Friday, June 1, 2012

GLD Talk Continued


As many of you know from the comments here and on Twitter, Victor The Cleaner just completed a great new post called GLD – The Central Bank Of The Bullion Banks. The timing was pretty neat. Lance Lewis' GLD Puke Indicator delivered a buy signal on 5/22 and Victor and I have been emailing extensively ever since that day discussing my view of the GLD Pukes.


During our discussion Victor conducted an analysis of the Puke Indicator using a hypothetical trading strategy based on buying spot gold at the puke and selling once the gold in GLD is replenished and found that it optimized at a puke size of about .5% of the inventory. Using 250,000 ounces as the puke size, he found that the $PoG climbed four times as much (annualized) in only one-third of the time (between puke and replenishment) as it did during the remaining two-thirds of the time. This was a significant finding which, at the very least, showed that the Indicator really does work. Using Lance's 1% threshold the trading strategy was a little less optimal, but perhaps Lance's higher threshold is more immediately predictive of big moves like today. I don't know.

But that's some timing, huh? Vic finally got his post up late last night and then today we have a jumbo up-move of more than 4%! At the very least I think it demands a little bit of attention.

Costata really enjoyed Victor's post and he emailed me with a few comments about it. I felt that Costata had maybe missed some of what I thought was an important thrust in the post and so I tried to summarize in one short email a few of the things that Vic and I had discussed over nine days of long emails. Not everything we discussed made it into Victor's post. Victor is meticulous in his exposition while I often try to cover too much ground, requiring me to just touch on some things which, if it was Victor writing, would require a toy model, some characters with alphabetical names, and a fancy chart or three.

Anyway, Costata suggested that I should post my email and JR concurred, so here you go, with minimal polish:

Costata: "It also occurred to me just now that if this analysis is correct, it makes the possibility of a run on the unallocated accounts with the LBMA clearing members even more remote. The "large buyer" at the LBMA that VTC speculates about appears to be extremely disciplined - the BIS perhaps.

Thoughts?"


Me: No, VtC divided it into two possible theories. Large buyer who knows the bottoms in the markets is one theory, an unlikely one. The second theory he called “speculative interpretation” is the real message.

If the BBs are redeeming GLD shares to fulfill allocation demands, that implies that they do not have enough 400 oz. bars outside of GLD to fulfill those demands. And that also implies that the BBs are using GLD shares as reserves.

Obviously 400 oz. bars come and go. They come in from mines, scrap and hapless investors and they go out to allocation demands and deliveries. That’s the flow. So when we see a GLD puke, we infer they were essentially out of 400 oz. bars at the time. There is no other reason for a BB to redeem GLD shares, even if it is performing the arbitrage. GLD shares, for all practical purposes, are as good as 400 oz. bars not in GLD from the perspective of a BB. As shares, the BB reserves can even be lent at interest to those who want to short GLD. In fact, the BBs could potentially have only GLD shares as their reserves, which is why Randall Strauss called GLD a “central coat-check room” for the BBs. The pukes suggest to me this may be the case.

That flow from the mines to investors is the flow. Remember when there’s not enough supply in that flow is when the stock to flow ratio explodes toward infinity. With this view, we can infer this may be what is happening with each puke.

We can’t really look at the size of GLD and the size and frequency of the pukes and extrapolate a timeline. If you look at Lance’s chart, the size of GLD peaked in 2010. If we suddenly see a puke of, say, 10% of the GLD inventory, I’d say it’s game over starting there. The largest puke so far was about 4% over two consecutive days last August. That was about 50 tonnes when the PoG was around $1,800. That was HUGE. Almost $3B.

So when the pukes happen, that is BB heart attack time, but then the price rises and eventually (so far) the puke gets replenished. So as the price rises, the reserves are stretched and so is the inflow. As Victor said, the inflow of gold from the mines is relatively constant by weight but the outflow is normally constant in currency terms. So they raise the price until the puke is replenished and then they stop. That’s the message in the post.

How they raise it, which he didn’t go into, is a little more interesting. From that LBMA survey, we can see that the LBMA had net sales in one quarter of 7,575 tonnes of paper gold. That’s a gross increase in the amount of paper gold in existence over only three months. 100:1 actually seems conservative in this light. That’s most likely FOREX use of gold as a hedge or a currency play. But even still, the BBs have to hedge their price exposure when selling that much paper gold. Without a hedge, that would be a 7,575 tonne naked short position for the BBs.

So that net increase in paper gold is also a net inflow of cash for the BBs, cash which they use to hedge that net exposure. In fact, we can see from the LBMA survey exactly how much cash it was. It was $338B. That’s over 3 months, so it’s more like $5.4B per day inflow. That’s a small percent considering the daily turnover in paper gold used as a FOREX currency is $240B and the daily turnover of all currencies is $4T. So in a $4T/day FOREX market, that’s a $5.4B/day net flow from other currencies into gold. That was $5.4B per day in Q1 2011 that needed to be hedged by the BBs.

There’s no way they hedged all of that in the “gold” market (Comex/mining forwards/GLD). It’s simply not big enough to absorb that rate of flow without rising a lot faster than we saw it rise. So the BBs must be hedging this exposure the way they hedge net positions against other currencies in the FOREX market, simply using complex formulas and derivatives that look at correlations between different things. Correlations change slower than raw price changes which (they think) gives them time to adjust their hedges if the correlations start to exceed the model parameters.

Anyway, that is a plausible way they are hedging their exposure to the price of gold without doing so in the “gold” market per se. But they can also hedge some of that exposure in the gold market as well, by going long gold on the Comex or some other way. So if they want the price to rise in order to stretch the physical side and (hopefully) replenish the GLD puke, they would simply shift some hedges from complex derivatives into Comex.

So even though they have some control over the price of gold, they are still relying on other market players from the physical side to respond as expected. And from the view of GLD as their reserve pool, we can see that reserves are not only quite finite, but they also peaked almost two years ago.

A/FOA said the ECB/BIS strategy was to “expand and support” the dollar paper gold market so the dollar would eventually “bankrupt itself” just to keep the gold market going and stay in the game with the euro.

FOA (08/13/01; 07:24:30MT - usagold.com msg#96)

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 [the ECB/BIS is supporting and expanding paper gold as a strategy]. Inflating the gold market place with so much "paper gold" that we would eventually have to bankrupt ourselves just to keep the dollar in the war game against the Euro.

[…]

So, don't count on this destruction of our paper gold market to mark the real value and availability of physical gold; that ratio will split somewhere down the goldtrail. This action will scare most harden gold investors to death; especially the ones in leveraged gold stocks and lesser white metals!

The war between gold and the dollar has been over for a while now. The action, today, is between the dollar and the euro arena and this is what will break the price lock on gold. Leaving gold bugs with a lot of questions that ask why this: both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to! The casualty on this battlefield will be the world gold market as we know it. A market caught between how Western perception thinks gold's price should be "discovered" and at what price level trading in physical gold craters the entire paper structure. A structure of American based "paper gold".

We have been saying for some time that this will be "the" show to watch unfold; but only if your holdings allow you to stay still in your seat as it happens (smile).

They shifted their war on gold to become a war on the Euro,,,, only too late. Now, knowing that the Euro is a fact, we must have a super gold price if the dollar is to stay in the game! The question becomes one of supporting a cheap paper price for the sole function of keeping the market and all its bullion players alive. With the war on gold over, they need to turn their tanks around to face the real enemy but cannot.


So it seems that as the war switched from dollar v. gold to dollar v. euro, the euro side helped make the dollar gold market TBTF. But with a rising physical gold price/demand, the dollar paper gold market has to keep up because it’s TBTF now. Too many of those “gold” FDIC stickers out there! If those stickers fail, the dollar loses. So the “gold” market is TBTF. Remember this from FOA?

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

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

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

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

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

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


So the paper gold of the bullion banks is now TBTF. Of course that doesn’t mean it can’t fail. It either fails, or the USG hyperinflates the dollar as prices rise. They are related, and each will likely cause the other almost immediately, but either one could end up being the initial cause IMO. If price inflation forces the USG to hyperinflate then the paper gold insurance stickers will have to fail to perform. And if these price rises in the gold market fail to manage the flow (demand) of physical as they have so far, we’ll likely see a 10% or larger GLD puke at some point. That would signify more than a 120 tonne allocation demand, a system-busting size. They might think they can rocket the price at that point and get it back, but more likely we’ll see more allocation requests coincident with a falling (paper) "gold" price as the longs dump their worthless “insurance” while wishing they had the real thing.

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

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

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

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

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

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


As I have said in the past, gold is so oversubscribed through the BB's paper gold it's more of a wonder when the $PoG rises than when it falls. Perhaps now we have a plausible explanation for why and how it has been rising over a decade, and also how it will end.

Sincerely,
FOFOA

PS. I realize there's a ton of stuff I only touched on here. I hope that Victor will grace us with his presence and his meticulous Thoughts. ;)



"Effect And Cause"

I guess you have to have a problem
If you want to invent a contraption
First you cause a train wreck
Then they put me in traction
Well first came an action
And then a reaction
But you can't switch around
For your own satisfaction
Well you burnt my house down
Then got mad at my reaction

Well in every complicated situation
There's a human relation
Making sense of it all
Takes a whole lot of concentration
Well you can blame the baby
For her pregnant ma
And if there's one of these unavoidable laws

It's just that you can't just take the effect and make it the cause

[Chorus:]
Well you can't take the effect
And make it the cause
I didn't rob a bank
Because you made up the law
Blame me for robbing Peter
But don't you blame Paul
Can't take the effect
And make it the cause

I ain't the reason that you gave me
No reason to return your call
You built a house of cards
And got shocked when you saw them fall

Well I ain't saying I'm innocent
In fact the reverse
But if your heading to the grave
You don't blame the hearse
You're like a little girl yelling at her brother
Cause you lost his ball

You keep blaming me for what you did
But that ain't all
The way you clean up a wreck
Is enough to give one pause
You seem to forget just how this song started
I'm reacting to you
Because you left me broken hearted

See you just can't just take the effect and make it the cause

[Chorus]



405 comments:

1 – 200 of 405   Newer›   Newest»
victorthecleaner said...

FOFOA, thanks for advertising the article!

Here are some further details from my email exchange with FOFOA. Firstly, the puke indicator works! This fact is thanks to Lance Lewis. But then you need to understand why it works. And the conventional explanation that it is arbitrage because of a mispricing of GLD relative to spot, gives you the following conclusion:

The GLD inventory strategy works. Therefore it is apparently bullish if GLD investors sell and all other gold investors in aggregate buy. And because it is bearish if GLD investors buy, but all other gold investors sell.

Now this implies that GLD investors are dumb and all other gold investors are smart. This explanation certainly misses the point.

If not arbitrage because of a mispricing of GLD relative to spot, then what is it that drives the inventory changes? The only option left is that it is a decision of the AP. That's Randy Strauss' and FOFOAs point of view.

But then you cannot explain why the indicator works. Unless... and here is one of the emails I sent to FOFOA:

Good. I think we are converging.

So the major reason why the gold gets into GLD is because the BBs decided to put it there.

But here comes the interesting question: The GLD puke indicator works. This means that during the 2-6 weeks after a puke, the *paper* price rises. We need to explain this.

Assume a giant takes out so much physical that the BBs have to access GLD. Yesterday's 1.3% of GLD were about 15 tonnes. This is still small compared to the paper trading volume (600 tonnes per trading day). [VtC: I got this wrong. FOFOA put it straight. It is rather in excess of 2700 tonnes]

We agree that the 'gold' price is dominated by paper trading. If the hedge funds are all selling, the price will go down, even if our giant takes some physical.

So why does the paper gold price rise during the subsequent weeks?


...

victorthecleaner said...

...

My picture is this: There are some buyers of physical who effectively have limit orders quite a bit below the day-to-day fluctuations of the 'gold' price. Normally, we don't see it when they are buying. But occasionally, when the price drops enough for one of these orders to execute at a moment in which one of the BBs is short of physical, the BB takes some gold out of GLD. These are the few occasions at which we see a trace of the giant buying.

Now take a look at Lance's bright blue picture. There is a staircase under the gold price. Since the fall of 2011, the stair is at about $1550. Whenever the price drops to that level, GLD pukes (twice in Dec and yesterday). This is the level at which the giant is buying. (perhaps they are buying higher, too, but when the price drops to that level, they buy everything that's available)

But why does the price rise after that? The physical taken by the giant is small compared to the day-to-day paper trading, and it is unrelated to all the speculative activity that drives the 'gold' price. Why does the paper price rise after the puke?

Think about your 'Today's "Gold"'. The main danger to the London bullion market is a drop of the paper price to such a low level that they lose too much physical.

But now that we have stated the problem, we also know how to solve it and how to defend the London market. Someone has to monitor the flow of physical. There is some flow coming in from mining and from scrap - that's probably pretty steady in terms of weight per day. And there is the outflow from physical buying. This is probably a steady amount of dollars per day. So if they see that they are losing too much physical, they can simply raise the paper price and thereby reduce the outflow of physical.

Is this the reason why the paper price rises after a puke?

How do they raise the paper price? There is basically only one way: Someone has to go long paper gold. Who? The Fed? ESF? Other CBs? Perhaps even the European CBs?

Funny, isn't it? And tell this to GATA: The Fed is buying paper gold in order to stabilize the bullion market. Hey, I want to see the looks on their faces when they figure this out.

Do you agree that if your picture of the puke is correct, that then the indicator can work only if there is some active management of the paper price?


...

victorthecleaner said...

The next question is do we have an idea who is managing the paper price up after a 'puke'?

I initially thought it might be some CB or government activity, but then I run the same analysis with silver and SLV, and although a bit weaker, the signal is still there.

Silver is odd because it is the only other commodity besides gold that is traded like a foreign currency. So it shares all the technical issues with the gold market. But if SLV pukes are also an effective signal (albeit at points in time that differ from the GLD pukes), then we need an explanation that does not invoke CBs or governments.

So the conclusion is that it is the BBs who somehow take the price up after the puke. Does it work without CB intervention?

...

victorthecleaner said...

The next part is a bit speculative, and I have not yet had time to confirm whether it is technically correct. But here is how the idea goes.

FOFOA pressed me to take the Loco London Liquidity Survey (Alchemist no 63) seriously. If you take these numbers literally, you see that during the first quarter of 2011, the LBMA members who responded to the survey, sold about 7500 tonnes of gold more OTC than they bought. So is looks as if they did enter a huge directional bet in the gold market. Short 7500 tonnes.

Of course, nobody is so stupid as to go outright short 7500 tonnes in a decade long bull market. So how can this number even make sense?

Here is the speculation: They do hedge this exposure. But they do this not in the OTC market for gold. Other options are, for example, they go long the COMEX, etc, i.e. gold investments outside the foreign exchange market.

Then you think about this, and, yes, they can hedge some exposure in the non-OTC paper gold markets, but 7500 tonnes still looks unrealistic (COMEX open interest is only about 1200 tonnes - and there are plenty of others there, too). So how the hell do they hedge it?

The only answer I can think of is that they hedge it by going long correlated (but not identical) assets. What's correlated with paper gold? Silver, copper, euros, crude oil, interest rates, yield curve spreads, whatever.

So now you have the mechanism for influencing the gold price. If you want to drive the price up, you just shift your hedge from correlated (but not identical) to actual gold investments.

Again, at this stage this is all speculation, and it needs independent confirmation that we are getting the liquidity survey right. In case this is correct, you can start thinking about how it will all blow up one day.

Victor

Herb said...

Is it possible that there is immense naked short interest in GLD?

victorthecleaner said...

Herb,

by 'naked short' you mean that they trade the intention to borrow shares rather than actually obtaining the shares?

I don't think this is the point. You can take the gold out of GLD only once your transaction has settled, i.e. by naked shorting (even if this was widespread), the buyer of the naked shorted shares cannot get his hands on the gold simply because his trade has not yet cleared.

Each share of GLD is owned by exactly one person. If you 'lend' your shares, what you rather do is enter a repurchase agreement. During the time for which your shares are on loan, you do not have title to them, but you only have a promise from your counterparty to deliver some (other) GLD shares at some point in the future. So as long as your shares are on loan, you cannot get the gold. Only the owner of the shares can.

Victor
PS: In case you are asking this because you have read Ted Butler, better forget everything you read. He got it all wrong and even worse, after people explained it to him, keeps repeating this stuff.

Motley Fool said...

VtC

If that loco survey is correct then the daily paper gold turnover actually has a lower bound of 5400 tonnes; at an average value of $1386 per ounce this quarter, in itself a curious number.

The average trade size is about 28,000 ounces. About a tenth of your chosen trigger for your strategy.

With about 385k trades executed this quarter, the amount in pukes given up is a insignificant percentage.

@VtC and FOFOA

Thanks for these interesting Thoughts.

TF

Motley Fool said...

Sorry, I notice now it's 1st quarter 2011. That number makes more sense now.

victorthecleaner said...

Another remark on GOFO. You probably remember all the hiccups and hedge fund blow-ups during 1997-2001 reported during the original gold trail discussion. Each time, you can see GOFO spike towards negative territory (negative GOFO = backwardation in the OTC forward market indicates that someone desperately wants to borrow gold and is willing to pay a premium for this).

After 2002, there have been *no* significant GOFO events anymore. Not even November 2008 was as dramatic as the common disasters during 1997-2001.

(One thing, I think, that we know, is that the average numbers as reported on the LBMA website may be somewhat fudged - take a look at the 22,23 August 2011 example in my article)

But even with the few screenshots of the Reuters quotes that people kept, GOFO is rather tame these days. This may be because there is such a readily available reserve inside GLD. If you can easily and privately access GLD, why would you bid for a gold swap and let everyone with a Reuters data feed know that you are short of physical gold. The answer is you don't. You just take it out of GLD. What impresses me most is that they have always managed to replenish it - well, almost.

Finally, August 2011 might have been some sort of a panic. Perhaps some of the regularly buying giants were close to losing their temper. Hence the huge pukes. This may give you an idea of a threshold at which people become nervous.

Victor

Dr. Peter T said...

Isn't having one's eyes opened ever wider one of the most rewarding experiences! Thanks, as ever, to FO/FO/A, and VtC.

costata said...

VtC,

You wrote:
The only answer I can think of is that they hedge it by going long correlated (but not identical) assets. What's correlated with paper gold? Silver, copper, euros, crude oil, interest rates, yield curve spreads, whatever.

This notion of using correlated "stuff" makes sense to me. If they are using a large number of markets to create some kind of synthetic hedge for their exposure then it would be almost impossible to track.

With the possible exception of the FOREX market no other market is big enough to allow to put on trades and still cover their tracks given the size of the paper gold positions they apparently need to cover. Even the oil market with T/O in the $200 billion plus range per day isn't big enough. Perhaps there is some constraint (parameter?), such as the oil:gold ratio, that needs to be taken into account in setting up their hedges.

So I'm wondering if there is any single market that has to be a component of these correlated "trades" for some reason. One in which the activities of the BBs covering their gold exposures would produce an echo of the kind of activity the "puke" and its aftermath produces in the "gold" market.

FWIW here's a link to an article (with more of an OPEC perspective on oil) discussing one of the periods (Q1&Q2/2011) you and FOFOA looked at.

http://www.arabianoilandgas.com/article-8888-in-depth-opec-monthly-oil-market-report-analysis/1/

I note this article discusses several commodity and non-commodity markets as being potentially influential on the price of oil. Re-reading this old article with your observation about correlation in mind this passage leapt out at me (my emphasis):

Instead, “the magnitude of the correction (May 5th, 2011) appears in large part to have been exacerbated by algorithmic traders unwinding positions," Credit Suisse analysts are quoted in Reuters as saying. Black boxes are responsible for half of all oil trades.

If they are melding together trades across a number of markets it would have to be driven by "black boxes". No ordinary human could process the data especially if it requires split second timing.

If these synthetic hedges are machine driven there should be discernible patterns that might be identifiable by taking your theory as correct and looking for confirmation in other markets. FWIW I would be looking at the oil market as the starting point and then currencies with correlations in the commodity markets.

Anyway, some more grist for the mill if nothing else.

Cheers

costata said...

Some TA comparing gold in USD, AUS and Swiss Francs.

http://www.avidchartist.com/2012/06/golds-bull-market-looks-to-be-resuming.html

somanyroadsinvesting said...

Interesting analysis. Thank you.

Victor said:

But now that we have stated the problem, we also know how to solve it and how to defend the London market. Someone has to monitor the flow of physical. There is some flow coming in from mining and from scrap - that's probably pretty steady in terms of weight per day. And there is the outflow from physical buying. This is probably a steady amount of dollars per day. So if they see that they are losing too much physical, they can simply raise the paper price and thereby reduce the outflow of physical.

This seems to get kinda close grand conspiracy theory doesnt it? Who is someone? Do you think then gold ever moves in relation to real economic data and news? Gold fell hard in the 2008 crisis because we were heading into a deflationary crisis, it rebounded like everything else after the massive QE's and stimulus packages. Do you think this played a role?

At the end of the day this seems to imply there is currently such oversized demand for physical gold that any economic slowdown, Indian demand, chinese demand etc has little impact. I dont know how one could prove that, also it does not seem very common sensical to me.

Edwardo said...

Thanks Victor, FOFOA and Costata for sharing.

So, the reserves of GLD peaked two years ago, and FOFOA conjectures that a large puke of 10% or more will amount to "game over".

It seems axiomatic, at least to me, that what we don't know far exceeds what we do. For example, and pardon the conspiratorial tone, but is it possible that there have been attempts to remove 10% or more of GLD's inventory that have been rebuffed via "negotiation." With that idea in mind I find it interesting that the two big pukes that occurred in August of 2011 happened near a major high (both temporally and in price) that nine months on remains unchallenged.

That action sits in stark contrast to the pukes that occurred at the major lows in 2008.

Edwardo said...

http://finance.yahoo.com/photos/dollar-bills-serve-as-artist-s-canvas-slideshow/dollar-art-photo-1338581158.html

Hmm.

Gary said...
This comment has been removed by the author.
JR said...

Right Gary,

and this:

The US side need it as without it the run on the bullion banks, and physical generally, gest ever worse, and would eventually lead to bust, or to the US having to supply its own gold to bail out the banks?

is so because SoV is the name of the game. The dollar died in the second oil crisis (see for example Ari via Flow Addendum) and the gold hedge market grew up to support the it and allow for the "Credibility Inflation" of the $IMFS (that's the dollar international monetary and financial system). That SoV support the paper gold market now provides to the $IMFS is essential - its TBTF as FOFOA described above:

A/FOA said the ECB/BIS strategy was to “expand and support” the dollar paper gold market so the dollar would eventually “bankrupt itself” just to keep the gold market going and stay in the game with the euro.

[...]

So it seems that as the war switched from dollar v. gold to dollar v. euro, the euro side helped make the dollar gold market TBTF. But with a rising physical gold price/demand, the dollar paper gold market has to keep up because it’s TBTF now. Too many of those “gold” FDIC stickers out there! If those stickers fail, the dollar loses. So the “gold” market is TBTF. Remember this from FOA?

[...]

So the paper gold of the bullion banks is now TBTF. Of course that doesn’t mean it can’t fail. It either fails, or the USG hyperinflates the dollar as prices rise. They are related, and each will likely cause the other almost immediately, but either one could end up being the initial cause IMO. If price inflation forces the USG to hyperinflate then the paper gold insurance stickers will have to fail to perform. And if these price rises in the gold market fail to manage the flow (demand) of physical as they have so far, we’ll likely see a 10% or larger GLD puke at some point. That would signify more than a 120 tonne allocation demand, a system-busting size. They might think they can rocket the price at that point and get it back, but more likely we’ll see more allocation requests coincident with a falling (paper) "gold" price as the longs dump their worthless “insurance” while wishing they had the real thing.

JR said...

FOA (08/13/01; 07:24:30MT - usagold.com msg#96)

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 [the ECB/BIS is supporting and expanding paper gold as a strategy]. Inflating the gold market place with so much "paper gold" that we would eventually have to bankrupt ourselves just to keep the dollar in the war game against the Euro.

[…]

So, don't count on this destruction of our paper gold market to mark the real value and availability of physical gold; that ratio will split somewhere down the goldtrail. This action will scare most harden gold investors to death; especially the ones in leveraged gold stocks and lesser white metals!

The war between gold and the dollar has been over for a while now. The action, today, is between the dollar and the euro arena and this is what will break the price lock on gold. Leaving gold bugs with a lot of questions that ask why this: both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to! The casualty on this battlefield will be the world gold market as we know it. A market caught between how Western perception thinks gold's price should be "discovered" and at what price level trading in physical gold craters the entire paper structure. A structure of American based "paper gold".

We have been saying for some time that this will be "the" show to watch unfold; but only if your holdings allow you to stay still in your seat as it happens (smile).

They shifted their war on gold to become a war on the Euro,,,, only too late. Now, knowing that the Euro is a fact, we must have a super gold price if the dollar is to stay in the game! The question becomes one of supporting a cheap paper price for the sole function of keeping the market and all its bullion players alive. With the war on gold over, they need to turn their tanks around to face the real enemy but cannot.

JR said...

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

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

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

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

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

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

JR said...

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

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

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

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

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

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

Gary said...
This comment has been removed by the author.
costata said...

FOFOA, VtC, Edwardo,

Edwardo's musing above about GLD reminded me of a report by Gene Arensberg from July 1st, 2011 that might add some more useful data to Victor's analysis. Regardless here's the link and an extract:

http://www.gotgoldreport.com/2011/07/stunning-plunge-in-comex-commercial-gold-net-short-futures.html

Commitments of traders data (COT) released today at 15:30 New York time by the Commodity Futures Trading Commission (CFTC) revealed a stunning plunge in the number of net short bets traders classed by the CFTC as “commercial” held as of the end of trading on Tuesday, June 28.

As gold fell $44.97 or 2.9% Tuesday to Tuesday from the highest ever gold price on a COT reporting Tuesday of $1,545.98 to $1,501.01, the veteran hedgers and short sellers covered or offset a whopping 42,492 contracts or 16.9% of the large commercial net short position (LCNS) – from 251,247 to 208,755 contracts net short.

Gold down 2.9% - commercials get the heck out of nearly 17% of their short exposure - a very hot pace of short reduction.


(Me: For other readers, bear in mind Tom Szabo's pointed reminders that it is the Comex shorts who can, at their discretion, force delivery on the longs - not the other way around. This does not preclude the possibility of longs wanting delivery and shorts wanting to deliver of course. Nor does it shed any light on whether any of this was due to related party transactions. Comex warehouse movements for this period might tell that story or they might not.)

That is the largest nominal one-week reduction in commercial net short positioning in New York gold futures since August 12, 2008, during the depths of the Great 2008 Panic. With gold then off a huge $60.50 or 6.9% in a single reporting week to $813.85, the commercial traders then reduced their net short bets by 43,104 contracts or 21.7%. (See the graph above for that period.)

The relative commercial net short positioning (the commercial net short position as a percentage of the total open interest or the LCNS:TO) dropped by a very large 6.7 percentage points from 48.8% to 42.1%. That is the largest one-week drop in the LCNS:TO since August 21, 2007, with gold then trading at $657.78 and staging for a major bull move higher that wouldn’t peak until the following April above $1,000 for the first time ever.

costata said...

VtC et al,

Here's another report from Arensberg March 17, 2011 about some curious trading on Comex during the 3 months from December 2010 to March 2011:

Consider that as recently as December 7, 2010 (3 months ago) the Other Reportable traders reported a net long gold position of 52,994 contracts. Now, seemingly suddenly, they have all but exited the net long side of gold futures entirely. The OR traders reported holding 56,057 contracts long and 53,737 contracts short this week, for a net long position of just 2,320 contracts.

That is a reduction in their net long positioning of 50,674 contracts or a stunning 96% in three months. Meanwhile gold barely moved on a net basis ($1,401.79 to $1,428.61).


http://www.gotgoldreport.com/2011/03/gold-gold-report-excerpt-gold-cot-bargain-hunt-underway-.html

Around that time Kyle Bass was securing gold tonnage for Texas U and news about the IMF sales program was (if memory serves me) still being dribbled out to the market. So lots of noise to confuse and distract.

Flore said...

Soros raised his GLD position last quarter

Texan said...

Costata, I just want to correct you on one extremely important point.

It is not called "Texas U", it is called "The University of Texas". :)

In all seriousness, it was the university system - UTIMCO - which purchased first unallocated and later actual physical bullion on which they took delivery if I am not mistaken. I also recently saw where Texas Teachers Retirement invested in gold, not sure of actual method. Texas Teachers is huge - probably second only to CALPERS in California.

Sarah said...

Here is a 30 minutes interview/sharing of viewpoints between James Turk (claims he's in the hyperinflation camp) and Robert Prechter (deflation camp) you all might enjoy - link:

http://www.goldmoney.com/bob-prechter-on-goldmoney?gmrefcode=elliottwave

milamber said...

Actually  Costata down here all true Texans refer to it as t.u. (jk Texan) :)

But to the statements, TRS owns goldish paper investments internally managed with help from GS & GBI. They account for less than 1% of AUM. 

http://www.trs.state.tx.us/about/news_releases/trs_gold_fund.pdf

The UT Endowment fund (where Kyle Bass is a trustee) bought & took delivery of $1 billion in bullion back in 2010. 

http://mobile.bloomberg.com/news/2012-02-02/kyle-bass-urges-texas-endowment-fund-to-hold-gold-hedge-as-assets-shrink.html

Milamber

costata said...

Hi Texan,

Long time no see. I stand corrected.

milamber,

Thanks for fleshing out that story. The demon is in the detail.

Cheers

FOFOA said...

Hello Edwardo,

"is it possible that there have been attempts to remove 10% or more of GLD's inventory that have been rebuffed via "negotiation."

I doubt it. You have to give physical to everyone who demands it to keep the game going. That's the key to the whole game!! If it’s just one individual demanding 20 tonnes you can quell that threat with a Puke or a CB loan. I suppose it's possible to somehow talk someone out of their demand, but that would be a dangerous game to play. What you are powerless against is a run, a dramatic shift in physical demand. You can raise the price to stretch the flow, but you can't raise it too far too fast without actually causing that shift you most want to avoid. Remember this from ANOTHER?

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."

On the other hand, you don't want it to fall too far too fast either because, apparently, there are some Giants out there who want the physical but who also know it is not in their best interest to run up the price. Like Victor said, "There are some buyers of physical who effectively have limit orders quite a bit below the day-to-day fluctuations of the 'gold' price." Another told us about something similar in the 90s:

"Well a funny thing happened right after the Gulf war ended. What looked like big money before turned out to be little money as some HK people, I'll call them "Big Trader" for short, moved in and started buying all the notes and physical the market offered. The rub was that they only bought low, and lower and cheaper. They never ran the price and they never ran out of money. Seeing this, some people ( middle east ) started to exchange their existing paper gold for the real stuff. From that time, early 1997 LBMA was running full speed just to stay in one spot! In other words paper volume had to increase to the physical volume on a worldwide scale, and that was going to be one hell of a jump. It could not be hidden from the news any longer.

This was not far from the time that "Big Trader" said that "if gold drops below $370 the world would see trading volume like never before seen". The rest is history. Now the CBs will have to sell 1/3 to 1/2 of their gold just to cover whats out there. To use the Queens English "it ain't gona happen dude"!"


I'm not saying that all Giants are CBs. They aren't. But some CBs do play with the BBs. I have a reader who is a FOREX trader and she sends me gold-related info that comes across her screen from time to time. On 5/23, the day after the Puke she sent me this which I shared with Victor:

"Hey FOFOA,

I hear on the wire today that there is at least one Asian Central Bank with bids in the interbank market for spot gold at $1525"


These emails she sends me are very infrequent. To give you an idea of the frequency, the last time she sent me any item of interest that came across her FOREX "wire" was October. Anyway, I was about to share with Victor a couple of her emails in which she explained this info she gets. But since it is relevant to the discussion at hand, I decided to share them with everyone. I hope she doesn't mind! ;)

9/14/11
Hi FOFOA,

I realise I didn't bother to tell you much about myself, but I am a currency trader and that is how I came across your blog.

Sometimes info comes across my desk to do with Central Banks hitting bids or offers in various forex pairs, like "word is, Singapore Sovereign Fund on the bid EURUSD below 1.365", or whatever. Today, for the first time in ages and ages (maybe since the $1000 mark) I got a wire about gold:


Cont…

FOFOA said...

2/2

"Interbank reports China bid spot XAU $1815 into NY close, further bid interest expected from same $1725-$1750."

Sometimes the wire will mention the size of bids or offers but not in this case. I'm not sure if info like this interests you, but let me know if it does and I will pass it on as it comes to light.

9/26/11
Hi FOFOA,

The interbank is what we refer to as the aggregate price posted by a bunch of banks, same way the spot forex market works. There is no single exchange and no single posted price, rather a bunch of bank run ECNs which aggregate against each other to provide a "best bid/offer". The best/well known examples are EBS, Currenex and Reuters D3

http://en.wikipedia.org/wiki/Electronic_Broking_Services
http://en.wikipedia.org/wiki/Reuters_3000_Xtra

Usually, on big market days and even most days, at the end of the day (NY close) traders with access go back over the nights action and try to match executed volume against order flow which they executed for clients or saw their buddies on another desk executing for clients, to help get a grasp on who was doing what in the previous days action. Sometimes traders will put stop or limit orders into the market directly, so you can see volume waiting before it's executed.

So as Tokyo opens you will often see wires like "Confirmed 3 yards executed USDJPY during London afternoon fix at 85.5" or as London opens "Sovereign buy stops located just above 1.5 EURUSD, small size, bigger at 1.5525" or similar (I just pulled those ones out of my arse for example purposes). A yard is 1 billion.

It isn't often you see such wires about interbank gold transactions.

As mentioned, before $1815 the last time I saw such a line (admittedly they might have occurred and I missed them) was in 2009 around the $1000 spot gold price.

So to clarify what I meant specifically:

On the interbank gold market last night, which is the gold equivalent of spot forex, there was very little volume. Certainly not enough volume to attribute to a large player. Large players may have been positioning themselves in gold through other markets, but not on the interbank market. As rumors about $1650 bids from a cachet of Asian Central Banks had been floating around ever since the original $1815 China bid was spotted, after the NY close traders looked very hard at the overnight interbank flows for signs of order execution by these same parties and came up with nothing. $1815 was a real bid (although who knows how long it was held for), but no bids materialised under $1750 from sovereigns, certainly not below $1650, in the interbank market.

I also noticed today there is a note from Goldman Sachs floating around the net about the recent price action in gold, and I will quote the appropriate section below:

"What we are seeing in the market place is high volume turnover on the exchange but extremely low liquidity and huge activity on the screens rather than in the OTC discretionary space where most of our counterparties have had very little risk in gold for several weeks. Interbank flows are almost extinct."


Sincerely,
FOFOA

Texan said...

An Aggie reading FOFOA is incredible enough......but an Aggie talking smack about UT in FOFOA comments!!?

That aggression will not stand, man! :)

Edwardo said...

Thanks FOFOA,

What I meant by my comment, specifically my use of the word "negotiation", was an offer by the fund to pay a substantial cash premium to entice a prospective redeemer of shares to back off. I imagine you gleaned that, but, in any case, I appreciate your taking the time to explain to me why what I have in mind isn't likely.

costata said...

From Doug Noland's PrudentBear newsletter:

One-month Treasury bill rates ended the week at 3 bps and three-month bills closed at 7 bps. Two-year government yields were down 4 bps to 0.25%. Five-year T-note yields ended the week 14 bps lower to 0.62%.

Ten-year yields sank 29 bps to a record low 1.45%. Long bond yields fell 32 bps to a record low 2.52%. Benchmark Fannie MBS yields fell 20 bps to 2.52%.


http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10672

Makes the gold "bubble" look rather tame doesn't it?

Aaron said...

Hi Sarah-

I took a listen to the Turk/Precheter interview you linked to. Prechter is definitely yet another misguided deflationist.

Prechter: "Well, yeah when I wrote conquer the crash I said ultimately the central banks would have to give up because they're working in a credit system. If they were just dictators with the printing press and they could turn the crank and all we had was currency out there that'd be different."

He's almost there.

But here's the most interesting part of the interview to me. Turk mentions Argentina was a deposit currency hyperinflation and honestly I don't understand how that's possible. When prices start to skyrocket at a few thousand percent -- if you are a private bank and can't print your own currency -- there is no way you can offer interest rates (enough to offset losses in purchasing power) to convince people to save their cash in a bank.

Turk says:

"Hyperinflation manifests itself in two different ways -- they either print paper currency (Me: correct) or they create more zeros in the checking accounts (Me: ??? -- sure maybe in the initial stages of governments outbidding competition via credit before the onset of massive currency printing, but this is a temporary stage prior to the real printing). When you look at Weimar Germany and Zimbabwe they had a paper currency hyperinflation and the reason why they had those is very few people had bank accounts. The banking account the banking system was not very sophisticated. And government employees at the end of the month got paid in paper bank notes in a little pay packet. So when governments in those countries started spending money and borrowing – borrowing more than the market was willing to lend or could lend the government either had to stop spending or turn to the central bank to give it the currency that it wanted to spend. And both the Reich's Bank and the Zimbabwe Central Bank started the printing presses and created all kinds of bank notes and had a tremendous hyperinflation.”

“But if you look at Argentina, back in 1991, it also had hyperinflation but they weren't moving bushel baskets of currency around because Argentina had a very sophisticated banking system. Most people had bank accounts and people were paid or most commerce was conducted – it was conducted by moving [money?] around within the banking system so when the Argentine government was spending too much money and borrowing it turned to the Central Bank and asked the Central Bank to create currency but they created deposit currency not cash currency -- so you had a deposit currency hyperinflation in Argentina. So given the similarity of the US sophisticated banking system with that of Argentina, I think we're going for -- towards a deposit currency hyperinflation."

What is he talking about? Deposit currency hyperinflation? I don't get it. He must be talking about the prep stage prior to the real printing.

Michael H said...

Regarding 'synthetic hedges':

If the hypothesis that the BBs effect a gold price rise by replacing synthetic 'gold price correlated' hedges by actual paper gold, wouldn't this action cause losses for the BBs?

Example: BB has XXX short exposure to gold price so as part of the hedge they buy XX long oil price exposure. They need the gold price to rise so they sell X oil price and buy X gold price.

By selling X oil price, do they begin to break the correlation between the remaining XX in oil hedges and the gold price?

I.e. by unwinding part of their hedges are they eating losses on the remainder of their hedge.

costata said...

All,

My nomination for the self-serving, duplicitous crap award (SDCA) for 2012 is below. This snippet is also from Doug Noland's bulletin (cue violins):

June 1 – Bloomberg (Emma Ross-Thomas): “Spanish Economy Minister Luis de Guindos said the euro’s future will be played out in the coming weeks in Italy and Spain, as data showed record levels of capital leaving his country. ‘I don’t know if we’re on the edge of the precipice, but we’re in a very, very, very difficult situation,’ he told a conference…

Spain and Italy are where the ‘battle for the euro’ is being fought, he said. The International Monetary Fund denied that it was preparing financial aid for Spain…”


I note with interest that there were very few comments about that comment I posted on the last thread providing links to a post by Michael Pettis and an article discussing Spain's current account. I cited it as an object lesson in the flawed arguments about the impending demise of the Euro advanced by the good Professor and others.

Acording to that article on Spain, because of the outstanding performance of their export sector, Spain's current account is so close to being in balance the exact number (+/-) amounts to statistical noise. Consequently Spain has no need (in net terms) to import capital. So why then is there so much talk about "Spain's deficit"?

If the figures in that article are correct it's the Spanish government that has the deficit, a budget deficit, not Spain the economy/country. Hence my award nomination above for Spanish Economy Minister Luis de Guindos. Their 8.9 per cent (or thereabouts) projected deficit for this budget cycle is all down to government. If they achieved a primary budget balance (net of interest) then they could negotiate a restructure of their debt from a position of strength.

If they can achieve a primary budget balance including payment of interest sustainably* on their sovereign debt then their crisis is over. Finito! (*The word 'sustainably' doesn't permit BS about their contingent liabilities BTW. I'm talking all cards on the table face up.)

Instead the Spanish government appears to be taking the "soft" option in politician-think. Either continue to borrow outside the country or crowd out the private sector in the local debt market and tax the private sector into the ground wherever possible to get their desired revenue numbers.

Michael Pettis of course has a better idea much favoured by left-leaning economists. Devalue the currency and socialize the costs by ripping off savers, those on fixed income and reducing the standard of living of the middle class whether they were prudent in their financial affairs or not.

I'm with Jesus on this issue (that's Jesus Huerta de Soto BTW) - "handcuff" the politicians. Instead of the routine 20 per cent devaluations of the peso of days gone by make sure currency devaluation is not an option and force these governments and politicians to balance their budgets.

It's doubly nauseating that Luis de Guindos sidles up to Italy in that snippet. The Italian government apparently already has a primary budget balance and can negotiate with its creditors from a position of strength if it ever needs to restructure its debt. And, No, I'm not suggesting it will need to.

Aaron said...

that should read...

"if you are a private bank and can't print your nations' currency, there is no way you can offer high enough interest rates to convince people to save their cash in a bank.

FOFOA said...

Hello Michael H,

Earlier Gary asked about the "needing/wanting issue". It's the dollar/BB side that needs the $PoG (paper gold) to rise so as to manage the flow of physical. Short exposure is a slam dunk to the BBs. They don't fear it one bit. As I said, it's more of a wonder (i.e. mystery) when the $PoG rises than when it falls, which is why it doesn't make sense to think that anyone is intentionally suppressing the $PoG. Here's some FOA from "A Clear Path" (3/2/00):

"From a Euroland viewpoint, the dollar no longer needed to be supported by a low gold price. With the Euro in place and holding a large portion of the world's new, non-currency "reserve asset" for support, they no longer had a reason to buy at $280 or sell at $480. Indeed, they told the world they were backing out of the paper gold game with the Washington Agreement."

So you're a BB, Michael, and you no longer have official support for a low (managed) price for physical to keep it in line with the price of your paper product, the $PoG. The other way to look at this is as if you are a bank who has just lost its CB backer, its lender of last resort. A bank with a lender of last resort doesn't need to manage the flow of reserves itself as its CB just steps in and floods the market with reserves when needed. Here's a bit from my post The View: A Classic Bank Run to set up this analogy:

"A bank can be "populated" with unallocated gold accounts in two primary ways. It can either be done as a physical deposit by a silly person or by another corporate entity, or else it can occur completely in the non-physical realm as a cashflow event whereby a customer with a surplus account of forex calls up and requests to exchange some or all of it for gold units, whereupon the bank acts as a broker/dealer to cover the deal – occurring and residing on the books as an accounting event among counterparties rather than as any sort of physical purchase. No bread, no breadcrumbs, only a paper trail and metal of the mind. This is how the LBMA can report its mere subset of clearing volumes averaging in the neighborhood of 18 million ounces PER DAY. Just a whole lot of "unallocated gold" digital activity as an ongoing counterparty-squaring exercise.

It is here that I offer the eurodollar market as a very good parallel to the bullion sector of banking. While not a perfect parallel (for all the most obvious reasons) it provides a remarkably good bridge to help anyone who has a good footing on modern commercial banking to successfully cross over to that seemingly unfamiliar territory of "bullion banking". In fact, they need do little more to successfully cross over than to simply think of bullion banking ops as though they were eurodollar banking ops – the difference being that whereas eurodollar banking makes extra-sovereign use of the U.S. dollar as its accounting basis in international banking activities (thus outflanking New York's purview and restrictions), bullion banking engages in similar "extra-sovereign" use of gold ounces within its operational/accounting basis (thus outflanking and overrunning Mother Earth's domain and tangible restrictions)."


Cont…

FOFOA said...

2/2

There's really no risk of paper gold rocketing to the moon. Unlike the real thing, paper gold can be quantitatively eased (expanded in volume) to meet demand, kind of like the dollar. The risk is an uncontrollable shift in demand from your paper to your reserves. To manage that risk, you must manage the flow of reserves.

You're a bank, so you never have any exchange rate or price exposure. You hired some Harvard PhD geeks to take care of that. You might have "short exposure" according to those annoying little gold bugs (why can't someone come up with an effective gold bug lamp?), but you're a bank, a master of the known and unknown universe, so you know better. Whatever your momentary exposure may be in that minute after one of your minions hangs up with a client, your black box takes care of it.

Most of your job is just "netting out" everyone else's transactions and then counting (and subsequently rolling around in) all the transaction fees. And your nifty black box nets these things out six ways to Sunday. If someone buys a dollar from you exposing you as short one dollar, that can be netted out against someone else selling you a dollar… or an almost infinite amount of other ways! A small part of your job is managing your net-exposure at the end of the day, and the even smaller, most annoying part is managing the flow of those stupid shiny rocks the dirty miners and blue-collar workers at the refinery ship to your vault.

Any net short exposure your black box spits out means you have net cash of one kind or another with which you can quickly eliminate that exposure by picking from the menu of choices your box spits out at the same time. If there's a net inflow of $5.4B with short gold exposure as there was in Q1 2011 according to the LBMA survey, there's no need to unwind anything that you already own. You just pick where you want to channel that inflow of cash. Some to the "gold" market (to manage the flow of physical) and the rest into whatever your black box says has a strong correlation.

If there's a net outflow of cash (or other stuff) leaving you with a net long exposure to shiny rocks, you could either short the "gold" market or simply unwind some other correlated long hedges. But if you want your precious $PoG to rise for those ever-annoying "reserve management" reasons, you obviously won't choose to short the "gold" market! You will instead be unwinding your other long hedges. And if you really want to give the "gold" market a boost (because of a Puke), why not unwind more than you need and pour that extra cash into COMEX?

You've just unwound your leveraged long in that other item which will now be temporarily less-correlated with gold because of your *UPWARD* manipulation of the (quote-unquote) "gold" price. And the best part is that since you are a master of the universe and you knew that gold would unexpectedly bounce up $70 (give or take) on Friday, you were able to let your black box know about it and he/she/it made the appropriate adjustments. All in a day's/week's work, and now back to rolling around in those fees.

Sincerely,
FOFOA

PS. Your Harvard PhD geeks never heard of Another, FOA or Freegold at Harvard, so that particular phat tail never made it into your unfortunate algorithm.

Pain d'Or said...

FOFOA

"I hear on the wire today that there is at least one Asian Central Bank with bids in the interbank market for spot gold at $1525"

Another confirmation on the Trail !
Thanks for sharing.

Definitely worth a klick on the donation button ;-)

Texan said...

Costata, Spain's government spending is 40%+ of GDP. Of that, they are running a 10% deficit. So 25% of their spending is deficit. Think about that.

Then they need at least another 5% of GDP immediately for bank recaps (that number will grow).

Now I suppose they could in theory balance the budget immediately (or with some credible schedule). But the reality is that the day "they" implemented a 5-10-15% cut in spending, "they" would have millions of marchers in the streets. And "they" would be voted out. If Greece is showing everyone anything, it is that "austerity" is suicide for the ruling party.

In a sense, the move in bank deposits that is occurring (10% of GDP in one month?), along with near 7% bond yields, is the "vote" before the real thing.

This is the issue in numerous EZ countries - they over borrowed, and structurally their economy requires deficit borrowing, and they can't adjust their economy without an internal devaluation. Now in China - this is possible. But China is not a democracy. So politically, we are now at the spot where "the people" want the euro, but don't want to accept austerity in order to pay their debts.

I don't think it is too much to be skeptical of the overall prognosis of the EZ given the inability of most democracies to willingly "accept sacrifice".

Gary said...
This comment has been removed by the author.
tintin said...

Fofoa said,
"...Interbank flows are almost extinct."

Lots of trading, lots of Comex open positions, but no physical flow in size?

is this not an indication of stock/flow exploding?

Texan said...

Gary, right. Only now the "savers" are taking their savings and leaving the peripherals, so to speak. Emigrating. So they wont be voting with quite as much passion. And they were always a tiny minority anyway.

FOFOA was recently writing about how the USG would never "crash it's lifestyle", even in the face of currency collapse.

And here we are discussing how the peripherals should be forced (by whom?) to crash their lifestyle. And that they will in fact choose to crash their lifestyle, whereas the US for some reason will not. Maybe because the choice is clearer, I don't know - but it does seem a tad inconsistent.

As for a couple of countries leaving the euro, from all I've read, it's a very big deal.

costata said...

Hi Texan,

I hear you but if it is true that Spain's current account is in balance then the imbalances you are pointing out are internalized now. Don't assume therefore that a reduction in the government sector expenditure automatically guarrantees a contraction in the domestic economy.

The private sector appears to have exhibited the capacity to expand it's output (in the export sector at least). Done wisely (and no I'm not holding my breath) -1 public sector could equal +1 private sector.

Note also that sales of existing dwellings are generally (always?) not counted as part of GDP. There are no GDP implications for biting the bullet and forcing a clear out of the deadwood in the Spanish RE market. Look at those capital flight and mattress money figures you yourself quote. There is wealth in Spain - the government should give it reasons to stay and get to work not chase it out.

I think the game is still the same. Vested interests are trying to foist losses onto the general public and the politicians are up to their armpits in this skullduggery. If memory serves me Bankia, for example, sold Euro 22 billion of bonds to retail deposit account holders in the recent past.

If that money had gone into RE at a land value of zero with the improvements (buildings etc) selling for 80 per cent of replacement cost how would those investors be travelling in 5-10 years time? And don't underestimate the multiplier effect of repairs, maintenance and renovation. It's greater than new construction in many instances despite what property developers and new home builders claim.

Governments hate these kinds of grass roots solutions because it often involves cash which they cannot track and tax but it is an ideal way of boosting a local economy. Money centre banks hate these kind of solutions too. Money stays (and circulates) in the local community rather than being absorbed into the centre and recycled back out to the regions via credit cards and other forms of expensive credit.

Same deal with government. They would rather drain a local economy, consolidate the revenue in the central government coffers and then (after a hefty skim for the bureaucracy) grandstand when they do the handouts in the form of welfare payments. Efficiency be damned.

And lastly I'm not blind to the potential response from the hoi polloi. They may well cheer the guys who are screwing them while they string up aspiring leaders who are trying to do right by them. But I don't see that as a reason to go along with the popular delusions.

Gary said...
This comment has been removed by the author.
Jeff said...

Nice to see you in the comments again, FOFOA.

Victor said: But even with the few screenshots of the Reuters quotes that people kept, GOFO is rather tame these days. This may be because there is such a readily available reserve inside GLD.

Maybe, maybe not.

FOFOA: Clearly, someone at Goldman Sachs was studying the gold basis, the related lease rates and the relationship of these metrics to the dwindling COMEX inventories in late 2008/early 2009. And, of course, why does Goldman Sachs study any market metric? I know you know the answer to this question.

Goldman Sachs studies market metrics to figure out HOW TO RIG THEM!

Jeff again; Maybe I am just getting cynical but I can't think of a metric that can't be rigged. Each metric may show you something, but can just as easily give you a false signal. Truth is opaque; until the paper gold market locks down we won't really know. Best have your seat at the All Inn.

Texan said...

Gary, The USG is not egging on an EZ collapse. To the contrary. Late last year the Fed extended a huge swap line to the ECB since much dollar funding had frozen due to US money market withdrawals. And the Obama Administration is, it would seem, pushing as hard as it can for further European integraton combined with some relaxation by Germany on austerity demands.

You are right that the currency will "float above" countries leaving, the issue becomes how many countries will leave once one does? At which point the "euro" becomes the DM v. 2.0. Which may be fine, but it is no longer the "euro" at that point.

You are also right that the crash in lifestyles is already baked in the cake. I just don't think the "savers",who can option out of the crash by moving their money and even themselves, will push enough for austerity to be implemented. They will just leave. Anyway I think that you correctly identified the political struggle - I guess we just have different views on ultimate outcomes.

Texan said...

Costata, I am not following. Spain is in recession now. GDP is shrinking. How does reducing public spending increase private output, at least in the near term?

The country already has 25% unemployment.

How do you think they will vote? I just dont see sufficient internal political will, which is I think why Rajoy is out today asking that a "commission" be formed to make EZ fiscal decisions. Ie, take it out of the hands of the voters.

Jeff said...

Texan, I'm not sure the Fed is using those swap lines to help the europeans.

FOFOA: In Central Banking, a foreign currency reserve is an asset, a claim you hold, denominated in that foreign currency, on some entity outside of your zone (presumably in the zone of that currency). In Europe, these CB reserves are Realdollars, not Eurodollars. So the question isn't how many Eurodollars the BIS has, but how many Realdollars it has.

Remember back in 2009 the Fed swapped $500 billion with foreign CBs? That was for this same purpose. Those Eurodollars need to be serviced with Realdollars from time to time. But that $500 billion swap line has now been withdrawn. Today it is $0 which you can see on the Fed's balance sheet. Without that access to Realdollars from the Fed, Eurodollar players must bid up Realdollars on the exchanges, which the Fed doesn't like.

So you probably also noticed that while the $500 billion swap line has been withdrawn, the $630 billion QE2 of Realdollars apparently ended up in the US branches of foreign commercial banks. But as Tyler points out in a subsequent post, these funds are really just providing a false sense of security for the Eurodollar players. (BTW, in this subsequent post there is a good description of Eurodollars.)

Tyler ends with this excellent observation: "if and when there is a surge in dollar needs out of Europe, the Fed will have two choices: QE(x) and FX liquidity swaps."

Now, in my humble opinion, you need to look at these operations in the proper perspective. And in my view, they are not creating new money or new dollars. What they are doing is changing the very nature of our money...

Eurodollars are just like the "bank credit money" we use inside the US. It is nothing but bank credit, backed by an asset that is a claim on someone else to provide Realdollars to the bank. But slowly and surely, we are replacing that backing, those "claims on someone else" with actual Realdollars. This can be seen in the expanding Fed balance sheet…

The Fed has not created more money, it has simply changed the nature of existing money. Remember, FOA said that "...hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"

During hyperinflation the entire money supply becomes "Realdollars" rather than bank credit backed by debt assets. So that is how I view all these "excess reserves held at the Fed", QEx and Swap lines etc.., as a step toward dollar hyperinflation.

milamber said...

@ Texan.

Close, but I could never 'gig em. :) I am one of the ones that got gigged (and gored). Put it to you this way. I spit blood out of my eyes :)

@ Gary

Thinking back to Fofoa's superorganism, what happens when the European superorganism (ESO) lifestyle crashes before the revaluation, severely impacting the shrimps & the giants too slow to save in physical gold. Then the politicos successfully affix the blame to the Euro as being the root of all problems? I am not agreeing with that mindset, but it is a popular one.

Over here in the States, a lot of time the *perception* of reality becomes the reality in the mind of the AmericanSO. My concern with the Euro as being the replacement in waiting is that portions of the ESO *may* (I am not saying it is definitely going to happen) descend into failed state status.

Thinking back to the ‘30’s and the leadup into WWII, I don’t think that the BIS wanted a shooting war to break out, but it did. My point is that things can spiral out of control.

“The best laid schemes o' mice an' men / Gang aft a-gley.”

Looking at the historical record of Europe, I don’t think that is an "out there" fat tail risk.

Milamber

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

Milamber, when you said:

'what happens when the European superorganism (ESO) lifestyle crashes before the revaluation, severely impacting the shrimps & the giants too slow to save in physical gold. Then the politicos successfully affix the blame to the Euro as being the root of all problems?'

If the lifestyle crash happens whilst keeping the Euro currency, I believe the shrimp/giant savers will be delighted! It's only if that crash happens on an exit that the savers lose out. It's only the socialist political parties that blame the Euro, and that is a lie anyway, but may be believed by many.

PS The European lifestyle IS crashing right now, no need to wait!

Texan said...

Jeff, well it is definitely helping the Europeans, irrespective of intent. Or they wouldn't have accepted it.. And yes, I am sure the Fed's intentions are not entirely altruistic. They don't want the the European banks all at once blowing out hundreds of billions of USD-denominated loans at prices well below par. That would suck, to put it mildly. Better to very gradually de-lever as the loans roll off.

Milamber - my apologies! No love for either school out there.....!

Edwardo said...

Milamber,

I'd like to point out that when you offer the following:

"Thinking back to the ‘30’s and the leadup into WWII, I don’t think that the BIS wanted a shooting war to break out, but it did. My point is that things can spiral out of control."


The BIS had only just been formed in 1930. Even if we assume their wherewithal to be formidable, an institution in its infancy might be rather limited in its ability to effect the tide of history.

Texan said...

Milamber, I think you are echoing Soros' comments today.

The whole speech is an interesting, if depressing, read. You would think the Germans will opt to keep it all together, but if their efforts are de minimis and/or perceived by the other EZ members as overly harsh, emotion may take over. Reflexivity at its worst.

Glad to have y'all back in the conference btw.

costata said...

Texan and Gary,

Texan I think you need to read the article I was referring to earlier about Spain's current account balance. Bear in mind too GDP only measures consumption (and it's debatable whether it does that particularly well).

http://www.bloomberg.com/news/2012-05-09/spain-s-stealth-devaluation-goes-unrewarded-by-investors.html

A few extracts (my emphasis and comments):

The country’s exports rose 11 percent last year, more than in France and the same pace as Germany, as labor costs fell and the current account gap narrowed....

Gary, see this next extract below in bold. The private sector has already "crashed its lifestyle". Texan points out that unemployment is 25 per cent. How much of that unemployment is in the public sector? It seems to me the problem is that the Spanish government is resisting taking the same medicine.

....Spain’s economy is shifting in a way Economy Minister Luis de Guindos says mimics the currency devaluations used before joining the euro to boost competitiveness.

Note this figure below - 10 per cent of GDP was the external deficit.

.... The current account deficit, which was 10 percent of gross domestic product at the height of the boom in 2007, will decline to 0.9 percent this year and flip to a surplus in 2013, the government forecasts.

Texan, you comment that the Spanish government is still running a deficit of 10 per cent of GDP. So that consumption is not coming from imports now. They are consuming locally and they are borrowing to do it.

If they cannot increase their external borrowings then to get this money to fund their budget deficit they must borrow locally or increase their revenue e.g. by increased taxes.

Texan you wrote:
How does reducing public spending increase private output, at least in the near term?

It doesn't "increase private output". The private sector has demonstrated that it can increase its productivity and output for export markets on its own despite the failure of the government to put its finances onto a sustainable path.

What makes you think the private sector cannot achieve the same performance domestically if the government stops competing with the private sector for resources and inhibiting its progress? They need to get out of the way and let the private sector and the free market sort it out.

Gary said...

Leeches the lot of them. And that's being nice to leeches.

milamber said...

Gary wrote:

“If the lifestyle crash happens whilst keeping the Euro currency, I believe the shrimp/giant savers will be delighted! It's only if that crash happens on an exit that the savers lose out. It's only the socialist political parties that blame the Euro, and that is a lie anyway, but may be believed by many.

PS The European lifestyle IS crashing right now, no need to wait!”

Gary,

I am not following you. Not being there, I can only surmise based on what I see via electrons floating in cyberspace, but it looks to me that a lot people that make up the ESO, and I am speaking primarily of shrimps (debtors) in Greece, Spain, Italy & France for the purposes of this comment, are saying we want to keep the Euro but we DON’T want to crash our lifestyle.

As an example, right now, France is not in the cross hairs of the debt crisis, but their Finances are a mess. France just voted in someone who said,

“… it is unfair that Germany pays much lower interest rates than Spain, for example….”

http://www.spiegel.de/international/europe/merkel-preparing-to-strike-back-against-hollande-with-six-point-plan-a-835295.html

Really? We are playing the unfair card in international politics?

Maybe I missed it, but it seems to me that there are a lot of shrimps very upset that their lifestyle is crashing. And in each country the Shrimps leader is trying to “do something” about the unfairness of it all.

What could they do?

Again let’s look to France for inspiration:

75% taxation rates for the Giants (OK wannabe giants)?
Limit CEO pay?
lower retirement age to 60 from 62?
Create thousands of State Sector jobs?

That is just France. You can go to each country on the wrong side of the internal trade imbalance and hear the same campaign pledges.

As FOFOA wrote in http://fofoa.blogspot.com/2010/07/debtors-and-savers.html

“The two classes are the Debtors and the Savers. "The easy money camp" and "the hard money camp". History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.

1. Debtors - "The easy money camp" likes to spend (and redistribute) money it did not earn, either by borrowing it, taxing the savers for it, or printing it. They like easy money because it is always and everywhere constantly inflating, easing the repayment of their debts.

2. Savers - "The hard money camp" likes to live within their means and save any excess for the future. They prefer hard money (or in some cases "harder" money) because it protects their savings and forces the debtors to work off their debts.”


“…easy money regimes almost always end in financial suffering when the easy money collapses.”

Based on FOFOAs writings, I ascribe what is happening world wide as the collapse of the easy money IMF$ system. The ones who see it are moving (have moved) into physical gold.

The problem is everyone & everything will be impacted by the coming American hyperinflationary collapse. Including Hard Money savers. The debtors will fight like hell to not have their lifestyle crash. Right now that fight is playing out in Europe. But don't worry; it is coming to an OECD country near you soon! :)

I think the debtors response to the crash in lifestyle is a very real threat and does have an impact on the plans that were laid in regards to the BIS/ECB outflanking the IMF$ system.

Will that blow up Europe (notice I did not say Euro)? I don’t know. But I try and include in my thinking what the impact of Europe (partially?) disintegrating will have on the Euro. It won’t kill it in my opinion, but it introduces an element of uncertainty in the plans that were laid those many years ago.

Milamber

Gary said...
This comment has been removed by the author.
milamber said...

Edwardo,

My apologies. I was not trying to imply that that the BIS was scheming to start a war. I should have written Central Bankers that were doing their level best to counteract the trade barriers and the shackles of the HMS barbarous relic gold standard that they were trying to labor under.

What I was trying to write (and obviously failed miserably) was that man (and woman) can lay the best plans. As Hans Gruber found out when he tried to steal $640 million in bearer bonds there can always be that fly in the ointment, the monkey in the wrench, or the pain in the ass that bollixes your plans.

Whether that is stealing from Nakatomi Corporation or transitioning the global economy from one reserve currency grounded in debt to a new one that use a floating gold valuation.

Milamber

JR said...

'what happens when the European superorganism (ESO) lifestyle crashes before the revaluation, severely impacting the shrimps & the giants too slow to save in physical gold. Then the politicos successfully affix the blame to the Euro as being the root of all problems?'

Of course, so what?

As ANOTHER said, Europe's politics are "a side show," easily subservient to the monetary structure which evolves on long-line cycles. Politicians like to pretend things can change on short cycles, with their help. But the euro has been in the works since 1962. And to those that believe short-line politics will break countries like Greece away from the euro, all I can offer is "time will reveal its long-line nature… in time."

Dilemma

JR said...

Milamber,

You are now arguing the easy money debtors will leave the euro for harder money?

I think the debtors response to the crash in lifestyle is a very real threat and does have an impact on the plans that were laid in regards to the BIS/ECB outflanking the IMF$ system.

Will that blow up Europe (notice I did not say Euro)?


The euro is the way for the easy money to stay in the game. If the euro fails we go back to hard money. That's what paper burning means - credit aka easy money die and we go back to a gold as money based system.

Not a good thought, no?

5/22/98 ANOTHER (THOUGHTS!)

If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will hoard all gold and buy any offered if this new European currency does not work" and "debt currencies fail". If this does come, no paper asset of world economic system will survive, nothing! Not a good thought, no? Thank You


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

See this - support the easy money $IMFS or go back to a hard money gold based economy.

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".

JR said...

The ECB/BIS did not want to go back to hard money again, we want to move forward with the euro

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

milamber said...

@ Texan

I don’t know if that is a good thing or bad that I am channeling Soros w/o reading him. I’ll have to take a look his speech. One thing about Soros, the dude is a survivor!

On the B12. Thanks. We never wanted to leave the old SWC. :)

But I'm glad we have a team that will at least be competitive in the B12 (notice I didn’t say undefeated!)

Milamber

JR said...

The plan was hatched after the dollar almost collapsed in the Second Oil crisis to avoid having to continue the pattern of returning to hard money after an easy money collapse (see The Debtors and the Savers

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?

milamber said...

@ Gary


Sorry about that. The giants I am referring to are the ones that have a positive net worth but they have chosen to save it in paper. Think of OG Warren & the very civilized Munger in this context.

Milamber

Texan said...

JR,

Greece, Spain, etc would not be returning to "hard money". Please.

Edwardo said...

Milamber wrote:

"I was not trying to imply that that the BIS was scheming to start a war."

I didn't think you were. I thought you were implying that they were trying to prevent one. Either way I was simply pointing out that their reach was likely limited in that regard. Now carry on and yipee ki yay.

Texan said...

Coattail,

Yes they are more competitive. But

1. 200bn in exports increasing to 220bn or 240bn even isn't going to move the needle in terms of debt servicing, especially as its a gross number. As it is, they pay for what they import. Thats great, but it doesnt reduce their debt. And that increase is unlikely to continue in the midst of a growing recession and other countries trying to adjust as well and compete.

2. Government needs to get out of the way yes- but how? Almost half the economy is government. It's double the size of the export sector. So if exports grow by a net 10bn even, but government spending drops by 30bn, what happens to capacity to debt service? Simplistic yes, but that's the basic math.


What we are really talking about though is not what should be done ( I largely agree with you, btw), but will it? I don't know.

Texan said...

Sorry Costata!

milamber said...

JR wrote,

“You are now arguing the easy money debtors will leave the euro for harder money?”

No. If I implied that, then my bad. What I was getting at in the context of this thread, is that the political sideshow has the ability to blow up the best laid plans.

Scared people do stupid things.

To this particular thread, what I am trying to figure out is how these two facts will resolve in the context of Europe’s debt crisis:

1. Greek citizens don’t want to crash their lifestyle.

2. Germans don’t want to increase their internal exposure to Greek debt nor limit their export machine.

I think I understand that the politics is a sideshow right now, but doesn’t history show the politics is a sideshow up until the day they no longer are?

I mean I didn’t hear anyone calling for Ben Ali, Mubarak, Khadafy, or Saleh to be deposed in 2011 but it happened because the political sideshow moved into action.

I view 2011 as a harbinger for FOFOA’s hyperinflation call. One day everything will be “normal”, then the next the spark is set in the gun powder and there she goes!

Milamber

milamber said...

JR wrote:

“The euro is the way for the easy money to stay in the game. If the euro fails we go back to hard money. That's what paper burning means - credit aka easy money die and we go back to a gold as money based system.

Not a good thought, no?”

I guess that is where I am still getting confused.

Right now with the dollar we are on an easy money system, right?

So when you write,

“The euro is the way for the easy money to stay in the game.”

I thought the Euro was supposed to not be tied to a nation state but backed up by the ECB’s credible gold reserves. And maybe backed up is the wrong phrase to use. But I have viewed the Euro as not easy money nor hard money, but a currency that is tied to a floating value of gold. A flexible currency, but one that allows (encourages) you to hold your savings (wealth) in gold (that will not be lent!) so that when the currency has to expand your gold will expand in value/price (as measured by said currency).

And I am using value/price interchangeably, because Uncle Costata’s discussion on those words has left my head spinning :) Not to mention FOFOA's moneyness!

Milamber

milamber said...

JR wrote:

5/22/98 ANOTHER (THOUGHTS!)

If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will hoard all gold and buy any offered if this new European currency does not work" and "debt currencies fail". If this does come, no paper asset of world economic system will survive, nothing! Not a good thought, no? Thank You

=================================
Reading Another’s thought about the Euro failing is what caused me to seek out ways the Euro can fail. Obviously if it fails, that will be a disaster. But it seems logical to me that if some of the underlying nation states of the Euro fail, then that is going to have a negative knock on effect on the Euro.

I am really thinking of France here. Everyone is focused on the PIGS, but I think it should be the F’n PIGS with France front & center.

Milamber

milamber said...

JR wrote:

“See this - support the easy money $IMFS or go back to a hard money gold based economy.”

JR, I am snipping portions of your response to keep my response in one comment.

SNIP

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"!

SNIP

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

------------------------

I guess this is where I get confused some more. When I look at the USD/EUR currency pair over 10 years, I don’t see a currency necessarily getting stronger over the last 10 years:

http://www.xe.com/currencycharts/?from=EUR&to=USD&view=10Y

I would have thought that the Euro would have blown the USD out of the water by now. But as FOFOA has written (I think it was FOFOA), Another stopped writing before China joined the WTO. So maybe the view that he gave us of the valley IS more important today than ever.

But I also consider this too: Another stopped writing before the full ramifications of 9/11 set in, before the latest round of wars in the Middle East, before the subprime crisis blew up, before the Trillions in backstopping the TBTF financials, before the European debt crisis exploded for all to see.

It is those events (and the future ones that we haven’t contemplated) that I think can be considered part of a "political sideshow", but I think they have some effect on the BIS/ECB plan to hang the dollar on high gold prices. Maybe the effect is only one of timing? I don't know.

Will the political sideshows be terminal to the BIS/ECB plan? I don’t think so, but to dismiss these events out of hand because they are a political sideshow…. I don’t know about that either.

More work on the trail is needed, I guess :)

Milamber

P.S. An interesting article I saw last week purported to show that,

“Oil prices have been positively correlated with EUR/USD for some time. One reason is the perceived asymmetric policy response by the ECB and Fed to higher oil prices, where the ECB typically responds more hawkishly. Another is that trade flows/ exports to the oil producers favour Europe over the US.”

“So rather than seeing EUR/USD as some kind of proxy for the health of the Eurozone (which has been mess for a very long time) think of it as having to do more with the price of oil, and how the price of oil affects monetary policy and currency flows.”

http://www.businessinsider.com/why-the-euro-has-been-falling-2012-5

victorthecleaner said...

Texan,

So politically, we are now at the spot where "the people" want the euro, but don't want to accept austerity in order to pay their debts.

Don't we conclude that all these countries will keep the Euro, but that their governments will default inside the Euro?

Why not?

Victor

Victory said...

VtC, FOFOA, terrific analysis!!

FOFOA in addition to your 10% redemption Game Over signal I have another to offer….

GLD starts trading at a sustained premium to spot (like PSLV) but the Arb one expects to occur (Gold added to GLD and newly created shares sold) does not and instead we get the opposite (GLD share redemption and physical leaving GLD.)

In such a scenario the redemption and premium wouldn’t even have to be very large %wise only that they occur in combination and I would think GAME OVER is near!

thoughts?

-v

Texan said...

VTC,

Maybe. Seems like a very difficult feat. Maybe they have two currencies, one local and one for trade. I don't know how any of it would work.

Sarah said...

I wonder what you all will make of this (links provided after quotes):

1) Rare interview with Baron Benjamin de Rothschild

On gold, he says: "I always tell them that they should diversify their investment portfolio broadly and invest also in gold and commodities. And I don't like gold."

Why don't you like gold?

"That is a sensitive personal matter. Trading in gold has the feeling of something from the past. I know our family used to trade in gold, and as a trader or the owner of a business that trades in gold I actually like it. But to hold gold as an investment, in a safe - for me that is like holding government bonds. Both bonds and gold pay close to zero interest and for me that is untenable. Maybe it's an approach I adopted because the family had the good fortune not to get entangled in the failure of Russian government bonds in the early 20th century...." "

http://www.haaretz.com/weekend/magazine/family-values-1.323094

From WIKI: "N M Rothschild & Sons, English investment bank does most of its business as a mergers and acquisitions advisor. In 2004, the investment bank withdrew from the gold market, a commodity the Rothschild bankers had traded in for two centuries.[24] In 2006, it ranked second in UK M&A with deals totalling $104.9 billion.[45] In 2006, it publicly recorded a pre-tax annual profit of £83.2 million with assets of £5.5 billion.[46]

Today, the price of gold is still fixed, twice a day at 10.30 am and 3.00 pm at the premises of N M Rothschild by the world's main Bullion Houses - Deutsche Bank, HSBC, ScotiaMocatta and Societe Generale. Informally, the gold fixing provides a recognized rate that is used as a benchmark for pricing the majority of gold products and derivatives throughout the world's markets. Every day at 10.30 and 15.00 local time, five representatives of investment banks meet in a small room at Rothschild's London headquarters on St Swithin's Lane. In the centre is the chairperson, who is by tradition appointed by the Rothschild bank, although the bank itself has largely withdrawn from the trading."

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

/SleepingVillage/ said...
This comment has been removed by the author.
costata said...

Texan,

Maybe they have two currencies, one local and one for trade.

Why? The Euro is working just fine for both purposes.

AND VTC postulates a default on the debt and you persist in discussing some currency event. If debt is defaulted then the debt problem is solved. There is no reason to then devalue the currency as that is merely another form of default.

Even the Greeks get it. They are running to Euro and de facto running away from Drachma or at least the threat of having it imposed on them.

Now let's take a look at your reply in detail:

1. 200bn in exports increasing to 220bn or 240bn even isn't going to move the needle in terms of debt servicing, especially as its a gross number. As it is, they pay for what they import. Thats great, but it doesnt reduce their debt.

It already has "moved the needle". The current account has both a goods and services component and an "income" component as in interest in/out, dividends etc.

And that increase is unlikely to continue in the midst of a growing recession and other countries trying to adjust as well and compete.

Their export success has been achieved during a "growing recession". They have apparently performed admirably. How much evidence does it take?

Bear in mind Spain's imbalances are apparently internalized now as a result of the current account moving into balance.

2. Government needs to get out of the way yes- but how? Almost half the economy is government. It's double the size of the export sector. So if exports grow by a net 10bn even, but government spending drops by 30bn, what happens to capacity to debt service? Simplistic yes, but that's the basic math.

Simplistic and the wrong math. Government is not, by and large, a producer it is a consumer. In effect above you are saying: "what if the producers increase their production and the government (consumer) decreases their consumption, what happens to capacity to debt service?

The export sector has improved its capacity to service debt. The non-export sectors ability to service debt has to be viewed in light of their total expenses (e.g. cost of living). If government can't service its debt then refer to VtC's earlier comment - they default.

From another perspective you could argue that decreased government consumption increases their capacity to service debt. I would argue that this is a dangerously misguided IMF style policy prescription. IMO the reduced government consumption needs to be transferred to the private sector via tax cuts and other measures.

Instead what are these idiots doing? Increasing VAT. Inhibiting the capacity of economic actors (who also produce) representing 60 per cent of GDP to consume while the 40 per cent of GDP that does nothing but consume doesn't in net terms pay VAT (except to itself).

And while I'm in rant mode, what is the neo-classical, faux-Keynesian, MMT solution to this little problem? Government should increase consumption to offset the fall in private sector consumption. Great.

Wendy said...

sarah, rothschilds smelled a rat in 2004, and it was their own body odor. They did what rats do and jumped ship.

I know this has been discussed at length in this blog, but I can't direct you to it. I'm hoping that someone else's memory here is better than mine, and they will direct you to the appropriate comments.

Beer Holiday said...

@Sarah,

I found an excellent discussion of the Rothschilds move in 2004 by FOFOA in the comments of Happy Thanksgiving .

The comment(s) are really long so I won't repost it, but if you follow the link, then ctrl-f "Rothschild" it'll work.

I recommend reading the source. IMVHO The general gist of the discussion has three parts.

Firstly NM Rothschild's comments made sense taken at face value: it wasn't worth the effort anymore.

Secondly the Rothschild's excellent history of wealth preservation suggests that if freegold is correct, then they most certainly would be on the right side of it, perhaps shifting their role to that of a buyer.

Thirdly NMR specifically commented that "When the bank gave up on gold, oil trading had to go, too." Further evidence that Another/FOA/FOFOA know what they are on about.

Beer Holiday said...

Here's a great discussion
at the USAGOLD archives.

I found some more context to the quote about oil:

"The decision marks a sharp reversal stance on oil trading, a business it re-entered last summer after selling its substantial oil operations 90 years ago.

"We decided to get into oil as a means of feeding an infrastructure that needed more business than gold could provide." But when the bank gave up on gold, oil trading had to go too, Mr de Rothschild says."

The quote is taken from an old FT article, "Rothschild's retreat signals end of era". I can't find the original article.

Gary said...
This comment has been removed by the author.
Texan said...

Costata,

Where will they get the euros? Exports of olive oil?

As for Spain, I don't follow. The government (and the real estate banks) wasn't a "consumer" in the local economy - it was a "producer". It and the banks borrowed externally and then distributed that money locally as income. Now they have to dial it down by doing things like "increasing student tuition", or "reducing pension payments". How is that going to work politically?

costata said...

Hi Texan,

I read your last comment. That's enough for me for a while, thanks.

Gary said...
This comment has been removed by the author.
Jeff said...

Let me beat AD to the punch with this question; 'Where does freegold fit in a zombie apocalypse scenario?'

http://www.lasvegassun.com/news/2012/jun/03/us-talking-about-zombies/

AdvocatusDiaboli said...

very interesting.
Especially since VtC mentioned that similair puke patterns can be found in silver.

VtC,
have you also found similair patterns in e.g. platinum, paladium, iron, zinc and copper? Just wondering...
Greets, AD

e_r said...

Texan,

The government (and the real estate banks) wasn't a "consumer" in the local economy - it was a "producer".

That's hilarious. Since when is producing loans real production?

KJ said...

vtc & fofoa, thank you.

tintin, you wrote:

"is this not an indication of stock/flow exploding?"

in relation to this part of the email exchange dated Sept 26, 2011:

"...Interbank flows are almost extinct."

Some facts from the Aug/Sept 2011 time period (comex close):

- August 1 - $1619
- August 11 - gold puke - 1.82%
- Fri August 12 - $1740
- August 19 - $1848
- August 23 - gold puke - 1.93%
- August 24 - gold puke - 2.16%
- August 26 - $1794
- September 2 - $1884
- September 9 - $1856
- Wed September 14 - $1823
- Wed September 14 - wire - "Interbank reports China bid spot XAU $1815 into NY close, further bid interest expected from same $1725-$1750."
- September 16 - $1812
- September 23 - $1637
- Mon Sept 26 - $1592
- Mon Sept 26 - email exchange - "...$1815 was a real bid (although who knows how long it was held for), but no bids materialised under $1750 from sovereigns, certainly not below $1650, in the interbank market."
- Mon Sept 26 - note from GS's - "What we are seeing in the market place is high volume turnover on the exchange but extremely low liquidity and huge activity on the screens rather than in the OTC discretionary space where most of our counterparties have had very little risk in gold for several weeks. Interbank flows are almost extinct."

The point, as I understand it?

Fofoa:

"...But some CBs do play with the BBs."

and Fofoa quoting Another:

"...The rub was that they only bought low, and lower and cheaper. They never ran the price and they never ran out of money."

Then on May 23, the day after the Puke of 1.36%:

"I hear on the wire today that there is at least one Asian Central Bank with bids in the interbank market for spot gold at $1525"

and here's vtc:

"...Think about your 'Today's "Gold"'. The main danger to the London bullion market is a drop of the paper price to such a low level that they lose too much physical.

But now that we have stated the problem, we also know how to solve it and how to defend the London market. Someone has to monitor the flow of physical. There is some flow coming in from mining and from scrap - that's probably pretty steady in terms of weight per day. And there is the outflow from physical buying. This is probably a steady amount of dollars per day. So if they see that they are losing too much physical, they can simply raise the paper price and thereby reduce the outflow of physical.

Is this the reason why the paper price rises after a puke?

How do they raise the paper price? There is basically only one way: Someone has to go long paper gold. Who? The Fed? ESF? Other CBs? Perhaps even the European CBs?"

Sarah said...

Thanks Beer Holiday for pointing me in the right direction to the Happy Thanksgiving article on this blog. In the comments thread there, FOFOA mentions that the bigger message of this blog is to tell everyone to buy gold coins, now ---something to that effect (I'm paraphrasing).

I suppose this might be stupid or redundant question, but since I'm new to the gold discussion here, I'll ask anyways. FOFOA doesn't literally mean JUST gold coins right? Gold bars, like those little PAMP suisse gold bars are also good, legit stores of value, correct?

JR said...

Texan and Milamber,

Euro != HI

leaving the Euro = HI

How do you arrest HI?

Hyperinflation is very hard to stop once it starts. The only way you can stop it is by switching to a harder currency.
Just Another Hyperinflation Post - Part 2

JR said...

Milamber

but I think they have some effect on the BIS/ECB plan to hang the dollar on high gold prices.

The dollar will fail. The issue is whether the euro will too.

Sarah said...

This relates to my most recent comment above -

If there's an article here on gold bars vs. gold coins or something similar (I already read the thoughts on silver v. gold), I'd appreciate it if I could be directed to it. It's not possible to navigate to subtopics here (unless it is and I just don't know how...), since there isn't a list - not that I'm complaining.

Motley Fool said...

Sarah

Haha, of course not. Bars are fine, hell even jewelry is fine if you can find it for close to spot, which isn't that hard actually. :)

At the end of the day, gold is gold. Form is irrelevant. So whatever you prefer.

TF

JR said...

For all the folks thinking the "less easy" money in Europe amist the mileu of "austerity" is really just *too hard,* and what Greece or Spain need to leave the Euro to embrace their own, easier currency:

"Easy money" thinkers may or may not get their debt-free money, but if they do they will suddenly realize the flaw in their reasoning. Oops! That it can only have expandable value (needed for the welfare state) if producers are willing to hold it while it expands. Without that, socialist welfare expansion will simply dilute the value of the currency and be as limp as a eunuch.

The Return to Honest Money

See that - easy money only has value if people save in it. Guess what people won't be saving in if Greece leaves the Euro?

So then how do you arrest HI?

Hyperinflation is very hard to stop once it starts. The only way you can stop it is by switching to a harder currency.

Texan said...

I can't believe that y'all cannot grasp the basic concept of government spending more than it takes in as akin to "producing". I don't mean it in the literal sense that the government is a producer. I mean that the color of its money is just s green as anyone else - when it spends, the local economy is the recipient of real cash funds.

Spain borrowed Externally and lent Internally. They are doing so at a deficit rate of 40bn a year. If they "close the deficit" , there will be 40bn less of spending minimum. That drop in sending will massively overwhelm any marginal increase in current count balance.

Follow the cash.

JR said...

Fun musings KJ

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

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


Party Like It's MTM Time

JR said...

Good stuff Texan,

Market participation produce goods and services.

Governments produce paper.

ChrisF said...

Sarah,

Gold bars vs. Gold coins.
I have quite a lot of both but over the last few years, having absorbed FOFOA's thesis that Gold will soon be valued @50,000 $/oz. in today's money, I have only been buying coins - even 1/4 oz. bullion coins.
My understanding is that coins are probably easier to sell for their Gold content than bars which may be easier to counterfeit (tungsten?).
Have never tried to sell either by the way.

Texan said...

I think i understand the confusion here. You all think the funding for Spain is coming from the Spanish, so its just misallocating resources?

No. As of Dec 2011, 50% of Spain's debt was held externally. 280bn euros that they obtained from other countries. And spent - on real goods and services - in Spain.

Now some of that is shifting back to local banks who have repo'd it to the ECB under the LTROs, so now the ECB is funding some of that debt.

Maybe an easier example. Greece borrowed hundreds of billions externally and spent it on "stuff" internally (remember the Olympics?). Then that debt was "forgiven" through the PSI. Greece received the benefit of all that money, but it will never pay it back. It's Treasury "exported" promises for euros.

Edwardo said...

And if the Euro fails, knowing the dollar is destined to HI, then what currency of size remains?
The Yuan.

Sarah said...

ChrisF,

I suppose gold bars would be ok if they are PAMP Suisse bars, since the bars come with the assay certificate, serial numbers, and are stamped. I haven't come across anyone who had a hard time selling those PAMP bars (no buyer hesitance I guess because the cert., serial numbers, etc are all there visible on bar packaging).

Although why sell if you don't have to?! no reason to really I've concluded after coming across this blog.

JR said...

No Texan,

You are trolling, go away.

FOFOA 101 = Spain's economy is structurally unbalanced under the $IMFS - it consumes more than it produces.

=========

Yes, countries with current account deficits are, under the $IMFS, driven to deficit spend in a vain attempt to try to "boost GDP.

dieuwer said...

For two years now GLD inventory has been below approx. 1300 tons and gone nowhere. It seems to me the game is almost up.

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

As the Euro area has balanced external trade, Spain's trade deficit funding comes from other euro area members, aka the Spanish bondholders.

milamber said...

Texan wrote,

"Milamber, I think you are echoing Soros' comments today."

I finally got a chance to read his speech & I found parts of it interesting.

http://www.georgesoros.com/interviews-speeches/entry/remarks_at_the_festival_of_economics_trento_italy/

(Although right now his site says page not found. I better tell ZH I found ANOTHER conspiracy!)

He did touch on what I was trying to get at, that it is very difficult (he says impossible) to predict what the future will hold (as it relates to economics) because economics involves people making decisions and you don’t know what they are going to do until they do it. He does a credible job bashing NeoKeynesism EMT, and the idea that economics is something that can be modeled like the physical sciences. The 1st part of the read, I thought he was going to cut & paste Human Action!

Anyways, I disagree with him as it relates to FreeGold, since he said not a word about gold. :( Which to me if you are giving a speech about economics in 2012, and you are discussing the ECB & international money flows, I am thinking gold is involved there somewhere, right?

Still after reading his speech & his analysis, I still think that the dollar has already been cooked. And I think that it is more than likely that the Euro will take its place as the transactional currency of choice. But I still think that political decisions have the potential to thwart that & make things much worse for the world.

Also, I got a chuckle when he said this in reference to the debt crisis:

“… you cannot reduce the debt burden by shrinking the economy, only by growing your way out of it. “

That’s not true. You can also reduce it by repudiating it.

As Kyle Bass said last year on CNBC,

"How many of your relatives and extended family would you sign a joint and several liability agreement with?

Answer: none."

Germany has gone in joint and several with the debtor countries & this year the Target2 Balance is going to go over 1 Trillion Euros owed to Germany.

As the (modified) saying goes,

“If you owe Germany through Target2 a million euros, then you have a problem. If you owe Germany through Target2 a Trillion euros, then Target2 has a problem.” :)

Milamber

Texan said...

JR,

Yes, other euro area members (for the most part) fund Spain. And it's deficit. I was simply pointing out at ten beginning of this set of comments that an increase in exports will not offset the decease (by other euro area members) in funding to Spain. Ie, they cannot balance through exports, unless they follow Costata's policy recommendations and drastically slash spending. Which I doubt they can do politically, but I guess we will find out.

milamber said...

JR wrote:

"The dollar will fail. The issue is whether the euro will too."

Agreed. My point that I was trying to make is that the political sideshow *can* contribute to the Euro's demise. Will it necessarily cause it? I hope not. But hope is not a credible strategy here.

Thus I force myself to listen to the political whore mongers and see what crap they are going to say(and then do)next.

Milamber

Texan said...

Milamber,

I think he doesn't say anything about gold because it would have become the MSM take-away on the speech, and that was not the focus of his speech. He is talking about the survival of the EZ (in approximately it current geographical configuration) as a "transactional currency".

I like your analogy. I tend to think of the EZ as a Condo building where the penthouse owner is asked to pay not only the entire building maintenance and dues, but also some of the residents living expenses.

Signing off for now.

Woland said...

"How many of your relatives and extended family would you
sign a joint and several liability agreement with?"

If we were all in a boat in the middle of the ocean with a hole in
the hull, my answer would be "all of 'em", so long as they could
bail.

Edwardo said...

Soros operates in a fashion similar to OG Buffet. He is at pains to tell the truth, the whole truth, and nothing but the truth, not, one suspects, because he doesn't know better, but because it doesn't suit him to do so. As Milamber points out, Soros would like us to believe that he has never heard of a debt jubilee. What is interesting to me, regarding Soros' (publicly presented) understanding on how debt can be extinguished, is that a physical only gold market would, upon revaluation, have, in effect, the same impact on the presently intractable public debt as a good old fashioned debt jubilee. And the only reason the physical only market hasn't, as yet, emerged is down to the inertia of the creaking old system, the Euro's perceived woes, and, I suppose, a few sands left in the upper portion of the dollar's hourglass.

holdinmyown said...

Hello Edwardo. You said:

"And the only reason the physical only market hasn't, as yet, emerged is down to the inertia of the creaking old system, the Euro's perceived woes, and, I suppose, a few sands left in the upper portion of the dollar's hourglass."

There may be more than just a few grains of sand in that hourglass yet. In my discussions with M around this time last year I was saying that the 10yr UST rate still had the possibilty of falling for some time yet. I expected then that we would still be having these discussions a year later. Barring a full blown credit fallout (the abyss for the $IMFS) there may be some legs left in this dog yet. For example if the Fed and other CBs stick to their guns regarding no more (major) QE (for a while longer at least) this could cause a flight to "safety" to the USD as world banks and other financial institutions sell everything that they have that has not yet been hypothecated (and maybe even some of that too a la MF Global). No CB wants to be seen as the cause of a meltdown but if it happens "naturally" then who is to blame? I expect that we will eventually see a deep deflation before the dominoes (banks) start to fall. It would be at this point that the CBs (all of them) start to print in earnest. The real print fest will only begin when the voters (and politicians) beg for it. It is only then that I expect the ECB/BIS to pull the trigger on FG/RPG.

holdinmyown said...

I was remiss in not thanking FOFOA for this very interesting article and also a big thank you to VTC for his article on his own website and for his comments here. Welcome back Victor!

tintin said...

Hi KJ thanks for your response.

Hi all, can we make this following speculative connection regarding the puke:

London--->Hong Kong--->Beijing?

http://www.reuters.com/article/2012/06/04/hongkong-china-gold-idUSL3E8H4...

SINGAPORE -- Hong Kong shipped 101,768 kilograms of gold to mainland China in April, up 62 percent on the month and marking the second-highest monthly exports, the Hong Kong Census and Statistics Department said on Monday.

tintin said...

Jubilee, the modern version:

Freegold--->sell a few bars--->pay down the whole debt.

Jeff said...

Hold the line on no more QE?

FOFOA: Don't be fooled by the misdirection. QE, twist, whatever; it's not about interest rates or helping the economy recover. It's 100% about disguising and managing this uncontrollable, unstoppable mess. It's more like a broken sewer line than a water main now that I think about it.

So if you're watching "economic indicators" and Treasury market figures and interest rate curves trying to guess if there will be more printing, aka QE3, you should instead ask yourself if the USG will cut a quarter of all its spending habits this year, or ever. That would be roughly equivalent to cutting all of Medicare, or all of Social Security, or all of defense spending, or a third of each, just to give you an idea of how much they are printing.

It is a myth that QE is a result of the Fed's concern for the economic outlook or even about keeping interest rates down. That's just what they want you to be focused on, rather than the real reason for QE. Notice that QE began at the same time as the federal budget deficit overtook and surpassed the trade deficit. Not only that, but the amount of QE matches close enough for government work the difference between the budget deficit and the trade deficit.

Edwardo said...

holdinmyown,

Congratulations you on your call last year regarding 10 year Treasuries, and while you may be correct in how you envision things playing out, see Jeff's most recent post, which is really an FOFOA snippet, on why we don't need to see another print fest to launch the good ship dollarpop into the physical only gold market event horizon.

In the meantime, I'm guessing that the number of grains of sand remaining at the top of the dollar hourglass number around one hundred, and each grain is worth approximately 10 days. Of course I may be off in my estimate by quite a few grains.

tintin said...

Jeff,

Excellent observation: Notice that QE began at the same time as the federal budget deficit overtook and surpassed the trade deficit. Not only that, but the amount of QE matches close enough for government work the difference between the budget deficit and the trade deficit.

holdinmyown said...

I agree with FOFOA that the Fed does not need to print any more in order for HI to occur. What I am saying is that if they (TPTB) were determined, they could extend the life of the $IMFS for some time yet (several years perhaps?) as long as some unexpected (black swan) event didn't trigger it first.

JR said...

"If we were all in a boat in the middle of the ocean with a hole in the hull, my answer would be "all of 'em", so long as they could
bail.
"

And instead, the silly skeptics keep claiming you will jump out of the boat and try to swim on your own.

Its like they don't understand why you got in the boat in the first place - because you would drown if you were not in the boat.

holdinmyown said...

"Everyone knows where we have been. Let's see where we are going!" -Another

Aaron said...

Speaking of boats, check the text in the lower right hand corner of the video.

;-)

FOFOA said...

In a comment on his own blog, Victor writes:

***Please also take a look at Kid Dynamite’s blog for another coincidence involving GLD:

Did Eric Sprott Buy and Redeem GLD?***

I missed that one last year. Great detective work by Kid Dynamite! But my response is why would your first assumption be that Sprott went through the hassle of redemption through an AP and the risk of having a story as silly as that come out? I mean, raiding your competitor's ETF through a third party to stock your own ETF for a secondary offering? Why not just buy the gold from your friendly neighborhood BB forex desk and demand delivery? Where they get it is their problem. As I wrote in an earlier comment:

"You [as a BB] have to give physical to everyone who demands it to keep the game going. That's the key to the whole game!!"

This is totally consistent with the theory at hand which I first wrote about more than two months before KD's post and which VTC is expounding on now in his trademark meticulous way: GLD [is] The Central Bank Of The Bullion Banks.

KD's GLD Puke on 4/6/11 (presumably for a Sprott ETF delivery) was "only" 234,022 ounces worth $340M, well below Lance's Puke Indicator threshold. Food for thought, huh?

Sincerely,
FOFOA

Sarah said...

Funny money and more- States seek currencies made of silver and gold

http://money.cnn.com/2012/02/03/pf/states_currencies/index.htm

jojo said...

New mouse?? (http://www.youtube.com/watch?v=BdIev12fCPs)...shades of Carl or am I hallucinating?
Carl was from Texas too.

Sarah, I have seen a guy walk into the coin shop I go to and pull a tooth cap (gold) out of his mouth and sell it right there on the spot. No need for serial numbers, registrations etc. Gold is gold (as long as it's gold;) )

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

Woland said...

“If we were all in a boat in the middle of the ocean with a hole in the hull, my answer would be "all of 'em", so long as they could bail.”

Touche :)

But to continue the analogy, it seems to me, some of them are saying the following:

“No. We won’t bail any more. In fact we demand that we retire from bailing at age 55 (it is after all a hardship industry) with a full pension (don’t worry about funding it fully right now). We didn’t design this boat (although we do LOVE the onboard bars). And yes it is true, we sort of skirt our portion of the maintenance costs, but that doesn’t matter because that’s how we do things in our portion of the boat.”

Does that sink the ship? I don’t know. How big is the hole in relationship to the ship? How much water is coming on board? But this is also where I see that the Euro has that big ol’ shiny golden Ace in that hole. With that, the Euro has the ability to blow the other ships out of the water (but like a nuclear weapon, they still have to execute correctly):

"I think, the currency of a country does no longer hold "backing". This term, it is used often, but is not correct. Today, all modern money does have "reserves", and such is used only for "the dirty float" in currency warfare. As in war, the larger and better equipped army in "reserve" does rule over the lesser force. Perhaps we should think in this way: in a "cold war" of modern exchange rates, "digital currencies from reserves are used", however, when a "hot war" of major default does begin, "nuclear weapons of GOLD" are deployed!

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

5/21/98 ANOTHER (THOUGHTS!)"

Milamber

Woland said...

It would be fun if someone (other than me) would do a chart
showing ounces per capita for all the major states, using both
CB reserves, and estimated private holdings. I know Italy comes
in at about 1.5, while the US is still supposed to have about .8 oz.
These are CB holdings only. Is there any data across "nation states"
regarding private holdings? In most cases, the form would probably
be jewelry, rather than bullion or coins, I would guess.
just wondering.

JR said...

Yes Milamber,

If everyone decides they don't want the euro it we fail.

Everyone agrees with this, so hopefully we can stop harping on it and move on to the issue you not so deftly keep ignoring - which is why that will occur?

You seem to think the politicos will tell the sheeples lies and the sheeples will believe the lies. Or just that some sheeples won't go for it. As you wrote:

Does that sink the ship? I don’t know.

But to advance such arguments requires you to pretend you don't know anything about why the euro was formed.

If you want me to explain to me why the euro will be left, you have to first understand why they joined, and then explain why that rational is no longer applicable.

Sure the euro could break up, as FOFOA was written about, but it probably won't. And to understand why not, you have to understand why it exists in the first place.

Good luck with that one :)

You are getting closer, but the key is understanding what the purpose of the Euro was. When you understand that, you will not see what is currently occurring is not inconsistent with that purpose, and thus is no justification for "leaving"

=======

Here's a big hint as to why they joined the Euro:

The Privateer writes, "The claim is that the obvious message of the European debacle is that a sovereign government must have full control of ALL aspects of monetary and fiscal policy if it is to prevent the type of sovereign debt debacle now engulfing Europe. As yet, no argument has been put forward for the opposite proposition."

Here's one: Under the $IMFSystem when relatively small currency zones have control of "ALL aspects of monetary and fiscal policy," hyperinflations are relatively common. Hyperinflation is the adjustment mechanism in floating exchange rate zones under the $IMFS. This is exactly why the euro severed its link to the nation-state... Because a) we are still living under the $IMFS and b) Europe has a living memory of hyperinflation.

If you think austerity riots are bad, you should see hyperinflation riots!"


RPG Update #4

JR said...

oops

"If everyone decides they don't want the euro it *will* fail."

"When you understand that, you will ** see what is currently occurring is not inconsistent with that purpose, and thus is no justification for "leaving""

milamber said...

Edwardo said...

“And the only reason the physical only market hasn't, as yet, emerged is down to the inertia of the creaking old system, “

I don’t think that is the only reason.

What if you are Soros, or OG Warren (OK maybe not OG), or some other entity that controls Billions (Trillions), but you have made your wealth (And you hold your wealth) by using the dollar. All your life the dollar has been very good to you. But then something happens (LTCM, The Euro being created, Subprime, a religious experience, whatever) that causes you to reevaluate your strategy.

You realize that maybe there is something to holding gold. Maybe you even come across FOFOA, and you REALLY reevaluate your strategy and you are convinced to move the bulk of your wealth into gold.

But you have a problem.

There is a HUGE stock of gold, but a teeny tiny flow of gold. What to do?

Might you do everything in your power to keep the system going for as long as it possibly can so you can quietly accumulate as much Physical gold w/o running the price into the FreeGold range?

If I was a giant who poo pooed gold for years, but then had a revelation, that is what I would do.
I only bring this up because a lot of people think that the system runs the way it runs because it has always run that way. And there is SOME truth to that statement. But hasn’t one of the points that has been made here is that there is a lot of late paper that is trying to get into physical gold as quickly as possible, but w/o breaking the paper gold system? Isn’t that what this post (and Victors work) are exploring?

So rather than just a creaky old system preventing Free gold, there are lots of vested interests in it as well that are trying to get physical gold before the reset as well. I think we see that when GLD pukes.

And we also see it when the 2nd largest Educational Endowment fund in America takes physical possession of 664,300 ounces of bullion over an 18 month period.

http://www.thestockenthusiast.com/opinion/why-did-the-university-of-texas-buy-so-much-gold/

Milamber

JR said...

Good stuff Milamber,

As RJP has noted:

OG Warren B ..."is a particularly avid reader of books about panics and similar phenomenon."

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milamber said...

JR said...

“Yes Milamber,

If everyone decides they don't want the euro it we fail.

Everyone agrees with this, so hopefully we can stop harping on it and move on to the issue you not so deftly keep ignoring - which is why that will occur? “

Hmm. We may be talking at cross purposes here. I am not arguing that people are going to leave the Euro. I am arguing that scared people do stupid things.

For example, In Greece, 80% want to keep the Euro.

But 78% want to amend the MoU that the Troika demands they adhere to that allows the loans to flow to pay their bills.

And 66% want the formation of a cooperation gov’t.

http://www.phantis.com/news/opinion-poll-indicates-desire-stay-eurozone

These things don’t go together. Something has to give. I do not know what it will be. But I don’t think that the Architects of the Euro gave this possible outcome *ANY* thought. Their focus after getting screwed by America was on how to outflank the IMF$ using physical gold and the derivative paper gold market to create a credible reserve currency built on RPG Gold. They never gave any thought (that I can find in the archives) about Europe tearing itself apart due to trade imbalances.

I am by no means arguing that some people in Europe will not want the Euro. I am saying that they want the Euro, but not the conditions that allows them to keep it. How does that resolve? That’s what I am pondering.

Milamber

milamber said...

JR said...

“You seem to think the politicos will tell the sheeples lies and the sheeples will believe the lies. Or just that some sheeples won't go for it.”

What do you call it when Alexix Tsiparas says the following?:

“…reverse unpopular wage and pension cuts, nationalise banks and freeze privatizations…”

"The adjustment we are proposing will come from taxing the wealthy and those with high incomes," the 37-year-old said to a crowd chanting "It's time for the left!"

“Tsipras promised his supporters he would save indebted households, cut taxes on bread and milk and hike taxes on the rich.”

A vehement opponent of Greece's international bailout, which is conditional on deep spending cuts, Tsipras reiterated his resolve to cancel the 130 billion euro ($161 billion) rescue programme.

Tsipras has argued Greece can keep the euro while ditching the package.

http://www.reuters.com/article/2012/06/01/greece-tsipras-idUSL5E8H1HLK20120601

And that is the leading left in Greece. The Fringe Right is wanting to bring back Hitler and they won 6% in the last election!

Again, my question is how does this resolve & what effect will it have on the future?

Milamber

milamber said...

JR said...

“But to advance such arguments requires you to pretend you don't know anything about why the euro was formed.”

“If you want me to explain to me why the euro will be left, you have to first understand why they joined, and then explain why that rational is no longer applicable. “

“Sure the euro could break up, as FOFOA was written about, but it probably won't. And to understand why not, you have to understand why it exists in the first place.”

I don’t think you are stating my argument correctly, which I why I think we are talking at cross purposes.

But I do agree that the Euro will break is NOT likely.

But, what happens if underlying nation states that comprise the Euro descend into failed state status (not zombies, not NWO conspiracy crap), BEFORE the reset? I am trying to think about the implications of that. I would LOVE it if that is stupid premise to begin with, but right now I cannot rule it out.

Milamber

milamber said...

JR said...

“You are getting closer, but the key is understanding what the purpose of the Euro was. When you understand that, you will not see what is currently occurring is not inconsistent with that purpose, and thus is no justification for "leaving"”

Again, I am not arguing that they want to leave the Euro or as Eichengreen says, even can http://www.voxeu.org/index.php?q=node/729

My understanding of the Euro being formed was to have a reserve currency waiting so that when the IMF$ collapses, world trade would be able to continue.

Or as Another put it:

1. The purpose of the euro was to provide an international transactional alternative to the dollar.

2. The consequence of the launch of the euro would be that gold would undergo "the most visible transformation since it was first used as money."

Milamber

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milamber said...

jojo said...

"I think you never make it to the state of being a Giant if you made the mistake described above.

That is to say, Giants know better and sooner than any shrimp and they didn't get to be Giants by "poo pooing Gold" which implies they lack an aweful lot of knowledge, which begs the question, how'd they become a Giant then? (they didn't).

Is that circular enough? ;)"


Wow. Since there is a smiley face at the end, I don’t know if this is tongue in cheek, but to say that ALL giants have to save in gold in order to be considered Giants is a little ludicrous.

And remember (at least in the USA) corporations are people too. So don’t forget all those corporate entities when you are looking at how wealth is held. I think you will be surprised to find that there lots of “wealthy” entities that don’t save in gold.

And (at least for those in $) it has worked for them (as FOFOA pointed out) for almost the last 90 years because of the structural support for the IMF$ system. Unless something happened to them to change their world view, there would be no reason for them to move the bulk of their wealth into gold.

Especially when you have the following conflicting goldish messages drilled in your head your whole life,

“ The dollar is as good as gold”

“We keep gold because of tradition”

“Gold is a barbarous relic” Keynes misquote, but that is what everyone who wants to demonize gold says

Until the credibility inflation & the debt as savings fraud is understood by all, then there will be Giants who will continue to save in paper.

And they will lose it all in the revaluation.

Milamber

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Dr. Octagon said...

I think you guys are arguing about nothing. What matters is when there is a critical mass of wealth that chooses to save in the form of gold, instead of in currency. That is the tipping point for a shift of value from currency to gold. It is *because* a critical mass *has already made this choice* that matters.

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Jeff said...

Actually what matters is whether gold bids for dollars. When it doesn't it's lights out.

FOFOA: 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...

The dollar NEEDS voluntary bids from private physical gold to survive. My guess is that pool of REAL bids of size is bone dry and cracking. And "dollar liquidity" is just a cheap façade at this point. This is why the dollar NEEDS a rising gold price. As the price (for selling, not borrowing gold) rises, weak little bits of gold here and there will bid for dollars.

Jeff said...

That's why the falling oil price possibly breaking the oil/gold ratio is so interesting. The USD needs a high gold price if you want a little gold flow, but to keep the ratio if oil falls, you need a low gold price. Can't have both, so what's it going to be?

Gary said...
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Jeff said...

Gary, the saudis have stated that the oil price is too high for Europe, and promptly went about lowering it, so I'm not sure what the gameplan is.

Blondie said...
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Blondie said...

Whether or not a “giant” stores value in gold or not is more likely a function of the age of their wealth than the size. Old money always used and understood gold. New money, made in the age of The American Experience, does not necessarily understand gold having spent much of/all their lives in a world where gold is disparaged by the system as the barbarous relic of a bygone age.

Some of this new money has been made as a function of this current system, by “trading” and "financial services". Most of this “wealth” will not move into gold because most of these “new giants” will follow their $IMFS confirmation bias (as “masters of the universe”) until there is no physical flow at a rate that will preserve their “wealth”.

Old money always had gold as wealth consolidated. New money has all manner of derivatives of wealth, unconsolidated. One is timeless, the other not. New money will receive further education on this.

Easy come, easy go.
Illusions can be such ephemeral things.

holdinmyown said...

"Gary, the saudis have stated that the oil price is too high for Europe, and promptly went about lowering it, so I'm not sure what the gameplan is."

The game plan is to keep the game going as long as possible ... after all TPTB are the House and we are all the suckers (pundits). When FG/RPG occurs they lose much of their power (wealth generating ability) as there is then a brake to go along with the spur.

After all that is what central planning (oops I mean the "proper" management of a nation's (or currency bloc's) currency, money supply, and interest rates) is all about isn't it. We can't be leaving such an important pricing mechanism under the control of the great unwashed masses (ie market) now can we?

Paul B said...

Could someone please explain this to me?

If the purpose of the euro was to provide an international transactional alternative to the dollar.

Why is it then that the $IMF/FED is bailing out the BIS/Euro?

milamber said...

@ Blondie

Thank you. That is what I was trying to get at with describing Giants that maybe just now are realizing that paper is not the place to be in during a Nuclear Currency war. And that may be what finally causes GLD to do the Final PUKE, or FPUKE.


Milamber

Edwardo said...

"...as per Steve Liesman, maybe it'll be $2 or $3 trillion of dollar QE-type stuff to bail out Europe."

Liesman, (even it's pronounced leesman) never was a man so aptly named. In fairness to him, though I'm not sure he deserves fairness, his world view simply doesn't allow him to avoid proffering absolute rubbish most of the time. A Liesman quote from today (paraphrased, but only just) "The U.S. should take the lead in Europe."

The problems with that notion are manifold. And the ignorance and arrogance embedded in such a view are staggering. To say he doesn't get it, would be an insult to those who don't get it.

Edwardo said...

"The game plan is to keep the game going as long as possible ... after all TPTB are the House and we are all the suckers (pundits). "

Who are TPTB? That acronym implies a monolithic entity whose concerted actions are shrouded by impenetrable mystery. There are a variety of power blocs that are, by no means, acting in concert. And while these power bloc's activities are hardly transparent they are not entirely opaque either.

holdinmyown said...

Hello Paul B.

"Why is it then that the $IMF/FED is bailing out the BIS/Euro?"

In order for the USD to retain its position as the world's reserve currency the $IMFS must be protected at all costs. No systemically important (TBTF) institution can be allowed to fail for fear of contagion throughout the system (the domino effect). If the ECB is prepared to let some of its banks fail (actually failing to protect the bank investors such as equity and bond holders) while protecting only the depositors this potentially threatens the entire $IMFS. So the Fed/USG is forced to protect the entire world financial system in order to retain its exorbitant priviledge.

Note that the Euro is not trying to replace the USD in this (reserve currency) capacity. They only want to have a "transactional" currency available for world commerce in the event that the USD should fail in this role.

milamber said...

Can one of you central bank folks please take a look at the BIS quarterly report (June 2012). It can be found here:

http://www.bis.org/publ/qtrpdf/r_qt1206.htm

Specifically the sub section labeled,

“The expansion of central bank balance sheets in emerging Asia: what are the risks?”

It can be found here if you don’t want to look at the whole report:

http://www.bis.org/publ/qtrpdf/r_qt1206g.pdf

On Page 54-56, they have a discussion about financial instability in general, but then specifically discuss Asian Central Banks large reserves crowding out local lending. And then they have the following paragraph,

“The US dollar exposures of emerging Asian banks also display a worrisome trend consistent with a credit boom. These banks have been very active in extending US dollar loans without a corresponding increase in US dollar deposits in recent years (Graph 7, right-hand panel).”

Now I can’t reproduce the graph here (at least I don’t know how), and I am at a loss to understand it, as it relates to this post and the discussions concerning China joining the WTO and the support they have provided the dollar. I would have thought that we would see an increase in dollar holdings to go along with the dollar loans. Or is that now how this works? Or are we not seeing those dollars backing those dollar loans because those dollars are going into physical gold?

Anyways this paper is way above my pay grade, so I thought one of you Central Banking folks could explain this using small words so that this shrimp can pretend to understand :)

Thanks,

Milamber

Gary said...
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holdinmyown said...

Hi Edwardo.

I care not who TBTB are. That is why I refer to them as the powers "that be". I am not a conspiracist. I do believe however that collusion exists within the $IMFS. After all is not collusion not what a central bank is all about? What do believe the purpose of central banking to be if not collusion among the banks/financial institutions?

Alien said...

Paul B

you won't get an answer to your question here, not from these ... (fill in best you think of).

Just keep saving in Au, paper money is dead.

Gary said...
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milamber said...

@ Gary

Then who/what is causing the pukes?

I don’t think it’s a Giant that has been in gold for decades (centuries).

I don’t think it’s the superorganism finally waking up and demanding en mass physical delivery (contrary to KWN and Egon Von Greyerz).

I don’t think the ones who have understood the game since the Asians forced the LBMA hand back in 97 would do it.

Reading FOFOA’s & Victors work, it seems to me that we have entities with currency, but no gold. & now they want some gold.

I took Blondie's comments to mean that old Giants have acquired their gold long, long ago. But today we have new Giants that are seeking to acquire. But if I am wrong, I am sure he will set me straight!

And I am wondering if it is these Giants that are going to unknowingly bring about RPG in their haste to get their gold?

Is every puke another day where someone realizes that the real Gold window is getting closer to being shut? But for real this time. Or at least until it opens back up under new management at RPG prices?

Milamber

JR said...

Yes Milamber,

These things don’t go together. Something has to give. I do not know what it will be.

I would suggest that the side show of public opinion polls and related political rhetoric is what "will give."

As ANOTHER said, Europe's politics are "a side show," easily subservient to the monetary structure which evolves on long-line cycles. Politicians like to pretend things can change on short cycles, with their help. But the euro has been in the works since 1962. And to those that believe short-line politics will break countries like Greece away from the euro, all I can offer is "time will reveal its long-line nature… in time."
Dilemma

JR said...

Milamber,

Yeah new savers are seeking gold, and by and large old savers (aka the old giants) are not dishording.

FOFO form above:

You have to give physical to everyone who demands it to keep the game going. That's the key to the whole game!! If it’s just one individual demanding 20 tonnes you can quell that threat with a Puke or a CB loan. I suppose it's possible to somehow talk someone out of their demand, but that would be a dangerous game to play. What you are powerless against is a run, a dramatic shift in physical demand. You can raise the price to stretch the flow, but you can't raise it too far too fast without actually causing that shift you most want to avoid.

=======

Re: the superoganism waking up in mass:

FOFOA said...
Hello Kicker,

No, Freegold transition does not require small sizes. They will likely be an after effect. The vast majority of currency is traded for life's necessities and debt service rather than the timeless wealth asset of Kings. Following in the footsteps of giants requires more than pocket change.

The transition to Freegold is all about the big players.

Sincerely,
FOFOA
August 3, 2011 2:16 AM


FOFOA comment to "Go Go South Korea"

Edwardo said...

Holdinmyown asks,

"What do believe the purpose of central banking to be if not collusion among the banks/financial institutions?"

Collusion isn't the purpose of central banking even though CBs engage in collusion. A practice isn't a purpose.

JR said...

Did you guys remember FODFOA wrote Who is Draining GLD?T

for small giants (aka sort of like the new giants Milamber was talking about above):

So after this chat I started thinking that I should write this post for other "small giants" out there that might be looking for tonnes of physical at a good, off-market price...

If you are a Giant, or even a Small Giant, you should know about this off-market opportunity to take giant amounts of physical into your possession at a good price. And you should know this before it is all gone...

In this scenario I am not assuming that the drain on GLD to date has been the direct redemption of ETF shares by Giants. I presume it is simply redemptions by Bullion Banks in order to meet the delivery demands of "important clients," real Giants, perhaps from Asia and the Middle East. And because the BBs would normally have better options than plundering GLD, I am assuming those options are either gone or far more problematic than legalized looting...

And for those of you GLD fans that think you will simply hold onto your shares until the bitter end, I have a warning for you. These Giants don't need to over-bid your shares away from you. They can always buy them at the price of paper gold trading in London and New York. And there will come a point when you are watching the premium on physical coins jump from 5% over GLD to 50% on its way to 500% over the paper gold price. How long are you going to stubbornly hold onto your precious paper before you finally relinquish it to that last Giant's delivery "basket?" Remember, unless you've got $13 million, you've only got paper.

JR said...

See what Blondie wrote,

Most of this “wealth” will not move into gold because most of these “new giants” will follow their $IMFS confirmation bias (as “masters of the universe”) until there is no physical flow at a rate that will preserve their “wealth”.

Old money always had gold as wealth consolidated. New money has all manner of derivatives of wealth, unconsolidated. One is timeless, the other not. New money will receive further education on this.


Old money is by and large is in gold, and most new money won't get there until its already happening. But the remaining flow is there to be had by someone, until there isn't enough remaining flow to meet all the *new savers* trying to buy gold at *today's price* an something gives.

That something is today's price.

holdinmyown said...

Edwardo said:

"Collusion isn't the purpose of central banking even though CBs engage in collusion. A practice isn't a purpose."

I asked you what you believe the purpose of central banking to be but all I get back from you is "a practice isn't a purpose".

I will tell you what I believe to be the true purpose of "most" CBs. At its core the creation of a central bank involves a partnership between government and the banking industry. Government provides the banks with a monopoly to manage a nation's currency, money supply, and interest rates in return for the support of the banking industry in purchasing government debt to act as collateral to the CB's liabilities. Thus the currency is meant to act as both a MoE and a SoV. The benefit to the banks is that they end up with an oligopoly with significant barriers to entry allowing higher profits than otherwise possible (or at least likely). In addition they (the individual banks in the system) get a lender of last resort that stabilizes the individual banks in times of (temporary) illiquidity due to changes depositor time prefernces. The government benefits by having a guaranteed buyer of its debt, enabling it to siphon off capital from the economy through opaque monetary inflation rather than through direct and transparent taxation.

The reason that I said that this is the purpose of "most" CBs and not all CBs is that this applies to the so called "independent" world central banks such as the Fed. The Fed is a private institution owned by the banks that has been given a monopoly over the control of the US money supply by congress. In effect the Fed is an agent of congress for this purpose. So if the Fed is owned by the banks then how can it execute the mandate given them by congress without collusion of the commercial banks who control it? The structure mandates collusion among the banks.

The above does not apply to the ECB which has a single mandate of price stability. Also it has severed its ties to both the nation state and to gold. The individual country NCBs of the Eurozone however have not all severed their ties completly to the nation state. In some cases (eg Greece) the NCB and its commecial banks are encouraged by the government to buy the debt of that government. This is because each NCB is reponsible for regulating the banks operating in country. Perhaps a central regulator (the ECB) of systemically important banks is required?

The above also does not apply to CBs such as the Bank of Canada that is a crown corporation (owned by the state) unless there has been regulatory capture of the institution by the banks through campaign contributions to all political parties.

So again I ask you: What do you believe the purpose of a CB to be?

Jeff said...

FOFOA: Those "many" also think the CBs hate gold. In fact, they lump all "banksters" in together, as if one bad apple spoils the whole bunch. I argue that the Central Bankers not only do not hate gold, but they are in fact working toward Freegold. This was Another's message. They long ago realized the need for a stable store of value in a fiat monetary system and that once the dollar's wonderfully stable debt is gone, this is next...

Don't make the mistake of assuming central bankers are stupid, or anti-gold, or that they are not fully aware of the concepts and principles I am writing about. When I write about the "logical preference" for gold, or the "de facto ascent of gold" to global IMFS reserve asset par excellence status, or gold as "the de facto solution to the international reserve question," these are logical, de facto realities of which central bankers are acutely aware. So when you hear them talking about complex solutions requiring massive[ly unlikely] global cooperation, new international treaties and enabling legislation, realize that they are talking about ditching the dollar in the most diplomatic terms they can...

Edwardo said...

The reason The Fed came into being was to function as a lender of last resort. The proximate catalyst for The Fed's creation was the panic of 1907. Clearly The Fed's purpose and functioning has "evolved" but, ultimately, that is their raison d'etre, to act as a lender of last resort. Certainly, they are in overdrive on that mission these days.

The Fed isn't really a private institution, it's a quasi private one. That may sound like a distinction not worth making, but, given the fact that the Fed's charter can be revoked at any time by Congress, the idea that The Fed is, strictly speaking, a private outfit is simply a non-starter. And The Fed haven't yet had their charter revoked because The Fed generally acts in concert with Congressional wishes, and, the vast majority of office holders don't want to assume their Constitutionally granted powers. For political purposes they much prefer to pretend that The Fed is a kind of wayward operator all the while certain that they will act in ways that benefit Congress.

Aiionwatha's Nation said...

Central Banks and Government are a purely simbiotic relationship. One cannot exist without the other as things sit today and both hide behind the other when the heat is on. The bankers keep the money and redistribute to the political lackeys after term of service has ended and the muscle on time. Nothing all that complex about it.

FOFOA,

Having had the chance to re read your position on the Treasury gold position, I see some merit in that tact, but I have to say that every single other time the vault door has been lifted it was well after the stash was long gone. Look at any bank failure, the derivatives market when it busted in 2008, enron, Lehman, BSC, MER, AIG, LTCM the GAAP presentation of the USA's books (for our brave T Bond holders). Same with gold. By the time you most folks know they want some it will be "unavailable."

holdinmyown said...

Edwardo:

That's what I said above: The purpose of the Fed is to act as a lender of last resort and to buy USTs (short version). So how does one manage the nation's currency, money supply and interest rates without collusion amongst the commercial banks?

Jeff:

"I argue that the Central Bankers not only do not hate gold, but they are in fact working toward Freegold."

I have to respectfully disagree with FOFOA on this one. Had he said "some central bankers not only do not hate gold, but they are in fact working toward Freegold" I would agree. But to say that the central bankers at the Fed are actively working toward Freegold is tatamount to saying that these central bankers are working to remove the USD as the world's reserve currency. That I do not believe.

holdinmyown said...

By "short version" above I meant short version of my much longer explanation above ... not short version of USTs.

Aiionwatha's Nation said...

and this doesn't give me tons of comfort:
I have seen some evidence, gathered from military and Treasury officials (slightly vague, no???), that the gold is where the government says it is (where did they ever commit to saying it was?). I have seen no evidence whatsoever that it is not (and neither has anyone else).

Based on this (what???), I assume (ass: you and me) the gold is there. If I learn differently someday (after i'm a german national), I'll change my view, but until then I'll base my economic and monetary analyses on the fact that the United States is the proud owner of 8,133 metric tons (of unimportant stuff).

Sorry, no sale on this end but I hope you are right and I am wrong. It doesn't matter to RPG one way or the other. Just what juris diction you are in.

Aiionwatha's Nation said...

Last bit on that, defending your nest position versus a reality you want to portray are very different circumstances.

milamber said...

JR said...

"Did you guys remember FODFOA wrote Who is Draining GLD?"

JR,

Thanks. I had forgotten the details of that post & forgot to read it carefully when Jojo referenced it in the comments.

It is obvious (now it appears obvious to me!) that who is actually draining GLD is irrelevant. the fact that GLD is getting drained is the point.

I guess the next thing to watch for is if GLD can't get replenished. So far no signs of that (That I can see).

Milamber

JR said...

Who are the CBs?

It is important to start thinking of these gold operators as the banks that they are, because then you can start to see the significance of the CBs publicly announcing, through the twice-renewed CBGA, that they are no longer going to be the lender of last resort to this system. Quote: "The signatories to this agreement have agreed not to expand their gold leasings…" You cannot be a backstop without expanding!

[...]

To see this view, you have to look at larger trends in action. For example, the reduction in LBMA volume following the first CBGA. The steadily rising gold price since the CBGA. The dehedging that began after the CBGA. The CBs selling less and less until they finally became net buyers. Why the change?

[...]

I think the CBGA was a warning to the BBs that they had better wind down this monstrosity. I think the CBs realized the necessity of a stable store of value as the foundation under a fiat monetary and financial system, and that only (what I call) Freegold could accomplish this. I think that is, and has been, their goal all along. To force bullion banking to wind itself down. This is the view ANOTHER and FOA painted.


The View: A Classic Bank Run and comments

victorthecleaner said...

In the June 2012 issue of Resource World (p. 26) Nick Barisheff writes (emphasis mine)

It bears mentioning that daily turnover of physical gold, according to the London Bullion Market Association, is approximately US $34 billion. Volume is estimated at five to seven times that amount.

He most likely got these US $34bn from the LBMA clearing statistics.

Funny, isn't it? Even some who claim to have 30 years of experience in the industry must be seriously surprised when the thing blows up.

Victor

victorthecleaner said...

5/26/98 ANOTHER (THOUGHTS!)

[...]
I say, a travel to London will offer much education, as the "city" trades more gold than exists!


Victor

Jeff said...

Rickards on auditing US gold:

http://www.usnews.com/opinion/blogs/economic-intelligence/2012/06/04/calls-for-a-us-gold-audit-miss-the-point

Jeff said...

Nick Barisheff, Ted Butler, Andrew McGuire, the internet is full of hacks peddling bad advice and misinformation on gold. 30 years experience in being wrong is nothing to be proud of. Plus ça change, plus c'est la même chose.

d2thdr said...

Costata wrote ,'And lastly I'm not blind to the potential response from the hoi polloi. They may well cheer the guys who are screwing them while they string up aspiring leaders who are trying to do right by them. But I don't see that as a reason to go along with the popular delusions.'

Well said.

AdvocatusDiaboli said...

a little OT, but wanted to share this funny one:
http://www.youtube.com/watch?v=ndshbH3qZ6Y

A little hard to comprehend, actually not funny, but rather disturbing, isnt it?
Greets, AD

JR said...

Another: The concept of what wealth is, is going to change. Concept is but a thought and a thought of what value is, changes thru life. Time will prove all things.

In a comment to Go GO South Korea, FOFOA said...

Hello Kicker,

No, Freegold transition does not require small sizes. They will likely be an after effect. The vast majority of currency is traded for life's necessities and debt service rather than the timeless wealth asset of Kings. Following in the footsteps of giants requires more than pocket change.

The transition to Freegold is all about the big players.

Sincerely,
FOFOA
August 3, 2011 2:16 AM


Small sizes are an after effect, a consequence of demand for that which is revealed to be the timeless wealth asset of Kings.

The euro is showing us the way:

Monday, August 6, 2001 - GOLD @ $267.20 - FOA: "The result will be a massive dollar price rise in gold that performs over several years, as the reserve function transition politically begins."
Tuesday, January 1, 2002 - Launch of euro notes and coins
Friday, February 8, 2002 - GOLD ABOVE $300
Monday, December 1, 2003 - GOLD ABOVE $400
Thursday December 1, 2005 - GOLD ABOVE $500
Monday, April 17, 2006 - GOLD ABOVE $600
Tuesday, May 9, 2006 - GOLD ABOVE $700
Friday, November 2, 2007 - GOLD ABOVE $800
Monday, January 14, 2008 - GOLD ABOVE $900
Monday, March 17, 2008 - GOLD ABOVE $1000
Monday, November 9, 2009 - GOLD ABOVE $1100
Tuesday, December 1, 2009 - GOLD ABOVE $1200
Tuesday, September 28, 2010 - GOLD ABOVE $1300
Wednesday, November 9, 2010 - GOLD ABOVE $1400
Wednesday, April 20, 2011 - GOLD ABOVE $1500

Woland said...

If your "wealth" is a hyperactive squiggly line which is in
continuous motion, even as you sleep, without any connection
to your own activities, then either you or your wealth have a
problem.
FOA: "Confidence is a strange human emotion. It is fragile
beyond compare. Many confuse confidence in one's assets
with confidence in others' confidence. There is a big difference".

An old favorite: "Men, it has been well said, think in herds; It
will be seen that they go mad in herds, while they only recover
their senses slowly, and one by one".

JR said...

FOA: "Confidence is a strange human emotion. It is fragile beyond compare. Many confuse confidence in one's assets with confidence in others' confidence. There is a big difference".

Answers aplenty in the bye and bye
Talk about your plenty, talk about your ills
One man gathers what another man spills

Woland said...

Hi JR; One of my daughters (now 43) used to follow them for
several years. I, however, am too old. Oh well.

On another note, I just read over at Marketwatch (of all places!)
a piece by a Michael Casey of Fx Horizons, entitled, "Imagining
the end of the dollar's reign." He sounds like a new hiker on the
trail, in many ways. He had an amusing line in the above piece:

"US foreign currency reserves are barely enough to cover 2 weeks
of imports." Now there's a novel perspective for you. Confidence
that others will forever "stack the Benjamins" does not appear
strange to us here in the USA.......yet.

victorthecleaner said...

On internal devaluation versus external:

Why Internal Devaluation Is Advantageous (by A. Aslund)

Victor

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