical necessity, privacy and security, most BIS gold activities are with unallocated gold. The main difference between the BIS and private bullion banks being that BIS sight accounts are fully reserved. Being "reserves" is the very definition of CB gold.


http://fofoa.blogspot.com/2011/08/go-go-south-korea.html

Jeff said...

CBs don't corner the gold market, and they don't want to.

FOFOA: "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."...

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.

JR said...

So there are still lots of paper gold claims out there, we now there is huge leverage and most of it is not held to demand physical, but as a currency hedge against $ asset risk. Like an in insurance sticker.

So if SHTF, who gets paid on their "insurance sticker." Maybe the BIS might have some say in that, yes?

AdvocatusDiaboli said...

"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."

Any proof or facts about that statement?
Since Another stated that stuff, looks more like a one way trade:

England SOLD ONLY
Switzerland SOLD ONLY
France SOLD ONLY
Germany SOLD ONLY

overall physical holdings since ANOTHERS postings:
http://upload.wikimedia.org/wikipedia/commons/a/ae/Internationale_Goldreserven_in_Mio._Feinunzen.png

Nickelsaver said...

Tumbling like the leaves
We are spiralling on the breeze
Almost to the point of no return
Everything will burn baby burn

Michael H said...

JR,

The 'exchange reserves' quote from A reminds me of something I came across in the regular archives.

As I read it, I thought that it might be relevant to the Greek situation, and the troubles in Europe in general.

Friend of Another (9/22/98; 15:21:04 Msg ID:92)
TO: RAINMAN (9/22/98; 10:19:25 Msg ID:83)

...

Once currency starts to fluctuate in it's purchasing power or exchange rate, citizens begin to require other types of backing for their money in order to maintain confidence.

...

...,the Central Bank can purchase the currency in the open market using Exchange Reserves as Backing. The obvious, well documented problem with this comes when the government doesn't have enough Backing to maintain confidence in the currency. ...

My point? Modern digital currencies are today defended in the open market with Currency
Exchange Reserves, not Gold. Most countries call their gold reserves. But, no country today classifies it's Gold as Usable Exchange Reserves . The Euro will!

Of the 40 to 50 Billion in reserves that the ECB will hold to defend the Euro, some 15% will be Gold Bullion. Unlike currency reserves that will be sold to purchase Euros as defense, gold reserves will be added by selling Euros to buy gold from the EMCBs. At present, the dollar has only one competitor for reserve currency status on the world stage, gold.

The dollar has been made strong in a low gold price.

To compete with the dollar for world reserve recognition, the ECB will add Euros to the EMCB(European Member Central Banks) to replace their gold. The EMCB will then be free to purchase gold on the open market, using no longer needed US dollar reserves. Remember, the Euro will be the main currency reserve of Europe. The ECB will not have to sell it's currency dollar reserves as they are a small token amount for balance. The roaring price of gold in dollar terms will now make up the lions share of Real Reserves backing the Euro!

In this context, the ECB will have no problem using the new dollar gold valuations to cover any dollar commentments of it's overextended members. Now my friend, you have my view!

Perhaps you now understand why some natural resource countries value gold today at a Far higher dollar price than currently exists!

Thanks

mr pinnion said...

FOFOA
If you start a blog about realy interesting stuff, at a time when theres a load of really interesting stuff going on relating to the really interesting stuff your writing about, it stands to reason that your going to attract quite a few nutters.

I dont understand the deep angst.If you were an atheist , blogging about atheism,would you expect religious people to come here and not argue their case? Would you expect them to say, after a few weeks of debate, "You know, your right FOFOA, i m not going to believe in god no more.How could i have been so stupid!?"?People hold on to their beliefs, espesially about politics.What did you expect?
If their questions have been answered, over and over and still no luck.Then block em.

I m addicted to this blog and would hate to see it go.
Is that page view counter origional views?I often wonder how many new people are being exposed to the FOFOA view and if the number is growing at an increasing rate.And how many take its message seriously every day.

As for moderating the comments.Not bothered either way.I dont mind having AD around coz i skim and scroll past.
Is it possible to moderate six days and have a free for all Friday maybe?
Keep up the good work

Regards
Ozzy

Michael H said...

DP,

Thanks for the link to Ash's piece. Interesting to see him defend freegold in the comments section against onslaughts from our old friend 'pipe'.

Also funny to read his re-branding. F-theory?

Jeff said...

First of all, AD, that quote about credibility was written by FOFOA, not ANOTHER. Can you guess why? Review the charts on FOFOA's Euro Gold post for the answer.

Motley Fool said...

Michael H

Hmm, I don't mind the rebranding. It's quite neutral. The word 'free' tends to rile a lot of people and baggage up, just like the word 'gold' does. The combo is explosive.

F-theory. Sure, much less baggage.

TF

sean said...

In recent months I've noticed that the quality of internet discussion in general seems to be deteriorating. This blog used to be one of the last bastions of thoughtful and intellectual discussion but it also seems to have been under an onslaught of whingers, whiners, and wankers. Perhaps their proliferation is the result of feeding on the disinformation being pumped out by the media - which also seems to be reaching bursting point at the moment. Perhaps the siege mentality is a consequence of the fear that instability causes. If so, I’d say we’ve not yet plumbed the depths!

For what it’s worth, I see absolutely no need for FO/FO/A to defend himself against the specious arguments of “neutrality”, bias, or indeed even censorship. It’s his blog after all. He is under no obligation to allow posts about anything that doesn’t interest him. He is free to permit posts only about the many varieties of cheese, should the whim take him.

I am personally extremely grateful for this blog, because it helped me find the path into the Archives, which I initially found completely impenetrable! Of course I hope FOFOA will continue to post, as each new post typically illuminates a whole new area I wasn’t even aware I didn’t understand properly! I know from experience it’s not easy to write new articles regularly and to maintain the inspiration, so if the frequency ever reduces to only once a month… I’ll still be grateful for the work that’s gone into that post, and the insights that you won’t find anywhere else. There are many excellent contributors and it’s a joy to read their discussions in the context of the archives. Of course it’s tiresome to re-visit old ground, but more importantly it distracts from the current theme, so in my opinion, moderation would not be unwelcome. Embrace censorship, I say! The internet is a big place, and everyone, ultimately, finds their place, be it FOFOA, KWN,chrismartenson.com or 4chan.

sean said...

Sometimes I see parallels between Freegold and Zen koans . They both seem obscure initially, and they demand an effort on the part of the student for understanding - but when revealed, they seem self-evident!

It was known throughout the land that this Zen master had the ability to turn lead into gold. One day, a brazen young boy decided to find the Zen master and learn the secret of turning lead into gold. So he set off on foot for a long, long trek through the mountains.

Along the way, kind strangers gave him directions to the Zen master’s cave and after many weeks of walking and climbing, the young boy, winded from the arduous climb, finally arrived at the entrance to the cave.
Carefully, he looked inside and, indeed, he saw an old man sitting by a small fire, deep in concentration.

"Old man," the young boy said brashly, "I have walked many miles and climbed many mountains to come here and learn your secret of turning lead into gold." The Zen master smiled wisely. "Be seated, young seeker, and I will share my secret with you."

The boy sat across the small fire from the master, watching every move the old man made. The master took a small block of lead and held it tightly in his ancient hands. He chanted for what seemed like hours, deep in a trance. The boy wrote down every incantation the master spoke. He wrote down everything the master did – all the time thinking of how wealthy he would soon be.

Still writing down the words of the Zen master, the young man watched as the master finally placed the block of lead onto the fire. He covered the lead with some straw from the floor of the cave and spoke one, final incantation. Magically, the ashes blew away and there, in the fire, was a bar of gold where the lead had been placed.

The young man leaped up. "I’m rich. I’m the richest man in the entire world," he shouted. "I can turn lead into gold. Foolish old man, why would you give away such a secret?" the boy asked as he began to leave the cave to plan his fortune.

The Zen master smiled at the eager boy. "Because the secret only works when you don’t think of a black cat."

Biju said...

Today mining index(GDX) is up, while Gold is down. Not seen this for over a year.

jojo said...
This comment has been removed by the author.
burningfiat said...

I was thinking of Uncle Costata...

If Treasuries is considered Tier1, why not football players? How do football players perform as SoV compared to gold?

http://www.zerohedge.com/news/football-legend-cristiano-ronaldo-be-used-ecb-collateral

e_r said...

Aaron,

I don't blame the savers as in "you jerks, you should have known better. Nasty savers." I blame the savers as in it is they with surplus wealth to store that drive the dominating store of value.

The Euro architects had good reason to structurally support the dollar until Euro launch. So really the largest surplus nations that provide structural support are China and Japan.

The USG needs savers willing to buy up the debt and it is those very savers that enable the financial system you see around us.

True.

On the topic of giant savers, Aziz has some interesting thoughts on China & Treasuries.

e_r said...

DP,

Read the recent posts on F-theory by Ash.
I wasn't around when there were heated discussions between Ash and other frequent commenters here, so I tried to follow some of the threads but I found it very difficult to understand what he was saying.

And Ash's posts last year on Freegold were very nebulous, to say the least. He seemed like an expert on Marx, but he failed in explaining it to someone who doesn't know squat about Marx. I couldn't even comprehend what he was saying beyond the first paragraph.

Nevertheless, it is evident that he is in fact defending FOFOA in the comments section for people of lesser understanding, which I find interesting :)

Ash says: F-theory predicts the manifestation of a monetary Ideal throughout all of global human society, and that fact alone should leave us very skeptical of its predictions.

First off: Why is Freegold a monetary ideal? Isn't that actually a more realistic and a honest monetary system than what we have had in the past?

He also says: I also think there is evidence to suggest that there were/are high-level people involved in the founding of the EU/EMU who eventually wanted to use a Freegold system to overtake the $IMFS and make Europe the dominant global force once again. However, in contrast to FOFOA, I believe those dreams have been dashed in the last few years and I can't imagine that any of them still hold out hope.

It sounds like just a belief. I hope Ash doesn't rely on faith to disprove FOFOA's arguments.

JR said...

Aristotle (2/7/2000; 8:10:15MDT - Msg ID:24593)
Building the Perfect System by Capitalizing on Gresham's Law

At first cut, people fall into one of two categories: 1) those who recognize the value of an honest monetary system built upon Gold, and 2) those who have not yet given any serious thought to the matter. Proceeding with the small but special population that belong to the first category, my own experience has revealed them to be inclined toward idealism. Good people, to be sure -- I wish we were all that way! But while their general awareness of what makes for a more perfect world should be providing them with fuel for an enjoyable life, instead, this level of idealism often blinds many of them to any shades of gray -- and there is little comfort living in a strictly black-or-white world. I write this with hope in the off-chance that it may help provide a source of comfort to this small group of idealists, offering them some subtle shades of gray that won't completely undermine their idealistic integrity.

While reaching out to my idealistic friends, I also hope to present a "roadmap of thought" for that larger, all-important population which falls into the second category mentioned above -- those that have not tapped into a more thoughtful, enjoyable life which I have seen to be the general hallmark of my few Gold-minded friends (the ones who have themselves avoided the extremist idealistic trappings.) Why do I call this second category the "all-important" population? Because the Many do indeed dictate the terms under which the Few must also live. I must, therefore, grudgingly devote sufficient attention in this commentary to ensure some of the idealistic readers can see this important "shade of gray" regarding majority rule. It is my hope that they will then be prepared to pragmatically accept the terms/constraints under which this *perfect monetary system* must be designed.

In this commentary I shall attempt to clearly lay out what I feel this "perfect" monetary system to be -- the *perfect* system for a consistently imperfect world, that is. I am not so bold as to think that the world of human ambition and disposition is something that can be altered to suit the perfection of our preferred (Gold coin) currency's characteristics -- especially the limitations (fiscal austerity) it imposes on its users, the population at large. I therefore resolve myself (and hope you do, also) to the humble thought that our currency system as a whole might be artfully developed into a state of harmony with the world in which we do live. The present system, and all failures before it, have been as square pegs in round holes. With the system to be described, I hope to avoid any system that lends itself to the repetition of past abuses and failures.

JR said...

Aristotle (02/11/00; 17:46:56MDT - Msg ID:25059)

[...]

ORO, I hope you are smiling as you read this, as I am as I type. A friendly exchange of ideas is good for everyone and makes for entertaining reading; agreement has the distinct look of a blank page or a silent room.

With that said, where can I get admission to the world you are living in? It is surely a more perfect version of the one I have found myself in all these years.

Remember, my goal was to lay out the "perfect" system for an IMPERFECT (real) world. I took on the project with no preconceived notions one way or another. Going in, I was a charter member of the Goldhearts club, and I emerged even more excited about the prospects of Gold than before. The future for Gold is bright, and it is rapidly approaching in the manner I laid out, if I'm reading the signs correctly.

In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. In the perfect world you lapse into in your comments, everything you say is well and good. We don't live in that world, however. My biggest challenge in piecing together my proffered solution was to accept what this real world had to offer and avoid foisting my own preferences onto the world like a square peg in a round hole.


http://www.usagold.com/halldiscussion.html

Ross said...

Two questions people might help me with:

a/ Is there a way to follow all comments on all posts in one RSS feed?

b/ Is there a way to get a feed of comments/posts from specific authors/posters?

I think these might be setting options FOFOA can enable if not already?

Michael said...

Midnight Gardener
I have not been following the whole thread but gold is fungible. It should not matter the year of production of a bar. If it were held as a numismatic item that would be different. I hold a certain type of coin in a Fidelity account. I expect to get that type of coin when I redeem but the year won't matter.

DP said...

Heh - "nebulous": it'll do if you don't want to say "half-witted, pompous sophistry, thinly disguising a basic lack of understanding or desire to be helped towards understanding", eh? q;)

Yes, on reflection, it's a shame you weren't here and commenting back in the day - you're much more Twit-friendly than me. I'm liable to waste half my meagre allotted character limit on contemptuous spittle as you see. It's a shitty job, but someone has to clean house.

However ... bygones. It really does seem he walked away as one of "us", as you too observe. Now I can perhaps add him to my "now we can laugh about it sometime over a couple of beers" list. Which is nice...

Indenture said...

How much is enough? Good question, but one of the reasons I continue to feel compelled to return to FOFOA on a daily basis is the fact that the question its self is flawed because of an underlying assumption. For me the question is not 'How much gold is enough' but instead 'How much physical fiat is enough'. I began reading FOFOA with zero physical, in any form. A couple hundred dollars in the pocket, maybe, but everything else was an electron chasing yield and I believe this general statement would define most FOFOA readers. We all had to begin somewhere, with some amount of fiat attempting to churn a return.

And at some point in the stream that is 'The Comments' each of us read our first posts from complete strangers. I tend to believe that I landed at FOFOA's feet at the perfect time to begin my understanding and have used this accumulated knowledge to come to the simple conclusion that given the choice between fiat and physical gold I would rather have physical gold. But others land here, in the Comments Section, at this moment. We don't know when the next visitor will read a single passage that sparks some deeper desire for more understanding. It could be something as simple as http://tiny.cc/ij7rew The point is we will never know what inspires the next person to become a listener, then a follower and perhaps a contributor but I do know that at some point the electronic currencies held by that person will be exchanged for physical gold and the person won't be asking themselves how much physical gold they can get but instead will be asking how much of their 'Worth' they will leave behind in fiat.

Gary said...

'If I were a Eurowhinger, I wonder, would I waste my sad little life posting my whinging views on a site where EVERYONE else couldn't care less what I think, as they have other matters to consider.'

Despairdo, do you think other site visitors don't understand that you think the whole Euro project is flawed?

We understand you think that, we couldn't care less that you think that, and it just shows what bitter little people you are that you hang out here annoying those who bother to read the crap you spew out. I just scroll past it all, simples.

Do yourself a favour, consider the hours of YOUR life, never to return, that you have wasted posting here. Consider it, and then do the right thing:

fuck off someplace else.

e_r said...

jojo,

Thanks for the ZH link.

The Fekete article is almost exactly identical to OBA's last Rubicon.

We have to interpret the new phenomenon, the falling tendency of the T-bill rate. Maybe the financial media will try to put a positive spin on it, for example, that it demonstrates the newly-found strength of the dollar. However, I want to issue a warning. Just the opposite is the case. We are witnessing a sea change, tectonic decoupling, a cataclismic decline in the soundness of the international monetary system. The world's payments system is in an advanced state of disintegration. It is the beginning of a world-wide economic depression, possibly much worse than that of the 1930's. The falling T-bill rate must be seen as a sign of the government of the U.S. and the Federal Reserve losing their battle against deflation. We have reached a landmark: that of the breaking up of centralized and globalized credit, the close of the dollar system.

It is also very similar to the ideas FOFOA presented in Today's "gold" .

Midnight Gardener said...

Greetings Michael,

I understand the fungible aspect of gold and agree it does not really matter. Make that, it would not matter if the bars were of the same exact weight, i.e. small bars.

I suspect this is at least part of the reason why the numbers are recorded on allocation contracts.

My point was that, in an allocated account, the bar number and weight cannot be known before it is poured.

Just for the record, the only 400 oz. bar I will ever be able to afford is one of those fairy tale bars Embry dreamed up that was referred to by Crack.

costata said...

Now this is an interesting development:

NEW YORK (Reuters) - China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government, according to documents viewed by Reuters.

h/t JSmineset and Trader Dan

Trader Dan interprets this as an iniative to avoid being front run by the primary dealers on their bond transactions. I don't find that a credible theory given that Tim Geithner has a telephone and some "connections" with Wall Street.

This arrangement would allow dealings between Treasury and China to be conducted in secrecy if both parties desire it. My first thought on hearing this was to wonder if China might be offered some inflation protected paper for their continued support of USG borrowing.

Perhaps such a deal would not apply to their existing holdings. For those holdings perhaps they alrady have hedging strategies in place ;)

JR said...

Which also harkens back to FOFOA's 2010 backwardation post mentioned in " Today's "gold"" called "Red Alert: Gold Backwardation!!!"

http://fofoa.blogspot.com/2010/07/red-alert-gold-backwardation.html

To this day I believe that Fekete was absolutely correct that backwardation is THE existential threat to the system that he said it was. Where he went wrong was in his assertion that the gold basis was the only metric that could not be rigged. He has since admitted as much.

[...]

Dollars Bidding for Gold? Or Gold Bidding for Dollars?

When you think about the message that the lease rate sends, it is directly tied to the liquidity the dollar desperately needs. On Sept. 29, 1999 the message was "lease us your gold, PLEASE, and we'll pay you handsomely for it." Today the message is "we don't need to borrow your gold, and if you insist on lending it to us, it'll cost you."

Now, if I am a liquidity creator for the dying $IMFS - a bullion bank - how do I create dollar liquidity? I take a piece of unencumbered physical gold (owned or borrowed) and I fractionalize it. I sell it off to the extent that the probability of a delivery demand is lower than my physical reserves. And in the process, I am creating DEMAND FOR DOLLARS because my "golden tickets" are bidding on dollars. Remember what ANOTHER said...

Date: Fri Jan 23 1998 19:01
ANOTHER (THOUGHTS!) ID#60253:

All modern digital currencies do not go into an investment, they move THRU it... There is an alternative. 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".

This is the key to EVERYTHING!!! It is not "gold liquidity" that the bullion banks create... it is DOLLAR LIQUIDITY. 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. This is backwardation!

Fekete says backwardation is when "zero [gold] supply confronts infinite [dollar] demand." I am saying it is when "infinite supply of dollars confronts zero demand from real, physical gold... in the necessary VOLUME." So what's the difference? Viewed this way, can anyone show me how we are not there right now? And I'm not talking about your local gold dealer bidding on your $1,200 with his gold coin. I'm talking about Giant hoards of unencumbered physical gold the dollar NEEDS bids from.

Think about it. You can't make it cold in July by simply rigging the thermometer.

And in my - purely speculative - analysis, "the BIS gold swap" CONFIRMS this view!

costata said...

Since talking nonsense by our resident Euro-skeptics is an emerging theme in this thread I thought this bit of rubbish from ZH would fit in nicely.

http://www.zerohedge.com/news/what-europes-loan-deposit-ratios-look

In this post Tyler discusses the low deposit to loan ratio of EU banks as some kind of fatal flaw. It is not news that the EU banks have always relied more heavily on wholesale funding than banks in the USA and elsewhere. EU banks traditionally obtain around 80 per cent of their funding from wholesale markets according to reports Uncle costata has read.

Quoting an earlier post Tyler writes:
And judging by the market's reaction today, more muppets, pardon, people are starting to grasp this.

And then he writes (with no evident grasp of the self-parody contained in his final remark):

Alas, we were too quick to judge the muppets, which continue to fall for every BS rumor over and over.

How right you are Tyler old chum.

Now if we have covered AD and Desperado's fixations and insecurities in sufficient depth perhaps we could move on to discuss the implications of this funding mix. What are the implications for EU commercial banks and the ECB's policy and liquidity operations?

We might also consider why a banking system has been allowed to continue to be structured this way. Attracting deposits (savings in Euro) are not as important to this system. Perhaps the ECB Eurosystem banks are content to see savers rely on some other savings vehicle for their hard earned bugs bunny rather than commercial bank "saving" accounts.

Cheers

Bron Suchecki said...

Blondie: "Do you see any reason why any CB gold leasing over the last couple of decades would have necessitated actual physical receipt of gold by a BB?"

Apart from industry users who do need gold loans in physical for their working inventory (a small market anyway), all other "users" of gold don't need the physical. What else can you do with it physically, where you don't actually own it and therefore don't benefit from any price appreciation. Borrow it to put on your display shelf and admire its glow?

So no I don't see any need by a BB for physical receipt from a CB. They are happy with a gold borrowing liability with a CB against a gold loan asset to a client and make a profit on the difference in lease rates.

"I wonder what percentage of allocated accounts are "filled" with this credit?"

None, I think you are confusing concepts. There is no connection between leasing and allocated. What are you saying the BB is doing?

Edwardo said...

Costata,

"My first thought on hearing this was to wonder if China might be offered some inflation protected paper for their continued support of USG borrowing."

Marvelous. Now the great, creaking, rickety, termite ridden U.S. sovereign debt "house" can be propped up for another indeterminate period of time.

enough said...

Hi Bron,

I'll tackle that one......

you ask........"What are you saying the BB is doing?"

my answer....whatever they think they can get away with :-)

e_r said...

Costata,

Since talking nonsense by our resident Euro-skeptics is an emerging theme in this thread

Corrected: Since talking nonsense by our resident Euro-skeptics is an emerging theme in *every* thread

I read a recent interview by Ray Dalio where the over-leveraging of European banks was mentioned. It is the conventional/predominant view of the European banks.

We were very close to a debt collapse in Europe, and then the European Central Bank began the LTROs [long-term refinancing operations]. The ECB said it would lend euro-zone banks as much money as they wanted at a 1% interest rate for three years. The banks then could buy government bonds with significantly higher yields, which would also produce a lot more demand for those assets and ease the pressure in countries like Spain and Italy. Essentially, the ECB and the individual banks took on a whole lot of credit exposure. The banks have something like 20 trillion euros ($25.38 trillion) worth of assets and less than one trillion euros of capital. They are very leveraged.

Also, the countries themselves have debt problems and they need to roll over existing debts and borrow more. The banks are now overleveraged and can't expand their balance sheets. And the governments don't have enough buyers of their debt. Demand has fallen not just because of bad expectations, although everybody should have bad expectations, but because the buyers themselves have less money to spend on that debt. So the ECB action created a temporary surge in buying of those bonds and it relieved the crisis for the moment, but that's still not good enough. They can keep doing that, but each central bank in each country wants to know what happens if the debtors can't pay, who is going to bear what part of the burden?


You say: What are the implications for EU commercial banks and the ECB's policy and liquidity operations. We might also consider why a banking system has been allowed to continue to be structured this way. Attracting deposits (savings in Euro) are not as important to this system.

Sorry, my banking knowledge is very weak -- so please bear with me if my questions are very naive.

I think Euro deposits are not the only collateral in this system, right? There is the safest collateral that recapitalize these banks.

Are you hinting that gold can also serve as a collateral to recapitalize the Euro banking system?

Why is the ECB not fully backstopping the banks? Partly, I can answer that it will then violate the mandate of price stability.

There is also a limit on how much they can devalue and therefore they cannot go on a monetization spree. Am I right?

Michael said...

Indenture
excellent way to frame the question for those who understand the danger of paper. As a business owner I must protect the business with adequate cash on hand. Even moving from an IRA to physical requires cash for taxes. I have found my sweet spot but it took a lot of thought. Even now I am tempted daily to go one way or the other. It is the timing problem of course but also asks the question 'what will the dollars downfall look like?"

Michael said...

Wharton SOB (school of biz) Siegel
http://www.moneynews.com/StreetTalk/Wharton-Siegel-Euro-Europe/2012/05/23/id/440104
suggests a Euro devaluation.
At first thought I'm thinking that could be helpful in the short term.
One problem for instance is that Greek worker are used to wages similar to other EZ workers. This would allow them to stay put but others in the EZ might be able to successfully argue for pay raises. Indeed as deflation is intolerably painful for all (rents stay the same but wages go down ideally) it seems that instead of allowing deflation why not just devalue the currency. Obviously there are groups that will be hurt but some (savers) are getting hurt anyway.
I am undoubtedly missing a few things here but Argentina is the only recent example I can refer to and they took it to an extreme (3:1). Whats the harm in a little deflation?

e_r said...

DP,

"half-witted, pompous sophistry, thinly disguising a basic lack of understanding or desire to be helped towards understanding"

LOL, pretty much. Ash used to post at Chris Martenson's website also and I think there was like one guy who 'got' what he wrote and he was also a Marx-geek.

Michael said...

oops
my last comment should read.
'what's the harm in a little devaluation'

Brad said...

What impact will the coming technological singularity have on the price of gold?

Wendy said...

Robert: "Yet most of us simply migrate elsewhere, perhaps posting in a different forum using a different alias"

Robert have you considered the idea that they (FO/A) might perhaps be posting using a different nic? And may have been for a long time?

FOFOA in terms of censorship, well it's your room and you, of course can do what you please, but while free speeh is still ok here, I have to chime in: my opion is that censorship beyound censoring what is considered illegal/illicit concentrates opinion of participants and leads to dogma.

Aaron said...

"Robert have you considered the idea"

Wendy!?!

Houston -- We have a problem.

Wendy said...

;)

Wendy said...

btw....Aaron is not FOA :D

nor am I :D

nor is FOAOA :D

Goodnight :)

Michael said...

Wendy
gotta disagree
when the language of the comments is at such variance to the theme of the blog then limiting the comments can be justified.
This is not a free press. It is a site devoted to a certain kind of idea...those of Another and FOA. When someone challenges those ideas fine...when they try to make the blog about their ideas I'd say that is hijacking and if it were me...I'd tell them bye, get your own blog.

M said...

@ Desparado

You said "but those behind the €-putsch were so set on their power-grab that they refused to allow even consideration of a plan for an emergency exit. Basically, they chained the slaves together in the lower deck "

Yep. Not being able to print your own currency is the ultimate in slavery. If only Greece conjure currency out of thin air, their country would prosper for generations to come. Just like such socialist utopias as Weimar Germany and Zimbabwe.

Desperado said...

@Costata: "Eurosceptic"... Why thank you for not using the "Eurowhinger" term! Perhaps with a little effort from the "Friends of the Euro" side we can have a civil discussion.

I don't think that you can lay the structure of European banks balance sheets at the door of the ECB. IMO this is a result of a long legacy of corruption, cronyism and socialism. It is a complete mess in any case, and these banks were hoping that the Euro would bring them enough growth to pull out of the mess. Fat Chance. TBTF in the EU goes back further than in the US.

@Wendy: "censorship beyound censoring what is considered illegal/illicit concentrates opinion of participants and leads to dogma"

Bravo! This was supposed to be an "open forum" and it has turned into a "Eurowhinger" lynching.

Threats of banning for "strawman arguments" and the moderator allowing one side to continue using obscenities while chastising the other accomplishes this as well.


@AD:

I really loved this one:
Will.i.am turns up to climate change debate... in a huge gas-guzzling helicopter. Amazing, and he also gets to carry the Olympic torch. This closely mirrors the farce of the Nobel Prize winners like Obama, Krugman and Gore. It is all bread and circuses.

And under which conspiracy do you think I should file this, Eurowhinger or Retarded?

"Wegelin Bank Fails to Appear for Arraignment in U.S. Court Case"

The US (Justice and IRS) is shutting down the oldest bank in Switzerland, older than the Republic itself simply for helping victims to resist extortion.

Blondie said...

Bron, when I asked: ”I wonder what percentage of allocated accounts are "filled" with this credit?“, the question was intended to be rhetorical, but I didn’t make that clear. My bad.

What I meant by it was that BBs hold CB gold liabilities, which are for them in nominal terms as good as physical gold in their vault. These (both CB gold liabilities and physical gold) are fungible gold assets from the point of view of a BB looking at their own balance sheet, are they not?

So if there was a short-term “liquidity issue” with physical gold (ie. not enough to meet current obligations such as for example unallocated accounts seeking to become allocated, allocated delivery requests etc), CB gold liabilities could technically be good enough to act as nominal deposits in allocated accounts. I know these sorts of things are probably not “supposed” to occur, but things do happen when circumstance dictates, in an attempt to mitigate or avoid problems. MF Global appear to have “confused concepts” too, and I imagine that if the wheels had not come completely off in that case then John Q. Public would never have been any the wiser.

The BBs just need their accounts to balance in nominal terms except in the case of withdrawals. Using the suddenly exceedingly popular stock/flow analogy; the aggregate nominal holdings of a bank being its stock; actual deposits and withdrawals being the flow… only the flow matters, because only the flow needs to be real: the stock operates fine as purely nominal. And that is what a CB gold liability is in the hands of a BB: a nominal source of dollar liquidity.

costata said...

e_r,

My comments about that ZH post on bank deposits wasn't designed to create a platform for me to pontificate. I think it's an interesting point of difference between the EU banks and the banks in the USA (and elsewhere) who rely on deposits.

So there are no dumb questions as far as I'm concerned. I would like to see if we can get the detail and nuance of this situation into sharper focus. With that in mind, here's what I'm thinking at the moment.

1. I think that the EU banks reliance on the wholesale market for the bulk of their funding simplifies the ECB's task. If (IF) the collateral posted by those banks is sound (at whatever discount the ECB dictates) then the ECB's support is primarily a liquidity operation.

2. I think gold will be Tier 1 capital at some point. How and where the banks obtain any additional gold they might want is an open question IMHO.

3. I also think that the ECB can top up any shortfall in EU bank deposits with newly printed Euro without risking HI.

My reasoning is that (a) there isn't as much bank credit money in those deposits as there is elsewhere and (b) there isn't a gigantic float of Euro currency and Euro-denominated debt outside their zone like there is with the US dollar.

I think replacing scads of bank credit money with base money in the US banking system risks triggering the events recently discussed by our favourite Yeti in his I vs HI post. Even though those orphan dollars aren't coming home they can compete with the USG for stuff outside the USA.

4. I intuit that you think that the ECB won't monetize on the scale some people claim and if so I agree with you. The EU banks and governments haven't up to now been given a free ride. Capital shortfalls and other solvency issues have not been foisted onto the ECB Eurosystem CBs.

Cheers

costata said...

Edwardo,

I don't think any moves on any front can forestall this transition indefinitely. If (IF) China was offered a special, secret deal on inflation protected bonds it would still become apparent over time as any discrepancy between actual USG spending and reported borrowings widened.

Having said that I'm not convinced that the players in this game have completely run out of options that can help them kick the can down the road for a while longer (say 1-3 years max IMO) but the ice is getting thinner all the time for the USG.

AdvocatusDiaboli said...

Desperado,
probably we do have much in common, on the other hand I think once in a while we do draw different conclusion. Often this leads me to think all of this has nothing to do with "conspiracies" or "evil forces" of some "elites", but rather pure ideocracy of some socialists instisting to rule people for what they consider "better humans/society" with best intentions (and some sociopath just love the feeling of power), similair to the Khmer Rouge, and in the end complete failure of any kind of rule of law. But on the other hand, no doubt, lots of people filling their pockets in the meantime.

Genau wie auch der Pabst letztes Jahr vor dem deutschen Bundestag sagte: "Nimm das Recht weg – was ist dann ein Staat noch anderes als eine große Räuberbande", erstaunlicherweise fanden die Parlamentarier das dann garnicht mehr so lustig...

Really funny was the shut down of WegelinBank, peanuts of 1.2billion.....(hey by the way, how is Corzine doing?).

About those climate change fascists (we germans are really good in this): Does any kind of CO2-tax change anything about the claimed environmental damages? No, not at all. But the key function is: It transfers money from one party to another. One of the many issues how you stabelize and improve the value of money.

Thats right: One way to improve the value of money is by stealing it from the productive party that received the money before. And I really always wonder why for many FG-advocats this appears so hard to see.
Greets, AD

costata said...

My apologies if I am failing to acknowledge someone who posted a link to this earlier.

http://www.zerohedge.com/news/guest-post-china-really-liquidating-treasuries

Interesting theory to explain why Treasury would put China on the same footing as the primary dealers by allowing China to buy direct from Treasury.

This raises a much more interesting question — now that the PBOC has effectively been upgraded to primary dealer status, would the Fed start buying treasuries directly from the PBOC in order to manage rates downward and prevent a spike in Treasury borrowing costs should China choose to quicken the pace of a future liquidation, potentially bursting the treasury bubble?

enough said...

Hi Costada,
When the press first reported this new dynamic and proclaimed it would facilitate a more streamlined treasury purchase mechanism for China, I laughed so hard. IMHO, this is to hide China's liquidation so the FED can monitize it on the quiet and nothing more. This also allows China to sell without spooking the mkt with public sales as they still have enormous positions to unwind. It definitely allows them to liquidiate more quickly and for the FED to keep those sales quiet. best E

M said...

How is the TIC data derived ? Through primary dealers ? Maybe this direct buying/selling is just a way of fudging the TIC data.

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