Thursday, July 12, 2012

Fallacies – 1. Paper Gold is just like Paper Anything


This is the first in a new series I'll be returning to occasionally. I have recently come across a number of fallacies relating to the subject matter of this blog and my plan is to compile them and then correct them one at a time.

1. Paper Gold is just like Paper Anything

This first fallacy aims to undermine a good deal of what Another and FOA wrote about by claiming that the paper gold market has the same effect on gold as any paper market has on its underlying commodity. This fallacy claims that the same arguments made for an explosive revaluation of physical gold could be made for anything else, therefore they must be wrong.

Commenter "ForLiberty" put it this way:

"This whole 'paper gold is holding the price down' argument makes zero sense to me. It is just a logical nonsense. All paper trades have two parties - bidup and biddown. A paper gold trade could have never taken place if nobody wanted to short it. This is how all markets work. There are paper tomatoes sold too. Is there a conspiracy there too?"

ForLiberty was apparently paraphrasing Martin Armstrong who wrote something remarkably similar:

"They argue that today gold is really paper gold, and the market have multiplied that many times. They argue that the real gold is only about 5 billion ounces. They then argue that the paper gold depresses the price of gold and this is why it is not where it should be right now. All this sound nice, however, you can make the same argument about anything traded today from wheat to stocks and bonds given the derivative markets. Some see conspiracy behind everything."


Is he correct? No he's not. Can we really make the same argument for anything else? No we can't. The paper market for commodities is just as likely to have a levitating effect as a suppressing one because it allows for financial participation by those who have no need or ability to hold the actual commodity. Gold is the only one that is unequivocally suppressed by the existence of a paper market.

No conspiracy. The mere existence of a commodity-like paper market for gold suppresses the price naturally, systemically. Long term systemic suppression of gold is something totally separate and different from short term price manipulation or distortion which can occur in any commodity or paper market.

Here's ANOTHER explaining that the BIS (primarily European central banks at the time) not only anticipated that a paper gold market would lower the price of gold, but that in the 1980s they supported the creation and expansion of this market for that very purpose:

Date: Mon Feb 16 1998 14:40
ANOTHER (THOUGHTS!) ID#60253:

"The BIS leads the creation of a paper gold market that will lower the world price of gold to the extent that it remains above "production costs".

Guess what, it worked! Contrary to all expectations of oil shortages, inflation, debt collapse and what have you, It Worked! But, there is one small problem?

The BIS and other various governments that developed this trade (notice I didn't use conspiracy as it was good business, as the world gained a lot), thought that the paper gold forward market would have allowed the gold industry to expand production some five times over! Don't ask where they got this, as they are the same people that bring us government finance and such."


In other places ANOTHER explains that we should not be upset with the CBs because they were just buying us time. And later he explains what they were buying time for—to make it to the launch of the euro. He also muses about the fact that it's the Westerners playing in this new paper gold market who are most upset about the low price. The physical buyers in the East see it as a gift. But I digress.

Nobody is claiming there are more than 5 billion ounces of paper gold. In fact, there is probably far more physical in the world than paper gold. Enough physical gold to cover all of the paper a few times over perhaps. But that doesn't matter, it is only the flow that matters. It's the same with commodities that get produced and then consumed. It's the flow between production and consumption where the price is discovered in the paper markets. But gold doesn't get consumed at a rate anywhere close to its next closest competitor. It just accumulates.

In commodities the paper market regulates the flow between the producers and consumers, acting as a kind of a shock absorber against unexpected supply and demand shocks. But gold is different because it just accumulates. There are two main differences between gold and everything else. The first is that gold just accumulates rather than getting consumed, so there is no reason for there to ever be a supply side shock, even if all the mines suddenly stopped producing. In fact, today we have a 60 year "supply overhang" in gold. Nothing else comes close.


The second difference is that the vast majority of demand for gold is in currency terms, not weight terms. This is not true for commodities. If you need a ton of copper for a construction site, you need a ton of copper. That's weight-denominated demand. But gold demand is overwhelmingly in currency terms. If you need a tonne of gold, what you really need is $50,000,000 worth of gold. It doesn't matter how much it weighs because you're just going to stick it in a vault.

Having a paper market as a shock absorber for the gold market only has the effect of keeping the price too low. My explanation for the LBMA survey discrepancy is a perfect example.

Since gold is not consumed by consumers or industry the way corn, oil, copper and grains are, and because it simply accumulates, supply shocks are not economically critical. On the demand side, gold is apparently used as a "safe haven currency". And we apparently had a demand shock of around 7,575 tonnes in Q1 2011. The normal supply for that period would have been around 700-1000 tonnes, so the paper gold market acted as a shock absorber and absorbed that demand shock by expanding. That way the price of gold only rose $30 in a quarter with a demand shock of 10 times the normal physical supply flow.

But that wasn't really demand for 7,575 tonnes of gold. It was demand for $337B worth of gold. Hypothetically, if the price of gold had been $55,000/oz. in Q1 2011, that demand would still have been for $337B worth of gold, the only difference being that the $337B demand could have been supplied by only 190 tonnes (a mild 20% increase in flow rather than an extreme 1,000% increase) and the price of gold would therefore have barely felt a bump in the road, even without a paper market shock absorber.

Therefore, having an elastic paper market shock absorber for gold is only necessary if the price is too low, because there will always be plenty of supply if the price is high enough (60 year supply overhang, remember?). At today's price, having a paper market shock absorber is apparently necessary to keep the gold market from blowing up.

It logically follows that it is the very existence of the paper gold market which is keeping the price too low, because if you took it away, price alone would have to regulate the flow. Take the paper market away from other commodities and you simply remove the investor/speculator money in the middle thereby exposing producers (and consumers) to unpleasant shocks.

We have no idea what the "stock" of paper gold is. The LBMA survey only gave us a glimpse of the flow (paper gold turnover) over a given time period (Q1 2011) and in a given market (loco London spot, forwards, options and swaps, with spot transactions being 90% of the reported trades). That turnover was 2,700 "tonnes" of paper gold per day with 64% of the LBMA members reporting. We only got a lucky glimpse because the largest banks in the world (bullion banks like JP Morgan Chase, Goldman Sachs, HSBC, Barclays, Deutsche Bank, Credit Suisse and UBS) are lobbying for a technical rule change that will make their overall Basel III compliance easier.

Sincerely,
FOFOA

616 comments:

1 – 200 of 616   Newer›   Newest»
Jonathan said...

'But gold doesn't get consumed at a rate anywhere close to its next closest competitor.'

A competitor ???!!!???

Pain d'Or said...

FOFOA becoming famous ;-)

http://treo.typepad.com/files/20120711-specialreportgold2012-ingoldwetrust.pdf

Page 25 !

JR said...

Its competitors in the physical plane to emerge as wealth reserve asset par excellence as the $ collapses:

"I cannot see a dollar collapse without a simultaneous revaluation of something else. It's a seesaw. The dollar isn't collapsing against gold. It is collapsing against the physical plane of goods and services. That's the fulcrum, not gold. Dollar collapse is the force, goods and services the fulcrum, and gold the load. So gold is revaluing against goods and services. The gold revaluation is against the physical plane so as to fill the reserve void left by the dollar's collapse."
FOFOA comment to Moneyness

Something has to fill the void. Will it be another commodity? Here are two reasons from above that *gold is different*:

In commodities the paper market regulates the flow between the producers and consumers, acting as a kind of a shock absorber against unexpected supply and demand shocks. But gold is different because it just accumulates. There are two main differences between gold and everything else. The first is that gold just accumulates rather than getting consumed, so there is no reason for there to ever be a supply side shock, even if all the mines suddenly stopped producing. In fact, today we have a 60 year "supply overhang" in gold. Nothing else comes close.

The second difference is that the vast majority of demand for gold is in currency terms, not weight terms. This is not true for commodities. If you need a ton of copper for a construction site, you need a ton of copper. That's weight-denominated demand. But gold demand is overwhelmingly in currency terms. If you need a tonne of gold, what you really need is $50,000,000 worth of gold. It doesn't matter how much it weighs because you're just going to stick it in a vault.

FOFOA said...

You're a silverbug Jonathan, amirite? Silver medalist? Going for the silver in the big game are we? There can only be one winner. There are four separate links in there. Please come back and make your case for why it is a noble pursuit to go for second after reading them. ;D

AdvocatusDiaboli said...

So todays paper market is not appropriate for the price discovery of phsical gold. Yes I hear you FOFOA. Nobody who ever understood "the asset gold" ever doubted that. So what?
It is what it is. It has been like that since more than 30yrs. So what? But the (Free)gold bugs scream "get your physical today, because tomorrow there wouldnt be any."
Dont some of these people:
1.) feel kind of stupid by now?
2.) why never plot a realistic market of the future which covers this essential properity of the asset gold.
3.) prove why and when such market will be entered? (I remember that "PAGE" BS, all over the PM "community"...)
Greets, AD

Motley Fool said...

This first fallacy results due to a misunderstanding of the purpose/use of gold.

Contrasting it with say grain, where the purpose is consumption, and the futures and options markets have the goal of modulating price changes through the seasons ( this is how these markets originated), and some hold these contracts simply for price exposure. These contracts have function in the grain market, and does not contradict the purpose of grain.

In the case of gold however the function is that of store of value. No paper derivative can fulfill this function, nor does the resultant price exposure have any purpose in relation to the function of gold.

Only gold in its physical form can provide the highest function of gold, value storage through time.

This realization dawning on the market, as it is gradually occurring, is one essence of FreeGold.

TF

JR said...

I'm a little hungry, but no, I don't feel stupid. Thanks for asking tho; glad to hear you care!

Monday, August 6, 2001 - GOLD @ $267.20 - FOA: "The result will be a massive dollar price rise in gold that performs over several years."

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
Monday, July 18, 2011 - GOLD ABOVE $1600


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

P.S. - the "(Free)gold bugs" don't scream "get your physical today, because tomorrow there wouldnt be any." They scream the opposite - there is a huge stock to flow ratio in gold, a 60 year "supply overhang" in gold.

Nobody is claiming there are more than 5 billion ounces of paper gold. In fact, there is probably far more physical in the world than paper gold. Enough physical gold to cover all of the paper a few times over perhaps. But that doesn't matter, it is only the flow that matters.

AdvocatusDiaboli said...

JR,
that C&P and the price table is really useless.
Put the (paper) price of e.g. copper next to it and you will find basically the same (also remember? ("one is not like the other"). So absolutely not argument you made.
Greets, AD

JR said...

Hi AD,

I still don't feel stupid. Maybe that's because I don't hoard copper.

But maybe I should get into the copper game, seems to be a growth industry, yes?

Anand Srivastava said...

Jonathan: That's silver.

JR said...

Lotsa silly good times going down on twitter; DP keeping track of lots of it at:

https://twitter.com/#!/darenpa72/specialgeeks

Check it out.

Added bonus - only 140 characters max on Twitter, so less C&P bombs more funnies!

One Bad Adder said...

Hi FOFOA - Oxymoronic "Gold-futures" showing their short-comings lately (as expected).
This post a top-notch and timely offering my Friend.

DP said...

Speaking of #Freegold spreading out to touch you all over and especially on your insides, as well as slowly crawling like a new strain of flu virus giving a warm glow to some of your best buddies & biggest enemies on Twitter

Do YOU know a truly #SpecialGeek whose name isn't already on my guest list??? Well dammit you gotsta act now!

@darenpa72 #NomNomNom [NamesHerePlease!]

The more, the merrier.

RSVP

BaronSilverBaron said...

As a holder of a considerable amount of Silver you have me worried FOFOA.

Are you really saying that only Gold will be standing after the collapse?

FOFOA said...

Yes, that's what I'm saying. But I'm not asking you to believe me. That's a big difference between me and a few others.

JR said...

Join us at the ALL INN and raise your glass to @darenpa72!

Robert said...

Greets, AD, when you say that the paper market is what it is and has been like that for 30 years, do you mean to imply that 30 years is a long time? As far as I recall, FOFOA never suggested that physical will be gone "tomorrow." More like "better a decade too early than a day too late." Or the analogy of an overdue earthquake. Tell me, what is the best time to prepare for a disaster: Before it strikes? Or after? How many days or weeks before the disaster should you wait before you start to prepare? What do you recommend?

Aquilus said...

AD,

Thank you for the links to the current political grandstanding in the previous post.

You have yet again successfully proven the point that politicians can put up a great show and make asses of themselves. Oh, yes, and that the power of coercion of the government is great.

Thank you for re-re-re-stating the obvious.

Now for a recent quote from a current politician which that was forced to act when things got past where he was in control.

From July 11,2012: Rajoy said. “But the circumstances have changed and I have to adapt to them.”

So the point is, as pointed to again and again on this blog: politicians adapt to any new reality.

They are not the driver in this crisis. They are along for the ride, and they can make life miserable for anyone in it for a while, but they always adapt in order to be relevant. They are politicians after all.

As for the industrial commodities: same idea. Yes, they keep pace with inflation, but if the outpace inflation for long, the real economy is killed.

So I bring you back to your politicians. Do YOU think they'll do something about that if that becomes the case?

How about gold increasing in price? Does it hurt industry if it rises? Nope. Does it help Central Banks re-balance their balance sheet? Yup. Does it help "the elite" re-balance their balance sheet? Yup. Does it hurt the economy? Nope. Does it hurt the average person at higher prices? Nope. Is it a focal point for most cultures on the globe? Yup. So why would politicians fight it (when the time comes)?

Oh wait, the global banking cartel. Your other paper tiger. I'd better run and hide before I badmouth them.

Greets

AdvocatusDiaboli said...

Robert,
after I posted, I noticed that the number of 30yrs. is not put correctly. In fact it is >500yrs that the financial system got away with issuing paper gold against physical gold.
So your right, better half a millenium to early...
Greets, AD

Jonathan said...

Okey Dokey FOFOA I'll reread those four articles. Only two words in my post and I get four articles. Glad I didn't write 'FIRST!'

I wouldn't call myself a silverbug, I just don't want to get squashed by the transfer of wealth crush, again. OK I admit it uRite, (10:90) by my actions.

John said...

@ Aquilas

...."does it hurt the economy? Nope..."

Are we sure about that? Given the connection with oil, doesn't it leave the real oil price substantially higher even if not commensurate with the rise in post FreeGold revaluation? Surely this is one consideration for the otherwise spineless politicians.

Jeff said...

Hi John,

Raising the price of oil is worth it, at least to a point, to keep your currency as the world reserve and keep your exorbitant privilege.

Aquilus said...

@John,

Good point.

The gold/oil ratio has been talked about numerous times and is one of the cornerstones of FO/FO/A. I'm not in the position to link to the relevant posts now (others please do if you could).

But the gist is that the current ratio is a paper gold /oil ratio and is much much lower than the physical only gold/oil ratio.

The whole idea is that physical gold price can and will rise disproportionately more than any other commodity. And by doing that protect the real economy from being hurt to badly. An escape valve if you would for all the monetary pressure.

enough said...

We wont have to discuss paper gold for long as we will be able to read about it in history books soon enough......

IT'S ON LIKE DONKEY KONG !!! giggle

see you on the other side friends :-)

BTW Jonathan... my physical gold to silver ratio is 1:1 IN WEIGHT.........yeehaw !!!

Jeff said...

FOFOA: What if scarcity doesn't matter in a monetary metal? What if STABILITY is infinitely more important than scarcity? What if the "stocks to flow ratio" matters infinitely more than scarcity? What if the gold stock to flow ratio at today's prices is more than 175 times greater than silver?

What if silver's wonderful history as a monetarily important part of "bimetallism" ended more than a century ago? Can you show me a politician or central banker that has said anything about silver lately? Was there ever a "London Silver Pool?" How about a WAS/CBSA (Washington Agreement on Silver/Central Bank Silver Agreement)? When was the last "silver standard?"

The $IMFS loves that silver is associated with gold! It "commoditizes" gold. It takes much attention away from "gold-the-wealth" and puts it on "precious metals."

But there are so many would-be gold bugs with no savings that want to participate in the gold revaluation that don't understand. And they still see the silver price rising with the gold they can't reach.

So they are convinced that silver will outperform gold, and so don't touch the yellow wealth metal. They speculate! Exactly what the $IMFS wants them to do.

You want to use silver as a call option on gold? Go for it. But then you are an active trader. You must be alert and prepared to take a loss and live with regrets.

I know all the standard arguments for silver. So save your effort. I spent a year studying them while I was accumulating silver.

"There is less silver than gold." Makes it a worse monetary metal at this point. Less stability.

"Historic 16:1 ratio." Good luck with that one. Bimetallism was officially abandoned more than 100 years ago.

"More industrial demand for silver." Uh-huh. Yup, it's a commodity metal now, and susceptible to economic forces.

"TPTB don't have any to suppress the market." Uh-huh. Yup, and they don't have any reason to bother supporting a revaluation when the dollar collapses either. In fact, they have an incentive to do the opposite! To support a WIDENING of the GSR so that industry doesn't suffer.

"Gold's too expensive." Then you don't understand money.

"You get more silver than you get gold." Yeah, you get more iron scrap too.

Puh-leeeeze. Don't come hit me with these tired arguments. I will not respond. I probably left out a few too.

If you feel better buying silver than gold, then just go for it. It won't affect Freegold in the least. I won't hold it against you!! It will help it in fact. Just like dumping your dollars for wheat or oil will help speed the process.

AdvocatusDiaboli said...

A,
"They are not the driver in this crisis."
...but instead the cause and will make sure that it will stay that way. Has been like that from beginning of mankind and will be until the end of mankind. (Just look at todays news from the PIGS.)

I dont claim to know what they will do and when they will do, I am not such a great prophet like FO(FO(A)) claim to be. But let's just look at the real world facts:
Can we agree, that they will spend? Can we agree that they will do anything in order to get their stuff from the physical plane even with brute force because they are in power and will do anything to feed their faithful voters? And if they cant have their stuff, nobody else will get anything? Start to face it, what is different this time: The majority of the population in western nations is not working (productively).
That's the essential face of the government of the superorganism thats its very nature, stinking through every single pore of the rotten cadaver.
BTW: How else do you explain that the german government is planning on wealth seizure of its very own citizens for the lazy and/or unproductive PIGS and others, although it could instead borrow the money at negative interest rates from some morrons in the markets?
Or how do you explain that other countries start on planning/establishing capital controls (Agentina) or manipulating their currencies (Swizz&China) or gold (India)?
AGAIN, BECAUSE THE GAME IS NOT ABOUT ANY KIND OF TOKENS! ITS ABOUT KEEPING THE PRODUCTIVE WORK FOR THE UNPRODUCTIVE, ON THE PHYSICAL PLANE, WORLDWIDE.
So gold might and probably will rise anyway. If the rising gold prise hinders the government in their basic goal, you can be 100% sure, that they will do something about it. At least I can say about Germany, that social envy is one of the strongest characteristics of the society, therefore I think gold bugs might be an easy scapegoat target in the future as well, just as the current wealth seizure project is already showing.
Greets, AD

enough said...

Record Negative Nominal Rates in many countries this morning......

Let's all raise a Bucks Fizz to Mr. Adder's rush to the here and now....

If you listen carefully you can hear it, the cracking of the floor/mirror that most view as "reality".......

Robert said...

Greets, AD, yes, now I think you got it! If you had pulled your gold out half a millenium ago, you would have been spared a long list of bank runs, devaluations and currency collapses. Of course there are some features of how the paper market has developed over the last 35 years, touche to you for pointing out that the risk of holding paper did not begin in 1971!

JR said...

Let’s look at the price of oil in gold. Here it is going back to @ 1946

Year Average $/bbl Average $/oz Ave bbl / oz
1947 $2.16 $34.71 16.069
[...]
2010 $71.21 $1,224.53 17.196

The average is just under 15. Real consistent - 1947, 1972, 1980, 1990, 1999, today still there.


It has ranged from a low of about 9 up to 29 (in 1988). I wonder why?

Coins
By Jed Stevenson
Published: April 14, 1991

Gold coins made by the U.S. to help oil companies pay their debts to the Saudis.

Sometimes coins are minted for the strangest of reasons. Some Saudi Arabian bullion coins, several of which will be auctioned by Stack's early next month, are a prime example.

The coins were struck in Philadelphia by the United States Mint in 1945 and 1947 to satisfy the obligations of the Arabian American Oil Company, or Aramco, which had been set up in Saudi Arabia by four American oil companies. The company was obliged to pay the Saudi Government $3 million a year in oil royalties and its contract specified that the payment be made in gold.

The United States dollar at the time was governed by a gold standard that, at least officially, made the dollar worth one thirty-fifth of an ounce of gold. But the price of gold on the open market had skyrocketed during World War II.

For a time the Saudis accepted payment in United States currency, but by 1945 they were insisting that the payments in gold be resumed. Aramco sought help from the United States Government. Faced with the prospect of either a cutoff of substantial amounts of Middle Eastern oil or a huge increase in the price of Saudi crude, the Government minted 91,120 large gold disks adorned with the American eagle and the words "U.S. Mint -- Philadelphia."

US Mints ‘Gold Disks’ for Oil Payments to Saudi Arabia

Might one theorize that as long as the GOR stays in that range which historically ranges from about 9 up to 29 (in 1988) the $IMFS will be the system?

enough said...

Edwardo,

I've got to tell you a funny/sad story....

I have a 1st cousin, hippy (literally) that lives in Santa Barera. She inhereted $55 million from her parents. All the cousins (including yours truly) recieved $25K (bless my uncle and aunt)....

She's seen all the press and made a decision to move into "hard assets".....

So she's buying millions in semi precious stones/crystals with names one can't pronounce. She believes thay are "under valued".

So the hippy descendants are aware of the systemic fraud but are making "hippy hard asset" moves.

AdvocatusDiaboli said...

Robert,
whenever that paper gold defaulted, what happend to the purchasing power of the real physical gold? It rose a little and dropped a little but overall the purchasing power remained basically the same. This happend the last 500yrs: The paper defaulted, physical gold remained, new paper gold was issued and so on...people that wanted physical got physical, people that wanted paper got paper.
Therefore I dont get it, why now suddenly it should be different and the other way arround, from proven history and everybody is so fanatic about that supposingly sudden 20-bagger. Makes simply no common sense, either way you look at it.
Greets, AD

costata said...

enough,

That story about your cousin is fricking hilarious. I'll leave youe 25 grand in my will just for sharing it.

costata said...

enough,

BTW I'll stipulate that the 25 grand is to be dumped on your front lawn.

Enough wine time for bed. Good night all!

dieuwer said...

I will play the devil today:

A lot on this board has been said about gold, the dollar and hyperinflation. Predictions abound. Problem is, these predictions have been made for more than a decade now (still remember book-seller Prechter?) and not much have come a pass.
Therefore, instead of making even more "thin-air" predictions, it suggest it is time to put a time-frame on all of this.
Therefore, dear forum people, whadoyouthink? WHEN is the shit gonna hit the fan? WHEN will bullion be at $55,000?
Next year? Five years from now? Ten? When I am dead and buried twelve times over?

costata said...

dieuwer,

Your questions caught Uncle costata just before bedtime. The countdown starts January 2013 unless the ECB gains control of the EU private/commercial banking system before then. It has less than three (3) years to run after that.

enough said...

Dieuwer,

are you currently standing outside in a thunder storm? If you are you might be dead before freegold....

I for one could not possibly be more explicit...

First paper gold must implode if I understand correctly, I think we are seeing that now.

What is the length of time between paper gold implosion and freegold?

not long.......

KnallGold said...

Yeah but the earth was flat for 1000years...(neither this is implying anything per se, but reality is a continuum).

But not going to argue about social envy as a big force in Germany. That's why there are so many Germans here in Switzerland and der Bohrjans foaming at the mouth with a dark red head.

Of course "keeping a low profile" is best advice for us Goldholder here...

KnallGold said...

make that "a 4 dimensional continuum", one can better grasp it with one's imagination. Plus it sounds more smart ass like...

POG @ 1550$/oz, hmm, is that seducing enough to buy?

jojo said...

"POG @ 1550$/oz, hmm, is that seducing enough to buy?"

Frankly, I buy whatever I can get these days. That is to say, every single dollar I can free up gets converted to gold. I pay little attention to price right now.

jojo said...

I had a late start.

Jeff Snyder said...

AD,

I've only recently been following the after-article discussions on this blog. I see you passionately are trying to disabuse freegolders of some of their ideas. I am sorry if you have addressed this elsewhere, but if your thoughts are that the freegolders are wrong to acquire and hoard these gold tokens or invest them with such future potency, and that they are missing some bigger picture, what is it that you think they should be doing with their savings/surplus that is better? I can understand lambasting someone who thinks that they just have to sit back and reap their ultimate reward and all will be well, so that they don't ever have to do anything else, like figure out how to create new productive and sustainable enterprises and functioning communities for our resource-depleting, climate-changing oligarch-rapists-in-charge world, but technically hoarding some gold tokens does not preclude making other efforts and preparations and I don't see that FOFOA's work is to be taken as a way to win the Lotto, although I see how some people could view it that way. For one thing, putting surplus in phys gold is one way to deprive these sociopaths of even more leveragable resources to wreak their havoc, so that it's justifiable on moral grounds alone forget about whatever "profit" motive might exist long-term. FOR what are you trying to save the freegolders from?

AdvocatusDiaboli said...

JS,
freegold is a certain theorem about the (future) function and pricing of especially physical only gold. Have I understood that correctly?
So in that sense, I find it only fair and interesting to ask in that context the appropriate questions about that.
Again:
- why never plot a realistic market of the future which covers this essential properity of the asset gold.
- prove why and when such market will be entered? (I remember that "PAGE" BS, all over the PM "community"...)


The political discussion (aka "giant BS") is basically a sideshow which pops up once in a while, since it is kind of annoying that any political actions if they are not pointing towards FG, are completely blinded out by some folks.
Again, (meta)physically: A "Store of Value" does not exist. Only tokens exist. Gold is the ultimate token, aka "wealth reserve (monetary) asset". I dont know about other folks, but my wealth is not constructed from tokens. So the answer to the question remains to everybody themself, when you get paid, what to do with it? Hoarding tokens? What kind of tokens? What other stuff?
I personally have the feeling that this neutral understanding is much too often neglected on this blog, because some people are much too caught up in their confirmation bias, just to get that straight.
Greets, AD

costata said...

DP,

http://www.youtube.com/watch?v=tzwBlm99YJY

Jeff Snyder said...

AD,
Thanks for that response. I agree that one should not lose the perspective that, as you say, "(meta)physically a Store of Value does not exist." As I see it, it all ultimately depends on a social network and the perceptions of value imparted by that social network, and therefor "everything is in flux." Even holding something as tangible as productive land as "wealth" depends on paper legal titles, and is impacted by politics, property taxation, the banks mucking up chain of title through MERS in a headlong securitization scheme, etc., and therefore depends on one's abiltiy to continually protect the asset from incursions from these sources. Should you really want to hold on to that asset, the maintenance cost is, ultimately, infinite, as in it may ultimately cost you your life.

If this is where you are coming from, I can understand why you might find an attitude of certainty with regard to the coming Freegold Revolution and its effects to be a little irksome, rather than viewing this thing as something of a bet.

It's really beyond the scope and purpose of this blog, so you don't hear about it much here, but people really need to figure out how to live and create some kind of functioning community with a reason to live in the aftermath of whatever storm is coming. I think something of "the life beyond gold" does come across in the writings of Another. It seems he had a fine sense of enjoying life, of enjoying the things that you had and appreciating them as real wealth in the here and now, come what may, and he seemed to have a pretty Zen attitude about the future and about what might happen, because from time to time he mentions losing it all with almost a shrug of the shoulders.

DP said...

costata,

LEGENDADO!

Issas Ekeret said...

Have to admire the dudes staying power!

Nickelsaver said...

FOFOA, great post!! and I love the fact that you are making it a series...can't wait for the next installment.

Robert said...

Greets, AD, The purchasing power of gold is not the historical constant that you suppose. And despite the failure of paper gold in the past, the paper price at that time was not a mechanism for setting the worldwide price. Now back to my question: How many days or weeks before a crisis should one start planning? Or is your new position that there are no store of value investments?

jojo said...

Trying to engage AD

jojo said...

GOLD FOR OIL
TURKEY SKIRTING IRAN SANCTIONS BY TRADING GOLD FOR CRUDE

d2thdr said...

Hi,

A slightly off-topic question but relevant (I hope) nevertheless.

All through history there has been a perpetual fight between debtors and savers. Agreed.

Will the RPG system allow debtors? Debtors, as we see today, are the non working non productive class. I expect there will be a few debtors who would want to start up businesses. They will be loaned Fiat for this - no one will lend Gold - perhaps banks will lend this fiat.

Will the banks be mandated to give loans by the local central bank? I do not see smart people leaving any money more than daily or monthly operating expenses in banks. The giants will or can. Or will the giants become massive money lenders?

I would appreciate any input or opinions.

JR said...

Hi d2thdr,

"Will the RPG system allow debtors?"

There will be debtors, that is what the MoE/credit money is for.

"I expect there will be a few debtors who would want to start up businesses."

Usually we call them investors, not debtors. Thin productive credit expansion (invest) as opposed to non-productive credit expansion (consume).

"They will be loaned Fiat for this - no one will lend Gold - perhaps banks will lend this fiat."

Of course banks will loan the fiat.

"Will the banks be mandated to give loans by the local central bank? "

No, they will loan money because it is profitless for them to do so.

"I do not see smart people leaving any money more than daily or monthly operating expenses in banks."

There is no need for bank deposits to be any more than the money we all earn and then spend within a normal period of a month or two. That’s still all of the money. It’s all of the debtors’ money because they don’t save, and it’s maybe 95% of our earnings (if we save at a rate of 5%). And if no one is sitting on “money” (credit) for more than a month or two between the time of earning it and spending it, then mild inflation is not only inconsequential, but it becomes economically beneficial and desirable. I’m talking 2% to 3% inflation.

The inclusion of the savers’ savings in this process only damages the savers disproportionately to everyone else. And it damages the savers more the more they save. Inflation “taxes” savers disproportionately. But not in Freegold.


comment to Interview

"Or will the giants become massive money lenders?"

No, the giants will save in gold. Lending what is saved is the problem.

The inclusion of the savers’ savings in this process only damages the savers disproportionately to everyone else. And it damages the savers more the more they save. Inflation “taxes” savers disproportionately. But not in Freegold.

KindofBlue said...

FOFOA

I was wondering if you follow Sinclair's musings?

The reason I ask is that his view -- which I respect, in addition to yours -- clearly differs as to the meaning of the 'paper price' of gold as reflected at the COMEX.

Lately Sinclair has been focusing on the manipulation of the gold price by TPTB in their attempt to dissuade the public from saving/investing in gold (which would make sense from that point of view as they want people to continus to save in dollars). Obviously, if the published price dives as you predict, Sinclair's worldview will need some adjustments (what will he be writing with gold at $400?)!

Any further thoughts you might have about this would be appreciated.

JR said...

LOL typos

Think productive credit expansion (invest) as opposed to non-productive credit expansion (consume).

No, they will loan money because it is profitable for them to do so.

JR said...

Hi KindofBlue,

I had similar questions about the"manipulation of the gold price by TPTB" as you call it, and here's what FOFOA offered me. I asked:

How do we reconcile FOA's thinking about the dollar price of gold with the paper price supression scheme?

FOFOA responded in comment to Gold: The Ultimate Wealth Consolidator:

Hello JR,

I am sure you understand this intuitively, but most "gold suppression" analysts fail to make the distinction between: 1. a suppressed gold market and 2. managed gold price movements. One is automatic and the other is controlled or manipulated.

The paper gold market automatically suppresses the price of gold by some multiple, perhaps 50. Meanwhile, the banks mess with short term technical fluctuations for profit. Most analysts think #2 causes #1. But the way I look at it, the CBs helped create #1 and then allowed the investment banks to do #2 (perhaps a decade later) for profit. The two are becoming less and less compatible (an explosive combination) as the dollar nears its end.

I think using a term like "the paper price suppression scheme" combines and confuses two very different factors.

New liquidity can only be created through gold as long as real physical gold is willing to bid for dollars somewhere in the world. This is why the dollar must depreciate against gold, to coax fresh gold "stock" into bidding for dollars! (ANOTHER taught us that gold prices dollars, and then dollars price everything else.)

In the past, the CBs supported this process with guarantees of their own gold (to bid for dollars). But today they are less willing to do so. Only unencumbered physical gold can be fractionalized, and only as long as people are willing to buy golden tickets in lieu of the real thing.

If you lease me an ounce of physical gold, I can safely sell 10 golden tickets knowing that only 10% will come for delivery. And most of the time, I can get my hands on more ounces from the private sector so I never have to come ask you for that physical ounce. (You leased it to me, but you held it for safe keeping) At some point you will stop leasing to me, I won't be able to get more ounces from the private sector, and more than 10% of my golden tickets will demand delivery.

At that point I'll come back to you for the physical and you'll just print up some euros to pay off my golden tickets rather than giving out physical ounces. Why? Because golden tickets NEVER WERE worth real ounces. It was all just an illusion of liquidity. Real liquidity is and always has been "that which you cannot print", "that which is tradable outside your zone", "that which is hard, not easy, to get".

Sincerely,
FOFOA
July 22, 2010 1:53 PM

Pat said...

KofB,

No way "gold" goes to $400 without the complete disconnect between paper price and physical. Gold will be Unobtainium way before $400. Of course I could be wrong. But in that case, you'd have more "We Buy Gold" shops than Mickey D's and Starpukes combined.

d2thdr said...

Thank you JR.

How can banks establish the credibility of the investors? Investors will the engines of the future economy, of that there is no doubt.

Does it not extrapolate that stock market is a product of the $IMFS which will die its natural death?

Edwardo said...

"So the hippy descendants are aware of the systemic fraud but are making "hippy hard asset" moves."

There you go. You can lead the hippy horse to the stream, but they'll go for the quartz instead of the gold nuggets.

JR said...

Hi d2thdr,

"How can banks establish the credibility of the investors? "

I'm sorry, I don't follow?

Yeah, the US stock market is denominated in dollars so it may not do so well in real terms, nor may the underlying business who transact in the dollar world.

enough said...

Edwardo,

BTW, seriously $55 million !! That might have been before inhertitance taxes,not sure on that.....

Anyway, it does prove my point. Hippy cousin had financial assets. She became afraid to hold dots and dashes in cyberspace as wealth. Dots and dashes that seem to vaporize or are erased on an ongoing basis. She chose pointy purple crystals as her store of value par excellence.....

She owned no physical gold. If she did, I'm sure she would have taken delivery (just as she did with her crystals).

So I believe currently breathing descendents that inherited gold from their productive super producer ancestors are well aware of the danger of entrusting the caretaking of their wealth to a criminal financial oligarchy with co-opted regulatory oversight (lack of).

Maybe someone could answer this question....

Why would one not take delivery outside the banking system given the mounting evidence of fraud within?

KindofBlue said...

Thanks JR & Pat

I guess what I was getting at was that Sinclair is talking about the manipulators trying to break the price and the trend. Sinclair thinks they will fail in their current effort as they have failed before. I suppose if they 'succeed'-- gold breaks below 1500 and beyond -- then FOFOA is arguing that Sinclair, for all his knowledge, is missing the bigger picture?

Sinclair is saying that the COMEX price is the price. I pulled the $400 number from my a** simular to FOFOA's $200, but I was wondering how Sinclair would square that hypothetical occurrence. FOFOA is saying unequivocally, then, that even "Mr. Gold" is in for a shocker!

gideon said...

I thought armstrong was wrong even before I read this, b/c in simple terms I see gold as being diffrent than other commodities in 2 ways, MEAN and MOTIVE. Regarding Mean, for most commodities, it doesn't make sense to acquire physical, as they have a short shelf life, and they take up a huge amount of space, so it is not really physically reasonable to hoard them. Only precious metals can be easily hoarded, and hold a large amount of wealth in a small volume. Regarding motive, I cannot really see why someone would lose faith in the corn market and see a need to hoard corn. But I can see people losing faith in the financial markets, and they would then have an excellent reason to hoard physical metals. As an aside, I do not think gold will plummet before the reset, I think it will not go much if any lower, and will rise at a faster rate beginning soon and then if there is a reset, it will come at the end of the bull market, maybe in 2015 earliest, 2020 or so at latest. I favor FOFOA being right about a revaluation, but I do not think it is inevitable.

fonoah said...

Hello Uncle Costata -

Scribbling on the back of an envelope, I’m trying to calculate how much the USG must borrow (print?) by your dead-line of Dec-31 2015 (1266 days from today):-

Exorbitant Privilege @$2.1B/day = $2.65T
Budget Deficit 3.5 Yr @$1.0T/Yr = $3.5 T
Roll-over existing debt @$1.5 T/Yr = $5.25 T (I’m clueless here?)

Total = $11 T (very approx)

Now even arch deflationist Mish (Shedlock) concedes that dumping $60K on every person’s front lawns brings on HI. Let’s assume 200 million front lawns in US, this equates to $12T, so your time estimate looks pretty much in the ball-park - even by Mishes’ measure!

Do I qualify as an analyst, or should I better stick to my day-job?

Cheers - FoNoah

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

FoNoah,

I'm not sure that the title analyst is a compliment these days. As observers we can admit we are still learning.

FWIW I think the issue now is the rate at which the collateral backing the banking and monetary system is decaying not the build up of debt. I imagine that the crisis will clearly emerge when enough people are yelling "the emperor has no clothes!"

At some point the system has to be recapitalized with something. The only option left will be gold IMVHO. Last "man" standing.

Edwardo said...

enough asked:

"Why would one not take delivery outside the banking system given the mounting evidence of fraud within?"

Especially when it's so easy. And that pretty much answers the question. When something is so easy, logistically, it must be something else that is standing in the way of folks taking a particular action. It comes down to psychology. It is the result of an impoverished mindset where such matters as wealth (and its preservation) are concerned. And, I daresay I believe it is the same mindset that informs a large number of the citizenry of this nation to play along with the political charade.

FOFOA is wont to say that he is surprised whenever (paper) gold rises in price. At least I think he says that occasionally. Well, I'm surprised that so many still opt to vote in our sham Presidential elections. But, season after political season, they do. And the ones that don't are, for the most part, merely idle. Pardon me, I feel a soapbox oratory coming on, so I'll wrap this up by saying that the very large contingent of folks with savings who do not choose physical will come around about the same time the electorate say enough to our putrid political system. Almost certainly it will be too late in both cases.

costata said...

Woo hoo deflation ...

http://www.gata.org/node/11553

In fact, in examining price trends, the U.S. is experiencing shocking price increases of over 15% per annum.

Doh!!

costata said...

Humungous woo hoo!!

It appears that the lights may be switching on for the Steve Keen et al debt deflation team and our old buddies the MMTers.

The Point of Origin of State Money in MMT Theory

http://andrewlainton.wordpress.com/2012/07/04/the-point-of-origin-of-state-money-in-mmt-theory/

So we can see the fallacy of the ‘money pours’ approach. A State does not have to have money in an account physically to spend. It is wrong to talk of having to have money in a treasury account before state spending can take place. This money arises out of an act of endogenous money creation like bank money – it appears (to use that much abused phrase) ‘out of thin air’ .

It does not mean that all money is ultimately state money which is a residue of a chartelist fallacy. Imagine a private bank taken over as a state bank with money already in circulation. The new issuances will be net state money but most existing money will be bank money.

The fact that the state sets the unit of account and enforces its use through taxation simply enforces the direction of flow of credits from and to State accounts; its sets no logical priority for money having to be created before it can be spent. Again a ‘money pours’ fallacy.

Clearly state created money must be credited to a an account before that account can be drained however all that is needed in a capitalist economy is an expectation of a future cash flow into an account prior to expenditure from that account as a bank can advance a line of credit based on evidence of future income.

So we can see the advantages of modelling and conceiving of state money creation operations in terms of net cash flow (as Steve Keen’s new model does) as it avoids some of the pitfalls of the counterpoised – money has to physically be in X before it can be in Y style of arguments that the debate had lapsed into.

We can retain the advantages of the state-money/circuitist synthesis whilst also realistically modelling bonds without complication or obfusification.

Beer Holiday said...

RE Steve Keen

I look forward to the day we can forget about his hyperinflation verses deflation debates with Peter Schiff, because I really like his ideas otherwise.

It has always annoyed me that he proposes a debt jubilee which would hand every saver 50 000$ overnight but is also a strong opponent of hyperinflation outcomes.

fonoah said...

Hello MF – thank you for taking the time to respond in the previous thread.

Noah is indeed my mythical role-model, because he was no activist or crusader, just simply an observer; someone who looked around him, saw what he saw, and decided to build his boat – much to the ridicule of his peers who were all partying like there was no MTM (meet thy maker) time.

In today’s world, I am perfectly content to “build my boat” (which will float freely on the currency that will rain down from the helicopters above) in the peace and quiet of my own back yard.

I have no interest (or ability) to advocate for more or less regulation for the MFGlobals etc (as perhaps Jeff was suggesting?). This might be a moral cop-out on my part? So be it – I can live with it.

I do agree and accept that “a large part of the population will always cry for “someone to do something”: I’m not sure where you are coming from with this though?

Thanks - FoNoah

costata said...

BH,

I think these guys are edging toward a mathematical model which discloses that inflation and deflation (in prices) can co-exist.

It's also cool to see a central tenet of the MMT manifesto being demolished using their own weapon of choice (double entry bookkeeping).

As Lainton observes in that post I linked above:

What we have here is an origin story for state created money. That it is spent into existence by government spending.

M said...

For the record....

From what I understand of AdvocatusDiaboli's insightful retorts to freegold and his alternative ideas, he expects interest rates(US treasury yields) to gradually fall to negative 20% over the next 30 years. And then on to negative 40% and so on.

And like everyone else, he figures the euro will disappear. No hyperinflation, no rally, no nothing. We will wake up one morning and there will be no euro notes or coins, no euro bank accounts or ATM's, no euros on any CB balance sheets.

FOFOA said...

Hello Gideon,

You wrote: "As an aside, I do not think gold will plummet before the reset, I think it will not go much if any lower, and will rise at a faster rate beginning soon and then if there is a reset…"

Hopefully you at least recognize that the "gold" you do not think will plummet is mostly the credibility of big banks carrying gold-denominated liabilities while playing the markets for profit. It will also be helpful for you to understand--and internalize--my scenario even if you don't agree with it. It will be very easy to hold on to your gold if you are right, but it will be very difficult if I am right and you didn't quite grasp my point.

I have one reader who already puked up his whole physical stash in May. He now thinks that he and I are in agreement that the $PoG will plunge. Unfortunately he sold all of his physical -- 1,700 ounces he'd been holding since about 2005 and $500 per ounce. I'm sure his sale brought him a monster capital gain to offset his losses in mining shares, so he won't be buying back in.

That's right, I said 1,700 ounces. He's a professional trader and analyst making millions advising several hedge funds which are trading tens of $billions. His technical charts tells him gold is heading back to $800. But he sold all of his physical because he never really understood Freegold.

I don't care if anyone agrees with me. But you'll be better off if you at least understand what I'm predicting. It's like those piles of rocks FOA mentioned. Later when it happens you can think "oh, yeah, I remember this."

Sincerely,
FOFOA

AdvocatusDiaboli said...

M,
lets look at it from another perspective: Do the yields really matter at all anyway, if the debtor never ever intended to pay back in nominal terms, not even mentioning in real terms? But instead that debtor has the biggest gun and breakes&makes the rules every day anyway?

I dont know about you, but when I look at the government bond market, by now, I just have to laugh. I only feel a little pity for the working people forced or duped into those pension fonds (by that dude with the biggest bat).
Greets, AD

FOFOA said...

Hello Jack Tarragon (he posted a few hours ago in the last thread):

You wrote: "So, let's say I have twenty ounces of Freegold. That will be a considerable amount of savings. Now, where do I store them? The bank? At home in a safe? Hidden in my garden or elsewhere? Do we really want to trust banks and their safety deposit boxes? … There are some logistical issues related to Freegold that are worth examining."

My advice is to figure out what works for you now and don't worry about "in Freegold". I have my own ideas about how it will work very nicely but I've learned through experience that it's pointless to explain something from a post-transition perspective to people stuck in the present. And anyway, I would never be so arrogant as to claim my ideas were smarter than the Superorganism's.

JR came up with a great slogan. Someone should put it on a T-shirt:

Believe in the Superorganism
It's smarter than you are!


Sincerely,
FOFOA

JoyOfLearning said...

FoNoah: thank you so much for that brilliant insight! I never thought of Noah that way... now he's my hero too! Brilliant!

Jeff said...

Fonoah,

I advocate for very little; I merely find it ironic that paper managers who resist regulation so vehemently are destroyed in their own pyrrhic victory. By eliminating regulation they undermine confidence in their paper system by those nervous Giants. That's why I posted FOFOA's 'bus' comment.

Gideon,

FOFOA: I can imagine a theoretical case in which confidence in the dollar collapses at the precise moment gold **IN SIZE** is withdrawn.

In this hypothetical case I can imagine a situation in which the price of paper gold never falls nominally. It may even rise nominally as it is falling "no bid" in real terms. As I have always said, my future predictions of gold at $55K or whatever are in today's dollar purchasing power. Gold will never actually trade for $55,000 dollars an ounce. It will be more like $100 billion an ounce or something even crazier than that if dollars haven't had zeros lopped off by then.

So viewed in this way, my chart at the bottom of the post represent paper versus physical in real terms, not dollar nominal terms.

FOFOA:

JR said...

Hi KindofBlue,

I think you're getting tied up in an erroneous assumption. The idea of "manipulators trying to break the price and the trend" is the common gold market analyst view. FOFOA's view stands apart from this. It is not about synthesizing the two views. It is about grasping that one of the views is not reflective of reality. I might believe in purple unicorns, but my beliefs do not make them real.

I guess what I was getting at was that Sinclair is talking about the manipulators trying to break the price and the trend. Sinclair thinks they will fail in their current effort as they have failed before. I suppose if they 'succeed'-- gold breaks below 1500 and beyond -- then FOFOA is arguing that Sinclair, for all his knowledge, is missing the bigger picture?

I understand FOFOA to suggest that Sinclair has it wrong about how the gold market works in the $IMFS.

"Lately Sinclair has been focusing on the manipulation of the gold price by TPTB in their attempt to dissuade the public from saving/investing in gold"

Do you think A/FOA/FOFOA's view is that TPTB "manipulate the gold price to dissuade the public from holding gold"? Or do you think the BIS/ECB help support the development of a paper market 30 years ago that as a result naturally "suppresses" the gold market and allows the BBs to play short term moves.

"Sinclair is talking about the manipulators trying to break the price and the trend. Sinclair thinks they will fail in their current effort as they have failed before."

FOFOA talks about a system of paper gold that by definition leads to price suppression. It is this system that allows BBs "to mess with short term technical fluctuations for profit."

"I am sure you understand this intuitively, but most "gold suppression" analysts fail to make the distinction between: 1. a suppressed gold market and 2. managed gold price movements. One is automatic and the other is controlled or manipulated.

The paper gold market automatically suppresses the price of gold by some multiple, perhaps 50. Meanwhile, the banks mess with short term technical fluctuations for profit. Most analysts think #2 causes #1. But the way I look at it, the CBs helped create #1 and then allowed the investment banks to do #2 (perhaps a decade later) for profit. The two are becoming less and less compatible (an explosive combination) as the dollar nears its end. "


IMO FOFOA does not view the gold market as TPTB manipulating the price to break trends and "control" the gold price. Long term price suppression (the BIS/ECB helping grow a paper market) is different from what Sinclair is talking about. As FOFOA wrote above:

No conspiracy. The mere existence of a commodity-like paper market for gold suppresses the price naturally, systemically. Long term systemic suppression of gold is something totally separate and different from short term price manipulation or distortion which can occur in any commodity or paper market.

The common view among gold market analysts is that the paper market works and the BBs' manipulation of paper is the problem. What follows is a consensus view advocating for something akin to "buy paper and you will do well when the BBs and their manipulation schemes blow up in a short squeeze."

FOFOA's view is that it is the paper market, not the BBs who are the problem. Thus it is the paper market, not the BBs' "manipulation" of the paper market, that is going to fail. Sure the BBs can't play games if that happens, but the bigger point is the BBs' games are not the main story - they are a sideshow, an effect of the main story.

It logically follows that it is the very existence of the paper gold market which is keeping the price too low, because if you took it away, price alone would have to regulate the flow

Cheers, J.R.

Blondie said...

FOFOA said:
"The common view among gold market analysts is that the paper market works and the BBs' manipulation of paper is the problem."

Which is remarkably like how the common view among "informed people" is that the monetary system "works" and the Banker's manipulation of paper is the problem.

Both have the same fundamental flaw: credit denominated in savings. The difference between the two being that paper gold qualitatively differs from actual gold, while paper savings and paper credit are interchangable.

Robert said...

Cheers, JR: I understand that FOFOA is no conspiracy theorist, and that his position in no way requires dabbling in the manipulation theories of the mainstream goldbug crowd. I get the argument that the paper market itself IS the manipulation. But can there be any doubt that on top of that there are also attempts to influence the $POG. With one manipulation scandal after another these days, and with Greenspan on record as confirming that the CBs actively intervene to influence the $POG through leasing, isn't is reasonable to conclude that both Sinclair and FOFOA may be right? Is there any market that is not maniputed these days, either directly or indirectly?

Motley Fool said...

Hi fonoah

I like the allegory. :)

It's perhaps not where I was coming from, but rather where I was going.

You see, my comment was not necessarily directed at you, I just saw an opportunity to bring up that stumbling block, for those that may be struggling with it.

For a long time I held the belief that people in general wanted to repay their debts, in full. This view created moral indignation with the current system, and those that seemed to be purposefully abusing it.

For this reason it was hard initially to give consideration to the euro model as solution, due to the moral chip on my shoulder.

I think a large part of the zerohedge community and goldbug community have this moral indignation, which makes it hard for them to objectively read and learn from what is written here.

I sensed some of this in you in your defense of Rand in that hypothetical.

Once I accepted that essentially all people have this aspect, of wanting easy repayment of debt, (and hard repayment of loans) it was easier to fit the pieces of the puzzle.

TF

AdvocatusDiaboli said...

I'm currently reading "Dimitri Speck - Geheime Goldpolitik".
Worth a read for everybody who wants to follow lots of real life charts, numbers and facts, completely without crazy illusionary assumptions. Basic conclusion from the book so far: The truth lies somewhere in the middle.
Greets, AD

P.S.
For everybody who hasnt yet read: "Goldreport 2012 - In gold we trust" is a absolute must read, to get a realistic perspective on current numbers in condensed format.

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

Hi Robert,

"But can there be any doubt that on top of that there are also attempts to influence the $POG."

Not from FOFOA:

Meanwhile, the banks mess with short term technical fluctuations for profit.

==========

"isn't is reasonable to conclude that both Sinclair and FOFOA may be right?"

Nope. Sinclair is just like *most analysts* and has it backwards:

The paper gold market automatically suppresses the price of gold by some multiple, perhaps 50. Meanwhile, the banks mess with short term technical fluctuations for profit. Most analysts think #2 causes #1. But the way I look at it, the CBs helped create #1 and then allowed the investment banks to do #2 (perhaps a decade later) for profit.

Sinclair's myopic obsession with "short term price manipulation or distortion" is too see the trees and not the forrest. The important idea is "long term systemic suppression."

Long term systemic suppression of gold is something totally separate and different from short term price manipulation or distortion which can occur in any commodity or paper market.

Cheers, J.R.

enough said...

Mark to Unicorn !!

the mirror is certainly cracking for ALL to see........

'the recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter. As a result, the Firm is no longer confident that the trader marks used to prepare the Firm's reported first quarter results (although within the established thresholds) reflect good faith estimates of fair value at quarter end."

Clyde Frog said...

On Mark To Whateverworks

Robert said...

Greets, AD, Following your recommendation, I browsed through Goldreport 2012, seeking "a realistic perspective on current numbers." And there on page 14 is the unsubstantiated and often repeated claim that the Old Testament states that an ounce of gold during the reign of Nebuchadnezzer purchased 350 loaves of bread, just like it does today. At least 4 years ago a Professor of Old Testament posted a message online discrediting this claim:

http://doctor.claudemariottini.com/2008/06/gold-and-bread.html

Kinda like the claim that in Roman times an ounce of gold bought a nice toga, much like an ounce of gold today buys a nice suit. You see that claim all the time, but without any citation. In fact, an ounce of gold bought substantially more than a toga in Roman times:

http://dougsmith.ancients.info/worth.html

I mention this because it touches on a subject that we were already discussing, and because you seem to take a more critical view of this blog than you do of Goldreport 2012, which cites numbers without any substantiation.

costata said...

Re: Jim Sinclair

Have you considered the possibility that he would just like to see honest markets.

And by honest I don't mean 'kind' or 'nice'. I mean a market where there are some widely known and understood rules which are enforced by an impartial umpire.

Jeff said...

Right on, Uncle Costata. Or, if everyone insists on marking to what is right for me is right, then at least we need an objective reference point, to balance those pesky supply/demand dynamics.

AdvocatusDiaboli said...

Robert,
thanks about that comment, but in the goldreport it does not claim, that the bible says so.
In the german original that sentence is (only) actually starting with: "It is being said that...."
So who knows what the real ratio has been, but I guess fact is that with gold you most probably could buy bread, in the Goldreport an introduction to the next spreadsheet.
Greets, AD

Anthemius said...

Dear all

I really don't understand this "gold to $400" idea. To me, sure it’s possible - but it’s also possible that it rises from here or some point below here, it is an empirical question and not answerable a priori.

The gold market currently comprises some percent of strong hands who will hold through the coming farce and the rest who will sell much easier (and no doubt much in between but you get the picture). Every time the price falls $100, say, you get R Oz of retail-and-otherwise-uninformed puked plus G Oz bought by giants-and-central-banks who know what’s going on, and are happy with this price for another purchase. Let’s say that those puking are puking p% paper (unallocated or futures) and (100-p)% physical, and those buying are buying b% physical and (100-b)% paper.

For sufficiently large p, b and with G>>R, then there will not be enough flowing gold at some point and the OTC market for gold will start to settle in bullion only. Although people will be junking their comex gold futures and unallocated accounts like dirty dishwater, there may be some holders of comex futures who can redeem in physical (insiders), and the others have to sell them for essentially nothing. But comex futures at this point will mean nothing – no’one will be referring to the “price of gold” as the comex futures price, it will then be as determined by the OTC market – say, many thousands of dollars.

The question then is what is this price at which the gold will not flow. FOFOA, you say $400 – but A) FWIW, I think this is much much too low B) no’one has any idea anyway, it depends on the values of R and G and p and b and other variables I have missed out. I really don’t get your certainty for this process and feel that Jim Sinclair’s call for a steady increase to be equally viable.

Am I missing something?

Jeff said...

Ratios are for the past.

FOFOA: We cannot know where the market will take the physical-only price of gold in order to solve today's debt problem. But we do know a few things that can give us a clue. 1) It will be a phase transition, or a paradigm shift that will knock your socks off. As someone recently wrote, you can heat water to 99 degrees Celsius and it will not boil. But go one degree higher and matter itself changes form. This is a phase transition. 2) The gold base expansion/phase transition will be completely unrestrained by economic forces, unlike any other physical material like oil, for example. In other words, it will appear completely arbitrary by all rational expectations and past ratios. The only scale on which it will make any sense is that it will solve the global debt problem.

The systemic rise of global imbalance, the creation of massive amounts of new and ever-more-worthless government digits, all to shore up unimaginable debt mountains held at the banks and central banks... all this and more, now demands settlement in very scarce physical gold metal. And with no international "window" to deliver such metal settlement at today's price, it must come from the global gold stock, from the holders of physical gold. The "flow" at today's price is not nearly sufficient. But the "stock" is plenty big... at the right price.

Gold must become free to settle all the massive imbalances that have accumulated for more than 88 years.

So the point of this post, what I hope will sink in, is that the future "inflation-adjusted" price of gold, the price in TODAY'S dollars, can literally be anything. Forget ratios. Forget technical analysis. Focus only on the debt!

Does gold's "future price" need to suffice at a "gold window" in exchange for dollars? No. So does it need to relate to the $5T in existing monetary base? No. Does it need to credibly establish convertibility with all existing debt? Yes! And how much of the world's gold needs to establish this credibility? All of it? The stock... the flow? The answer is that the global stock doesn't matter. And present flow is irrelevant. What matters most is future flow and the existing stock of the biggest debtors. This is the incalculable calculation that will lead you to the future price of gold.

Jeff Snyder said...

FOFOA

The story of one of your readers who puked all 1,700 ozs of his gold leaves me with a sick feeling in my stomach. The "investor" psychology at work there of capturing all gains near the top of the market is truly something to behold, because it seems based on the idea that all of life's "insurance" is obtained in accumulating maximum gains or wealth in $ terms. It kinda goes along with appearances to us shrimps looking on the behavior of the bankers and Wall Street crowd with their bonuses that for these guys, the operative philosophy is simply "more, more, more."

Decades ago, there used to be a place here in NYC a couple of blocks above Washington Square Park on 5th Avenue called the Lone Star Cafe. Had a big lizard and sign on top that read: "Too Much Ain't Enough." The LSC was of course implicitly referring to drinking, dancing and having a good time, but the motto seems to express the Wall Street mentality.

I mean, would it have killed him to keep 100 ozs "just in case"? Did he really need the extra $120,000 profit he made on selling those last 100 ozs?

Long way of saying I really, really appreciate that you are one of the few voices out there talking about SAVING, and unravelling the confusion of that concept with investing.

Cheers!

costata said...

A Credit Money Thought Experiment (With A Happy Ending?)

Part 1/3

I’m going to construct this thought experiment on a $20 bill and a credit card with a credit limit of twenty dollars. I selected a credit card for the comparison because it is an “unsecured” debt once it’s spent and an unsecured line of credit until it is drawn down. There’s no specific collateral backing the debt/credit in either case.

The same is true of currency in a sense. There are no specific goods, services etc in the economy which a specific currency unit has a claim upon. Only the amount of the respective “claims” are specific – a nominal amount of $20 in both cases.

The similarity between the credit card and the twenty doesn’t end there. In both cases the purchasing power of each instrument can be cancelled. The credit card issuer can cancel the card or reduce the credit limit. Remember also the $20 bill has a unique serial number. The currency issuer could cancel the legal tender status of that specific twenty and zero its purchasing power without affecting the legal standing of any other $20 bill.

Now imagine taking a twenty out of your wallet and placing it next to a credit card on a table in front of you. In both cases you have twenty dollars of potential purchasing power at this point in time. If we stop right now we could say that all of this “money” is a line of credit identical in spending power and that would be true from a functional perspective. But we are not going to stop right now. I think it is of vital importance that we explore how these two “lines of credit” behave over a period of time as well.

The credit card carries an interest rate of, say, 15 per cent. But in jurisdictions where interest rates are unregulated it could, theoretically, be unlimited. On the other hand the twenty doesn’t carry an interest charge but it is subject to an inflation rate. Let’s assume that the inflation rate is 2 per cent but in reality there is also no theoretical limit to the percentage inflation rate either.

If you want to really stretch the concept of a credit contract we could argue that the inflation rate is analogous to a negative real interest rate. Provided you, the currency holder, can wrap your head around the concept that your twenty dollar bill sitting on the table in front of you is a loan to your future self. But a “loan” you did not originate or enter into an explicit agreement to accept. Frankly I think this is esoteric thinking.

Continued/

costata said...

/Continued

Part 2/3

Let’s have a little retail therapy now. Imagine that you went out and spent that $20 credit limit on your card. Pandora’s (interest bearing credit) box is now open. For readers unfamiliar with the Rule of 72 it's a way of estimating the doubling time for an investment. You take a given yield and divide 72 by that number to figure out how many years it will take for an investment to double in “value” (price). You can use it as a rough way of estimating the rate of reduction in “value” as well.

If you don’t pay off that credit card balance, over time, the interest charge can compound to whatever level the card issuer is prepared to allow. Try to visualize this on a graph. Roughly every 5 years the debt doubles. After enough iterations of this doubling time the graph becomes parabolic. The message here is that interest matters even if owing $40, $80 or $160 to your lender for the purchase of $20 worth of stuff does not bother you. Just keep adding zeroes until the amount you owe starts to hurt in order to feel at a gut level the impact of compound interest.

(BTW looking at this from a macro economic point of view even if you pay off that credit card and the interest charges you have still generated a net increase in the overall money supply which has to find a home somewhere.)

Now let’s spend that physical currency $20 bill today. Imagine handing it over to the cashier and walking out of a store with $20 worth of goods. All done. No fat tail event to worry about because there is no interest rate embedded in the currency and you just negated the inflation rate by exchanging the currency for goods. But what happens if you don’t spend that twenty today and hold onto it for some period of time?

That currency’s behaviour might be more like this. It might behave like a reserve asset subject to a depreciation rate equal to the rate of inflation. To make the effect easier to visualize assume the inflation rate is also 15 per cent like the credit card interest rate and visualize this on a graph. Given enough time, at any rate of depreciation, the purchasing power of that bill goes infinitesimally close to zero.

Now visualize both of these lines in one chart. The lines run away from each other, don’t they? They run in opposite directions. The purchasing power supplied goes down for one money and the demanded purchasing power goes up for the other money.

Continued/

costata said...

/Continued

Part 3/3

To recap, in theory there is no limit to how much that debt can increase. With the base money you can start out with any quantity you care to specify and it can be inflated to zero in purchasing power terms regardless of the face value. Interest bearing debt money has an inbuilt tendency to expand. Inflation impacted currency money, in a very real sense, evaporates in “value” over time.

Interest bearing bank credit money functions exactly like currency provided you don’t spend it. Once you do spend it then it operates according to its inbuilt exponential dynamic which is quite different to the way the currency base money behaves. Currency base money does not function like interest bearing bank credit money if you spend it today. So under certain conditions, which occur quite often, one of these monies is the antithesis of the other.

Analysis which considers a subject at a point in time is a useful technique BUT it may not point to the same conclusions if you look at the same subject over a period of time. Case in point, this notion of a saver and debtor camp. Over a period of time interest bearing bank credit money is a path to serfdom. It reveals itself as the bankers money. A money which, by its design, effects a wealth transfer through interest.

The legal tender currencies we have grown up with effect a wealth transfer to the issuers (and their “friends”) through inflation as does government spending and borrowing. In my lexicon this money reveals itself as the government money. To a private citizen this might feel like being in the middle of a turf war between two crime families – perhaps the Govenostra and the Bankanostra.

To end, here’s the good news. Someone, or someone(s), have studied economic history and they are trying to create a currency and economic zone where:

1. The government has their hands off the “printing” press.
2. The government’s ability to create money through deficit spending is constrained.
3. The banks ability to create money is regulated.

JR said...

Well said Costata,

I agree, Jim Sinclair is a clueless clown:

Re: Jim Sinclair

Have you considered the possibility that he would just like to see honest markets.

And by honest I don't mean 'kind' or 'nice'. I mean a market where there are some widely known and understood rules which are enforced by an impartial umpire.


Jim Sinclair is a fool who don't understand the $IMFS gold market. As uncle Costata correctly notes, Jim Sinclair thinks paper gold is great and its the BBs that are the problem, so he wants somebody to regulate the BBs so they can't cause the problem anymore. But we know this is non accurate, Jim Sinclair is just mouthing the Western Paper Gold Long nonsense:

The common view among gold market analysts is that the paper market works and the BBs' manipulation of paper is the problem. What follows is a consensus view advocating for something akin to "buy paper and you will do well when the BBs and their manipulation schemes blow up in a short squeeze."

FOFOA's view is that it is the paper market, not the BBs who are the problem. Thus it is the paper market, not the BBs' "manipulation" of the paper market, that is going to fail. Sure the BBs can't play games if that happens, but the bigger point is the BBs' games are not the main story - they are a sideshow, an effect of the main story.


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

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.


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

Jim Sinclair's consensus "Western Paper Gold Long" view is completely wrong, but it does pander to the LCD, who love the we must control the evil banksters meme. FOFOA fans instantly recognize and dismiss such silly arguments like “We can’t trust the banksters. We's got to regulate them evil greedy fuckters…” FOFOA fans understand the folly of the "we must regulate the banks meme, " both in that it misses the big issue - its the system, not the banks that is the issue:

It seems the ingredient that you (and most everyone) miss is the ever present evolution, due to what FOA called the changing "political will." You (meaning y'all) point with great precision at the maths and structures that add up to: here is how it will work if we do this. "If we only constrain and regulate da banks in this or that way, the problem will be solved…" It's all the banks' fault, not the political will that flows directly from human nature. It reminds me of what I wrote about deflationists in Just Another Hyperinflation Post – Part 1:

"What is a deflationist? It is one who looks very closely at the present structure of everything, the laws, the rules, the regulations, what is supposed to happen, who should fail, etc… but ignores the political (collective) will that backs it all up."

What you (and virtually everyone) ignore is that every time something similar is tried, the same tribulations emerge and are dealt with the same way, over and over again, through a changing political will.


Reply to Bron

JR said...

So regulation is dumb because it belies a misunderstanding of our tribal nature, that that every time something similar is tried, the same tribulations emerge and are dealt with the same way, over and over again, through a changing political will.

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

See how easy the solution is:

Debtors net-consume on a sliding scale ranging from consuming exactly in proportion to their production on down to consuming as much as they can get away with borrowing. So netting it out, all net-exports from a zone come from the savers. The debtors consume their own production plus some of the savers' production, and if there’s anything left over it is exported. That’s what happens in the "surplus ex-gold zone". Gold is flowing into that zone. So the debtor's actions do have an influence on the balance of trade even though they don’t contribute to exports.

But when the debtors are borrowing too much currency and consuming too much in the physical plane, there is a mechanism in Freegold that ultimately slows them down. That mechanism is the purchasing power of the currency. When the debtors are consuming too much they'll experience price inflation which will force them to consume less. So it is the purchasing power of the currency that regulates the debtors. But changes in the purchasing power of gold within the exclusive savers' club is not linked to the mechanism which limits the debtors.


Glimpsing the Hereafter

Its not about regulating banks to control reserves or limit their lending, that is a fool's solution, one we know has failed and will continue to fail because it rests on willful blindness...one who looks very closely at the present structure of everything, the laws, the rules, the regulations, what is supposed to happen, who should fail, etc… but ignores the political (collective) will that backs it all up."

Easy solution:

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

The Return to Honest Money

AdvocatusDiaboli said...

"1. The government has their hands off the “printing” press."
Therefore in Europe the ECB is monetizing any kind of governmental crap some banks hands over to them. So no government gets a free ride, have to pay for the free ride the banks.

"2. The government’s ability to create money through deficit spending is constrained."
Therefore we have in europe a political correct wording, we call that "growth". Any kind of those dumb Maastricht rules are just for old fashioned idiots, who simply dont understand modern money.

"3. The banks ability to create money is regulated."
And if we run into a limit in Europe, we just simply reduce the reserve requirements, e.g. cut them in half. And if even that is not enough, since we already reached almost zero, we have our super bazooca, we call that LTRO thats the sister of the ELO.

Oh boy, about what currency have you been talking about? Would be to good to be true to live in your La-La-Land.

costata said...

JR,

Just to clarify for other readers, I don't think Jim Sinclair is a "clueless clown" as you describe him. So there is no agreement from me on your allegation that he is.

matrixsentry said...

I have read Jim Sinclair since 2003 and see critical differences between his over-arching view and the view of A/FOA/FOFOA. There is a clear demarcation between Jim Sinclair and the HMS crowd, and then again with the RPG/Freegold group, although it appears we may be in the process of becoming a crowd :-)

JS clearly sees gold climbing considerably higher in terms of all currencies. He sees something akin to our view that gold ultimately completes a revaluation and then plateaus within a range. His target has always been a minimum number and never an exact figure. His minimum has risen over the years from his often stated $1600 figure by 2012 and he now references Alf Fields' projections as the most likely outcome (as high as $10,000 if my memory serves).

When gold reaches this ultimate valuation he sees it "maintained? within a narrow band, perhaps $100 either way. I do not recall him ever specifically discussing the mechanism, but my impression is that gold would be held as an asset along with other monetary assets and the CBs would act in such a manner to control its price within the range. IOW, the CBs and the paper market would still exist and would simply choose to make gold their new premier reserve asset and act accordingly to maintain a stable currency price of gold.

Nowhere does JS suggest we need a gold standard or any other of the nonsense that comes from the HMS crowd. I think he simply sees a revaluation of gold in currency terms and a start of a new monetary system cycle where we begin with "harder" money. That strikes me as an intuitive position that a man of his age and experience would adopt. It is why he recommends well run miners as well as physical gold, he believes our current monetary system will continue on with some tweaks of reserves and reserve management as well as major devaluation of the dollar. This tells me he does not see an all out hyperinflation.

The important thing I believe that people need to understand is that JS is thinking in nominal dollar terms and FOFOA is talking in real terms. FOFOA's target of $55,000 was offered as a valuation in today's purchasing power, acknowledging that the future price may be in the billions or higher. Wouldn't it stand to reason that FOFOA's suggestion that paper gold may fall to as low as $400 is also in terms of today's purchasing power? $400 in real purchasing power in the future will paint a considerably higher nominal price, perhaps satisfying the call that JS is making with an ever-escalating gold price that is still discovered in a paper market (no Freegold).

So the bottom line is one of degree. I believe JS sees a revaluation of gold and its rise to the preeminent position on the central bank balance sheet, but he stills sees a system that enables credit production in gold (paper gold). We obviously see it differently and believe hyperinflation will completely redefine our concept of what is an acceptable SoV, effectively bifurcating the current unified concept of the USD as both MoE and SoV.

JR said...

FOFOA comment

It might be tempting after reading that to think that the banks, through their “fractional reserve banking”, caused the Panic of 1907. But, again, that would be to misunderstand how the economy has used “money” since the beginning of time. If that’s all you get from Randy’s post, then perhaps you are one who, as George Baker sensed, and because of your hard money education, would NOT be readily comfortable with the truth about Money.

Today all money is credit, even the monetary base. Today we use government credit as a base reference point for the economy’s credit. To view this in the proper light, I like to think of the base, or the government’s credit, as a negative to the system, and the economy’s credit as a positive. When the government borrows to spend it never really pays back in real terms, because governments are always net-consumers.

We put up with some government through taxes, the parts of government which are necessary to a functioning economy, but beyond what the government can get away with through direct taxation, the rest of government is a negative on the monetary system. That’s what I mean by government credit is a negative as opposed to private credit which is economically positive. It’s a tough concept to swallow right now because everything is so messed up on both the government and private banking sides, but that’s really the gist of it.

What allowed it all to get so out of whack to the point it is today is very simply the inclusion of savers’ savings in the process. This can be most clearly seen with the emergence of securitization in the 70s and 80s. Banks extend credit, but securitization allowed them to offload that risk to savers for a fee. This cleared their books for more lending. Eventually lending standards had to be reduced in order to feed the demand for securitized debt from the savers. The added risk of lower lending standards wasn’t a big concern because the banks never planned to sit on that risk; they planned to offload it to savers, China and German pension funds. This led to sub-prime and ultimately to collapse.

But it’s more than just securitized debt held by savers. It is systemic in that our trading partners like China stack up our debt rather than settling any trade imbalance by purchasing gold with the left-over currency on the open market. It is the stacking of debt which allowed for the non-inflationary expansion of the USG just like the stacking of MBS by savers allowed for the non-inflationary expansion of sub-prime and consumption-based debt.


So if savers are not buying up the non-productive credit, the lender has to bear the consequences. Even the lender of last resort.

Mr Market's a pretty sweet regulator.

Believe in the Superorganism
It's smarter than you are!

costata said...

AD,

I said they are >> trying to create << a currency and economic zone where:

1. The government has their hands off the “printing” press.
2. The government’s ability to create money through deficit spending is constrained.
3. The banks ability to create money is regulated.

JR said...

I know Costata,

I think that much is clear to everyone.

Now if we can just get you to be more little forthcomming about which team you have aligned with, it will be much easier for people to understand why your prescriptions are so divergent from those more commonly advanced in these parts.

Honesty is important not just in money. But before we can be honest with others, we must first be honest with ourselves.

Please fill in the blank for us (Sinclair-ite, Pettis-fan, etc.):

"What is a ________? It is one who looks very closely at the present structure of everything, the laws, the rules, the regulations, what is supposed to happen, who should fail, etc… but ignores the political (collective) will that backs it all up."

Cheers, J.R.

DP said...

If you like to watch public access super-concentrated pwn, you're licking the wrong window!

KindofBlue said...

JR

Thanks for your reply. You did a nice job of delineating the two 'camps'.

Not to lean too hard, but, like Costata, I don't think Sinclair is a "clown" and don't suspect you really do either. It may well happen, however, that historical events will overrun his 'trading' sense and pedigree.

Cheers

Edwardo said...

Ugh, I thought my last post went through. Alas, it didn't.

Thanks for your three part thought experiment on credit money. Excuse the pun, but I think it yielded good ideas. Compound interest, or so Albert Einstein and/or Lord Rothschild observed, is the eighth wonder of the world.

In the meantime, Jim Sinclair's view, as per the perspective adopted by some posters here, myself included, leaves something to be desired. But, I agree, he's no clown. What is not a matter of opinion is that he is a vested interest where paper gold is concerned. Having said that, in his defense, General Jim has always, as near as I can tell, consistently advocated owning physical.

Robert LeRoy Parker said...

re Sinclair.

Yesterday he said:

If you have your positions on margin you are crazy and I cannot do anything for you. All others stand tall because gold will trade above $3500 and not in some LaLa Land future of Armstrong’s imagination.

Ha!

Still a paper pusher imo. If not, he would have said:

If you have your positions on paper you are crazy and I cannot do anything for you. All others stand tall because gold will flow above $XX,000 and not in some LaLa Land future of Armstrong’s imagination.

Robert LeRoy Parker said...

above $XX,000 gold will achieve turbulent flow rather than the present laminar flow.

Edwardo said...

I thought the following exchange might be somewhat interesting to some of the denizens of this blog.

Hello Jessie,

You wrote,

"As you know, the central banks are out of silver bullion, and the bullion held by the system seems to be spoken for many times over."

Since when do CBs have silver bullion to be out of it?

Regards,

Edwardo


Jessie responds:

I meant to say access.

The US had quite a stockpile of silver some years ago, all gone now.

Jesse

Here's the link to the post that engendered that brief back and forth.

http://jessescrossroadscafe.blogspot.com/2012/07/gold-daily-and-silver-weekly-charts_12.html

Jack Tarragon said...

Telling the truth is a function of position.

No President of a country is going to tell the truth about a disaster that would lead to more panic and more death.

No Chairman of the Fed would tell the truth about impending financial collapse, even if he knew it was coming.

Jim Sinclair tells the truth he is able to tell based on his position as a gold mining President of a company. You need to read between the lines with him.

Armstrong just got out of prison and what he says is all about making sure he does not go back in. He tells his truth is code.

FOFOA can tell the absolute truth about what he thinks because his position as an anonymous blogger allows him to tell it with impunity. There are no consequences for him telling it. Sinclair has a business to run and reputation to uphold and he plays in a different arena.

Black and white truth is often garnered from reading the shades of gray. It is much more fun that way as well. Kind of like playing poker. And fiat is the biggest poker game in town. Make sure you are stacking the right kind of chips for the new game. Start reading between the lines.

Tony said...

Edwardo,

Please excuse my ignorance, but what are the implications of CBs no longer having access to silver, per Jesse?

Robert LeRoy Parker said...

God damn, oh god damn the pusher man


#bongeconomics!

enough said...

Hi Tony,

That means the CB's have no silver to lend the BB's if they get in "trouble". In theory, with gold as the CB's have inventory, they can be lender of last resort to BB's that are short.

byiamBYoung said...

Enough,

I'm afraid I don't follow. Could you restate your answer, pretending that your audience is 4 years old?

Thanks

enough said...

BYIAMBYOUNG.

meet Brown's Bottom :-)

Revealed: why Gordon Brown sold Britain's gold at a knock-down price

http://blogs.telegraph.co.uk/finance/thomaspascoe/100018367/revealed-why-gordon-brown-sold-britains-gold-at-a-knock-down-price/#disqus_thread

Edwardo said...

Bob Moriarty of 321(paper)gold has other ideas about Brown's Bottom. He manages to say a few sensible things and some ideas that are just plain silly. Decide for yourself.

http://www.321gold.com/editorials/moriarty/moriarty071312.html

Tony said...

So if the leasing of silver is not an option when the BBs get into trouble, wouldn't that lead a rather significant rise in the paper price of silver? Assuming one were living in better economic times, there might be a stronger case for owning some silver. Am I understanding correctly? Sorry, like byiamBYOUNG, I need to be coddled along and spoon fed ;)

costata said...

Readers may recall reports about big outflows of private money from China linked in an earlier thread here. If this report is accurate this outflow may be starting to show up in the official statistics. (Extract below.)

The writer seems to suggest that a trend may be emerging toward increased consumption. Perhaps a very early indication of the much discussed rebalancing of China's economy from an export and investment bias. Early days.

FX reserves fell by $US65bn in Q2, with May seeing a substantial rundown. In that month reserve changes not accounted for by trade or FDI was –$US120bn: the largest such outflow on record. Valuation effects would have weighed on the outcome to a degree, but the major force was weak investor sentiment.

Phat Dragon has noted many times that weak FX inflows have been a headwind for deposit growth in the banking system in the year to date. Overall deposits are expanding at a 12% annual clip, with enterprise deposits the weak link.


http://www.macrobusiness.com.au/2012/07/phat-dragon-tackles-the-data-dump/

M said...

Lol I was joking when I wrote that AD believes that interest rates will drop to negative 20 in the next 30 years but I guess he does believe it...

"Do the yields really matter at all anyway, if the debtor never ever intended to pay back in nominal terms, not even mentioning in real terms?" -AdvocatusDiaboli

Blondie said...

Silver isn't held by CBs because silver is not the pre-eminent store of value. Silver has a problem in this regard: it's not gold.

Own as much silver, gold or chocolate eggs as your understanding of the wheres and whyfores concerning them makes you comfortable with. Considering who else owns the same asset, and why, seems to be a natural part of developing this understanding. CBs don't own silver of consequence, but they do hold tens of thousands of tonnes of gold.

Why?

Beer Holiday said...

@Blondie, Why? - "it's long term tradition" :-)

Blondie said...

Well that depends entirely upon one's definition of 'money', doesn't it? Bernanke is telling the truth. It appears that in the context of this exchange Ron Paul never defined 'money', so neither did Bernanke. By not establishing this frame of reference both the assumption and the problem appears to be Paul's. Bernanke is clearly defining gold as a store of value rather than currency, but currency better fits most people's definition of 'money'. Not Bernanke's fault people don't attempt to think more precisely, or define their terms, but just make assumptions.

Sloppy thinking does not yield clear understanding.

Assumptions are the mother of all errors.

Beer Holiday said...

You hit the nail on the head! I appreciate the correctness of what Bernanke said in context (while doing his job to not discuss gold too much). I like how he says gold is an asset and not a commodity in that discussion.

d2thdr said...

Hi JR,

When I asked,'How can banks establish the credibility of the investors? "

You said,'I'm sorry, I don't follow?'

Here was one of your statements;

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

How will a bank establish if the investor is/is not going to undertake non-productive investment? Everything in the physical plane could be classified as productive.

For example surplus production of goods like what is done in China is a non productive investment. Yes its the hangover of $IMF system.

Does it not extrapolate production will be more local, end of multi-nationals, massive surplus productive capacity in China which may not be ever utilised?

Unknown said...

Hello,

I really love this blog and your comments.

Two questions:

a) FOFOA said “I expect this to continue until gold is more than 90% of the reserves behind the euro” because of the “MTM adjustments” but, on the other hand, $PoG will be falling (before revaluation) to $500 or less over the next couple of years, so ¿¿??, 90% is going to be reached after gold revaluation, isn’t it?

b) Main objective of ECB: “The main objective of the Eurosystem is to maintain price stability: safeguarding the value of the euro. The ECB has defined price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. In the pursuit of price stability, the ECB aims at maintaining inflation rates below, but close to, 2% over the medium term". This curious definition “below, but close to, 2% over the medium term” is just the same than the flows-to-stock ratio for gold. Does it means that the Eurosystem, with Freegold working, does not have to change the definition of its main objective?. Do they (euro architects) know it?

Thanks in advance.

Issas Ekeret said...

Objective: Yellow Rock loves Falling Demand

Edwardo said...

Blondie wrote:

"By not establishing this frame of reference both the assumption and the problem appears to be Paul's. "

Yes, but when...

"Bernanke is (not) clearly defining gold as a store of value rather than currency..."

The Bernank is being less than forthcoming. He is being vague, apparently deliberately, so that even educated onlookers can only infer that he means currency is money. The real issue-and whatever Bernanke is he is not so dense that he doesn't know what the real issue is- is value, and durability, or more precisely the lasting nature (or not) of value when gold (money) is juxtaposed with currency/fiat (money). Until The Chairman of The Fed is put in a semantic box by someone more able than Mr. Paul, he will not touch those key issues with a ten foot pole. In the meantime, we can lament that this particular public official, and my view is that Mr. Bernanke is, at the very least, a quasi public official, is not, like the "money" his institution emits, entirely honest.

Zenscreamer said...

RE: Silver

My wonderful husband and I celebrated our Silver Anniversary (25th) this week, and I was not at all tempted to buy even a single ounce of Ag to celebrate it.

Just sayin'.

enough said...

Tony,

you said....

"So if the leasing of silver is not an option when the BBs get into trouble, wouldn't that lead a rather significant rise in the paper price of silver? Assuming one were living in better economic times, there might be a stronger case for owning some silver. Am I understanding correctly?"

It is my understanding that the Bullion Banks have reduced their long term short positions in silver dramatically in this year long selloff. A "short squeeze" in silver is becoming less and less likley.

The Bullion Banks have no interest in or reason to suppress silver (contrary to silverbug theory) as silver is no longer, nor will it ever be again, a monetary metal.

TPTB may wish the public to believe that the BB's will continue to suppress silver due to it's "future" monetary importance, but that's just a false flag to throw the public off the trail.

Tony said...

Blondie,

Thanks for your comments regarding silver. Truth is, you're preaching to the choir here because I really have minimal interest/holdings in silver. A keep a bit for the transition, but I'm certainly not accumulating it. Quite the contrary...I'm a seller.

enough,

Thanks for taking the time to address my question. That was the information I was after--I was merely trying to get my arms around the implications of Jesse's assertion, and your explanation helped clear the air.

Dante_Eu said...

@FOFOA:

Next time you mention that "There can be only one" you should include this:

Highlander - MacLeod receives The Prize

:-)

messianicdruid said...

Uniformitarianism expressed in economic terms.

gideon said...

I was wondering if there had already been a discussion on here regarding the gold basis? I read Dr Fekete's writings, and he says the gold basis has been in gradual decline sine 1971, and once it gets low enough(maybe zero?) gold will go into permanent backwardation, and not be available at any price. At the same time, the treaury market would be finished, as it would then have zero gold backing. I wonder if this will correspond with the revaluation of gold, and if so, how does one calculate the basis, and is there anyway to tell via the basis when gold will go "invaluable"? FOFOA, are you familiar with his work and do you agre with it?

Aiionwatha's Nation said...

enough,

I would argue that silver still is very much a monetary metal because plenty of savers are still using it to store wealth outside of the system.

enough said...

Aiion,

Silver is just way too useful to industry to be a monetary metal any longer. In fact more useful to industry all the time and therefore inversely less useful as a monetary asset. Sure commodities are useful stores of value but that does not make them "monetary".

Just think, if they could find no more silver in the ground and all the above ground silver was used up in industrial processes, what kind of moneary asset would silver be?What you would be holding was a scarce commodity and nothing more.....

Aiionwatha's Nation said...

Within the big picture arguments I would agree with what you are saying. Flows to stocks are probably pretty high. However, the reality is that many people still choose to save in silver and due to that fact it is performing a monetary store of value function. What it will be doing in the "hereafter" is a different matter, but right here and now folks are storing wealth in silver. Diamonds are useful as well.

Aiionwatha's Nation said...

I'll follow up with only two diagreements to FOFOA's road to freegold.

No debtor nation in history has simply transitioned and the magnitude of this debt makes it pretty unlikely it will work here. Sorry, we zeroed out all the money and property value you thought you might live off of and made it mathematically impossible to pay for the cost of keeping you alive, but the super producer corporations that run the show care enough to make sure things are still functioning after the brain dead idioits we let pretend to run the show for the last 20 years realize they have a big donut in tradable value.

KnallGold said...

Juncker just said that there will be a EU finance minister *wink wink*

Aiionwatha's Nation said...

PS. Sorry if I sound like AD, just not too high on what is transpiring in the old USS of A.

Aquilus said...

Gideon,

Yes. FOFOA held Fekete in high regard in 2008:

Ultimo Contango a Parigi - Saturday, August 30, 2008

Backwardation - Monday, November 24, 2008

Fekete - Red Alert: Gold Backwardation!!! - Friday, December 5, 2008

Has The Curtain Fallen On The Last Contango In Washington? - Monday, December 8, 2008

There Is No Fever Like Gold Fever - Wednesday, December 10, 2008

Backwardation That Shook The World - Sunday, December 14, 2008

Forward Thinking On Backwardation - Sunday, December 21, 2008


But all that ended when Fekete changed his position and re-aligned it with the dollar deflationist camp (Denninger) in 2009. Here's that post:

Hyperinflation by any other name - Monday, April 13, 2009

That Fekete changed camps does not alter the validity of the backwardation ideas.

Aquilus.

P.S. For more fun, have a look at the marathon tweets between Sandeep Jaitly
(@Bullionbasis) and some of the commenters here about midday Saturday July 14th 2012 at Freegolders on Twitter List

Covers some of the "hard money socialist" beliefs clashing with freegold ideas.

Aquilus said...

Oh and here's Fekete's answer to FOFOA:

Gold Basis Screwed - Mon, Jul 26, 2010

Aquilus said...

Ok, last one: Fekete's response above was to FOFOA's 2010 article: Red Alert: Gold Backwardation!!! - Sunday, July 25, 2010

costata said...

Savers, Investors and Speculators

Part 1/2

My earlier comment seems to have got some knickers in a twist. None of what I’m writing is intended as a personal attack on our favourite Yeti. I think it would strengthen, not weaken, some of the arguments discussed here if they were put into a different time context. And yes I think it could weaken other arguments. But there is a solution to this problem. You simply shed the weak arguments and concentrate on the stronger arguments.

In that earlier comment at July 13, 2012 7:31 AM I remarked on the debtor and saver camp presentation by FOFOA. I think it’s an effective way of introducing some complex ideas examined at at a point in time. Likewise the notion of an easy money crowd and a hard money camp. In each case if you take this concept of a camp or group and try to examine it over a period of time the usefulness of that analysis decays in my opinion.

So by way of comparison I want to make a few observations about some posts by FOFOA where he presents perspectives that are of limited value at a given point in time but take on enormous significance when you look at them over a period of time. I’m referring here to his differentiation of the activities of saving, investing, trading/speculating. The posts I have in mind in making these observations include The Studebaker Effect, Glimpsing The Hereafter and Yo Warren B, you are so OG.

In my opinion there are still some jarring notes in these posts. I think it’s because there is a tendency to personify these activities. This literary device may be essential if you are trying to communicate with an audience. Many of us have been acculturated to think in terms of teams, black hats and white hats and so on. FOFOA’s analysis is highly sophisticated but many readers struggle even with the simplified versions. So perhaps he has to talk in terms of “saver”, “investor” and so on to give people the opportunity to identify with the subjects he is discussing (and the characters in his narrative?).

But one of the problems with labels like saver and debtor is that a person can be both at the same time. In the same sense that the two monies I described in that thought experiment can be dead ringers at a point in time but display huge differences over a period of time. Likewise a person can be a saver for a period of their life and a dis-saver at another time of their life.

To illustrate what I’m driving at allow me to reproduce here a paragraph that FOFOA has repeated in a number of posts:

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

Continued/

costata said...

/Continued

Part 2/2

It’s hard to disagree with what he’s saying in my opinion. However I would argue that you could rewrite this passage as a description of a dynamic rather than static activity without undermining its value. For example: Saving is different from investing or trading/speculating….. I think that the two approaches are compatible.

In some of the discussion in these pages there seems to be an inference that only savers can be net producers and debtors are exclusively linked with net consumption. I think it begs the question of whether someone paying down a debt used to acquire an asset should be lumped in with profligates who borrow for consumption, rollover their debts and take as much additional debt as their income will allow right up until they hit a brick wall.

In the same vein it’s clearly possible that someone who has never borrowed a cent in their lives can be bankrupted by the actions of a profligate government or tempted into error by the incentives created by governments. Again in the same vein if bankers lend recklessly and then transfer their losses onto a government someone with no debt can one day find themselves taxed into penury to pay off those debts. There’s some interesting insights into banking (as well as government finance) emerging from that modeling I mentioned in my comment about Andrew Lainton’s paper here.

In other words what I’m trying to say is that I think we need something more “elevated” here than morality plays. If pieces I write descend to that level I think I should be held to account for doing that. I think we should look at the same subjects in different time frames, in aggregate and also from a dis-aggregated perspective. If doing this weakens some arguments and strengthens other arguments so be it. I would also like to everyone notice, and I do mean everyone). I’m not going to approach these discussions like I’m walking on egg shells.

Now I could air some of the matters I would like to discuss at some other blog but one thing I can no longer do is air them privately with FOFOA. Frankly he doesn’t have the time these days to engage in lengthy private correspondence with any single correspondent. There are too many people who want to talk with him. If he tries to give every person his undivided attention he will not have time to think and write. We used to engage in marathon private discussions and arguments too (believe it or not). Those days are gone. I understand this. So does he.

Bjorn said...

Aquilus. Thanks for that link to Fekete answering FOFOA. I reread it now, and unlike the first time I read it I didn´t have any problems sorting out the various letter combinations. (Thank you VTC!) This was probably obvious to some of the sharper tools in this drawer (ehm Forum) but for me, I just now made the explicit connection:
That LIEbor was made public can´t have made it easier to obfuscate the COGOFO = LIBBR - GLOR... More cracks in the facade...

Michael dV said...

off topic but:
I was watching an older Max Keiser interview and it occurred to me that understanding crack whore gold might be best approached by comparing a prominent goldbug with a freegolder...thus:
Max V fofoa

Max Keiser: In the future world countries will compete with harder currencies
Fofoa: countries will compete by having better behaving fiat currencies.
Max: gold will back currencies
Fofoa: fiat currencies will prevail, gold will be on the sideline as a wealth asset. It will not be tied to the currency but rather serve as an asset as it does with the Euro now.
Max: the US will try war
Fofoa: politicians are not bright, hard to predict short term actions
Max: reset will occur
Fofoa: reset will occur
Max : possibly overnight
Fofoa: likely overnight
Max: Wealth is leaving and will leave the US
Fofoa: wealth can be kept in US as it will not be taxed or confiscated
Max: doomsday trigger: watch unemployment
Fofoa: watch balance of trade, govt spending
Max: banks are evil and plot against the people
Fofoa: banks are just doing what they have been trained to do
Max: nothing can reverse our present course
Fofoa: what is coming is inevitable

Beer Holiday said...

Max Keiser on debt whores (he's of the planet but it's still funny). It's also an instructional video on how a discussion between a reasonable person and Max plays out.

Costata, thanks again for the great comments, I'm probably not the only one who needs more time to think your ideas through.

d2thdr said...

Michaeldv wrote,'Max: doomsday trigger: watch unemployment
Fofoa: watch balance of trade, govt spending'

Part 1

Here is an interesting obsrvation with regards to India- There is a huge BOP crisis going on and as usual the people in charge are asleep.

http://www.business-standard.com/india/news/capital-flows-to-decide-faterupee-rbi/474990/

The Reserve Bank of India (RBI) on Monday said capital flows would determine where the Indian currency was headed. The rupee has fallen 4.3 per cent against the dollar since the month began, despite RBI’s intervention and administrative measures.

These are the few things done to prevent problems worsening;

DECEMBER 15, 2011
Restricts rebooking of cancelled forwards contracts to curb speculative trading
Cuts net overnight open position limit for banks
DECEMBER 16, 2011
Deregulates interest rates on Non-Resident (External) Rupee deposits and Non-Resident Ordinary (NRO) savings accounts
4-MAY-2012
Relaxes the interest rate ceiling on FCNR deposits of banks to attract funds from NRIs
Deregulates interest rates on export credit in foreign currency
7-MAY-2012
The government defers the controversial General Anti-Avoidance Rule (GAAR) by one year, providing temporary relief to the local currency
9-MAY-2012
Eases restrictions on the usage of foreign currency deposits, allows banks to use (FCNR) deposits as collateral against lending to local companies
10-MAY-2012
Exporters told to liquidate 50% of their dollars within two weeks
Allows intra-day trading at five times the net overnight open position limit of the bank

This is a structural issue and that cannot be resolved through such actions and interventions. I have been stating that for a while.

In fact all of these actions were proven wrong each and every time as RE slide simply isn’t stopping. And it won’t, unless the core issue is resolved rather than going the “band-aid” solution route.

The current RE crisis is beyond RBI and the government needs to step in. Government has barely shown any interest in balancing the budget in the last 4-5 years. I guess there are LOT of disadvantages when you have 100 parties together ruling a single country. After all, each and every one of those 100 parties need to be satisfied. And how do you go about it? Entitlement programs aka offering stuff for FREE! Wonder when would someone understand that it is mathematically impossible to give away Free Laptops/computers etc. You cannot go that route anymore. This MUST STOP immediately.

Now this

http://profit.ndtv.com/video/RBI-has-enough-reserves-to-stop-rupee-slide-AV-Rajwade/233208

AV Rajwade, Consultant at Currency & Interest Rate Risk Management speaks about the depreciating value of rupee against dollar and its impact on current account deficit. He says that RBI has the capacity to stop rupee downfall, although we are not seeing the kind of intervention that could have halted the slide. “We also need fiscal correction, changes in FDI & regulatory issues along with RBI measures,” he adds.

Loads of Bull shit.

I am really surprised this coming from a fiscal organization within the country. This is absolutely wrong and proven too because of the above. RBI has done all that it could, yet, RE slide simply continues. You cannot control market forces with tools you possess. Simple!

contd..

d2thdr said...

part 2

Now this

http://www.business-standard.com/india/news/current-account-deficit-may-fall-this-year/473379/

But, more than CAD, it is trade deficit that is worrying Joshi as it stands at 10 per cent of GDP in the last financial year against around three per cent even in the balance of payments crisis period of 1991-92.

He expects the growth in trade deficit to be not as high as in the last financial year, as gold imports might come down, though there is no certainty over oil imports despite international prices not showing a spurt this fiscal so far.

In 2011-12, India’s trade deficit grew to $184.9 billion from $118 billion in 2010-11. Commerce Secretary Rahul Khullar had listed petroleum and gold as the main catalysts behind this. “In these, imports were higher by about $69 billion compared to 2010-11 and that almost entirely accounts for the rise in the trade deficit in 2011-12,” he added.

Nobody understands the gravity of the situation. India is on the brink of bankruptcy if some action is NOT taken immediately.

Government instead of passing all rubbish bills should pass one of the most important bills ever created in India. Stop the ownership increase in vehicles and instead work towards making public transportation better. The pace at which Indian vehicle ownership is increasing it is impractical to cater to all the Petrol needs of the country and neither it is practical to drive those vehicles when all the roads in almost all metros are already too congested and overcrowded.

This is a catch-22 situation right now. The reason Oil imports have increased is because of increase in standard of living and vehicle ownership. Reason Gold imports have been on the rise is because we are nearing a currency crisis all over the world as “paper currency” that dominated world civilization for so many years is nearing it’s end. Gold becomes defacto standard of currency in case the “trust” component from “paper currency” evaporates. No wonder why Gold imports have surged even while Gold has nearly grown 800% in price in the last 5-6 years.

So now RE is sliding, OIL prices will rise and hence your pocket is squeezed even further.

There is a big crisis on the horizon.

burningfiat said...

Costata,

Your discussions and sometimes perpendicular views are welcome and refreshing.
Keep them coming!

PeaknikMicki said...

Hi all. Intereting blog. My first comment.
Regarding the silver debate I agree that to a large degree it's future price has different drivers than gold but I don't agree that we can dismiss silver also being monetised by nations that have access to silver but not necessarily large quaities of gold. A future re-wamp of monetary system does not necessarily mean a return to a classic gold standard.
Hugo Salinas Price has for instance proposed a plan to back Mexican peso with silver and he has presented similar propositions to other nations.
Regarding comments by Matrix...something further above that Jim Sinclair doesn't believe in a future gold standard and that the ~$10K pog is just based on standard market force, I think is incorrect. Jim has several times mentioned that he believes there will be a revitalized and modernized gold certificate ratio. For understandable reasons (if you are a GATA tinfoiler like me) this is not redeemable gold and will not even result in an audit of US reserves.
http://www.jsmineset.com/2009/01/08/rentenmarc-to-the-rentendollar/

He has also avoided giving final peak price for gold for the simple reason that it is a dynamic value and because it depends on exactly what it will be tied to. Lastly he also stated at least at one occation that he held back his predictions to avoid ridicule and unnecessary debate over the suggested dollar amount rather than the focusing on just the catalysts driving the price. I think it is for this reason he keeps saying not that PoG will be $10K but rather articulates it as "it will reach Alf Field's target".

costata said...

d2thdr,

Thanks for that powerful report on the situation in India. (I mean powerful in the sense of depth, insight and sincerity.)

Cheers

costata said...

Maximum and Minimum Price of Gold

The maximum price of gold is infinity. The minimum price of gold is zero. Priced in what precisely?

Discuss.

John said...

@ Costata

Priced in Zim$ we already have infinity...Yippee!!

Beer Holiday said...

Zimbabwe - the best performing stock exchange of the 90's - in nominal terms. h/t Kyle Bass

enough said...

Aiion,

for full disclosure....

I do hold 300 ounces of silver in the form of 1/2 rounds (.999)in case it is necessary to barter for goods and services during a short chaotic episode. I also hold quite a bit of long shelf life food. I dont know if a chaotic period will come. Nor if silver will be something to barter with but I keep it just in case.

As FOFOA says, you dont want to have to use your gold to buy "stuff" during the transition. Gold brings you through to the other side. If you have to use gold to buy stuff during the transition, you will be dishording at exactly the worst possible time. cheers, E.

I can see a scenerio where a few small denomination silver rounds could prove useful.

Aquilus said...

I think it's very important to realize that the idea that a nation does not have enough gold to back a currency, or even further, that because of that it will pick silver to back the currency has at its root the idea that currency has to be available at a government "precious metals window".

That is very unlikely to happen again!

No "backing of currency" is needed! On the contrary, the only "backing" a currency needs is the fact that gold is freely available for purchase in that currency. Not from the government. The source is irrelevant. The only thing that matters is that the fiat currency can be exchanged for gold at will. Source irrelevant.

My explanation is not that detailed. Please read Ender's double comment then if you have time the whole Confiscation Anatomy - A Different View - Friday, August 21, 2009 for more detail on the above.

burningfiat said...

Gold obviously has really low price (perhaps almost zero), priced in things that are otherwise priceless. Like Life, Health, Happiness, Freedom and Liberty.
Gold is only worth acquiring if the lower levels of Maslows pyramid has been secured.

Others may have different subjective valuations though!

Aquilus said...

AD,

Like I said, without all that rage and venom and all caps, I don't mind exchanging ideas when time permits.

That being said, let me come back to the premises of our discussion. We are both saying: man, we're currently accelerating into more government control, coercion, and fiscal repression.!

But then you go to: and it shall continue as long as the eye can see, and the Gov will keep taking from those stupid producers. Even when the producers are not under its jurisdiction, eh?

So in your world view the highway to hell is wide, straight and long lasting.

In my view, because gov cannot force producers to produce if it's not in their interest and can not force foreign producers to produce if they cannot have MEANINGFUL (to them, not to gov) profits, that this wide highway to hell will end suddenly at the bottom of a canyon.

Why? Because regardless of coercion now, the needs the coercion is applied for, must be met. If they are not met by extra production through extra coercion, a different way must be found (after falling in the canyon).

Gov does not control where the highway ends, but I agree with yiu that it can make life miserable between here and there.

Oh, and definitely check out Ender's double comment I linked to above please. It's directly relevant and not too long.

Greets

Aquilus said...

@Costata

I think to answer your question, one must start with FOA's explanation of what money really is. Not what currency is, what money is, since prices are really ratios...

Edwardo said...

Costata,

I applaud and support your desire to hew to as much nuance and complexity as one can stand in discussing what is, after all, a complex subject.

Put more colloquially, "You go, bro."


burningfiat wrote:

"Gold is only worth acquiring if the lower levels of Maslows pyramid has been secured."

I agree, and well said. And, therefore, is it reasonable to assert that such scenarios where securing the lower levels of Maslow's pryamid-as opposed to securitizing them-are in doubt would seem to be the one's that threaten a freegold outcome.

Edwardo said...

Costata,

I applaud and support your desire to hew to as much nuance and complexity as one can stand in discussing what is, after all, a complex subject.

Put more colloquially, "You go, bro."


burningfiat wrote:

"Gold is only worth acquiring if the lower levels of Maslows pyramid has been secured."

I agree, and well said. And, therefore, is it reasonable to assert that such scenarios where securing the lower levels of Maslow's pryamid-as opposed to securitizing them-are in doubt would seem to be the one's that threaten a freegold outcome.

holdinmyown said...

Hello Costata.

This depends on the viewpoint of the observer. I believe that the minimum IS the maximum. If all gold goes into hiding (theoretically possible but practically impossible) then one observer may see this as gold being worthless with a price of zero while the next observer may see this as gold being infinitely valuable since it cannot be obtained at any price.

HMO

Michael dV said...

d2thdr
It is crazy that a country gets the same (CAD/BOT) penalty whether it imports cigars and liquor and consumes them or if they buy gold and save it. To the rest of the world those 'crazy Indians' just can't get enough bling.
Only here do we see the wisdom of storing a wealth asset.
If Indians were crazy for US Treasuries I imagine their books would look a lot better would they not?
This system is nuts.

Motley Fool said...

Michael dV

Their books might look different but their currency would still suffer if their desire for Treasuries matched their desire for gold.

Even under freegold a similar nominal expenditure for external gold would damage the value of their currency.

The system is crazy, but their import of gold is imbalanced no matter the system.

Given that the long term benefit will still outweigh the short term cost, and so I cannot condemn it too harshly.

TF

victorthecleaner said...

There is a rumour that the ECB is trying to impose a haircut on the *senior* bondholders of the worst Spanish banks.

It seems, in Europe, debt is really toxic.

Victor

Aiionwatha's Nation said...

enough,

That's the way I see it, silver will be the best intermediary asset to hold during a disruption in the system bar none for exactly those reasons, you will not want to be spending gold. The key being how long of a timeframe we are talking about until any source of centralized credibility can be established once the roof blows. As a side note, it almost feels as though the footing of the current system is fading away just beneath the surface.

The other issue I worry about is the vast numbers of the American and European populations that rely on government assistance already and once this storm rolls in, it's likely to be a well pronounced majority that have no rations or anything else for that matter.

Blondie said...

@costata,

"The maximum price of gold is infinity. The minimum price of gold is zero. Priced in what precisely?"

Credibility.

Blondie said...

When exchanging value, between one another, credibility is all we have when our exchanges are not exactly like for like, in terms of value.

Gold is the supreme possession, the one with no time horizon and no other use, in which we store the credibility which evens up the otherwise uneven trade.

Blondie said...

As the human economy grows, in aggregate, over time, so too does the credibility stored in gold. This is why its value must be free to float, to reflect the amount of and value of that credibility.

If the human economy were to contract, in aggregate, then so too would the value of gold, in real terms.

Blondie said...

Whose credibility?

The credibility of those whom produce more real value than they consume.

They take their otherwise useful surplus value (ie. it could be exchanged for goods and services that are useful, no?) and put it in the one object that is not useful.

The rest of us give them credit for that, no?

Or would you rather that they bought useful stuff they had no need for, thus pricing it out of the reach of others? Just because we don't know we are giving credit, it doesn't mean it is not happening all the same.

Blondie said...

When I say gold is the supreme possession;

a) It is not my observation, but that of Pindar circa 5th century BC.
b) It is nature's choice as the supreme possession. No one installed it thus.

Pindar, with whom I agree, is simply stating what naturally is, much like the entire thrust of The Thoughts does. This is simply the natural system as it spontaneously emerged, without coercion. Coercion causes misallocation of capital etc etc.

Blondie said...

Actually, I think this natural system which spontaneously installed gold as the supreme possession is "Capitalism", and it has not existed free of coercion for over 2500 years now.

If it is not free from coercion, then it is not capitalism. As such Marx et al were not attacking capitalism at all, because they had no direct experience with it. They were attacking the coercion that had perverted capitalism, and rightly so. Unfortunately the coercion was assumed to be a normal part of the system, which it is not.

Everyone has been arguing from faulty premises the entire time.

jojo said...

What effect do you think freegold will have on the chains on Capitalism?

FOFOA said...

Hello Costata,

Good to see you taking your issues public rather than keeping them private. Thanks!

Quick question regarding your "Happy Endings Thought Experiment"… you wrote:

"even if you pay off that credit card … you have still generated a net increase in the overall money supply…"

When you spend using a credit card you create bank liabilities (what the economy calls money or deposits) and so when you pay off that credit card you are transferring another bank's liability (money) to your credit card bank which created the initial liability. So won't those cross liabilities cancel out and ultimately get cleared and then the money supply shrink from paying off your credit balance? Even in the interim before they are cleared, the money in circulation (and therefore aggregate "spending power" or "demand") is still reduced because the amount of banking sector liabilities to the non-bank public is reduced the moment the debt is repaid. So how do you back up your statement that paying off debt does not reduce the money supply?

I think that this question may get to the root of some of our disagreement. ;)

Also, since we have emailed about your issues with the Debtors/Savers dichotomy I think it would be fair to bring others up to speed. In your comment you alluded to the crux of the issue which is that you view the debtors and the savers as "a process or a cycle" that changes over a period of time. I argued that it is simply a dichotomy, a lens with which to view the world over any period of time. In your comment you wrote:

"But one of the problems with labels like saver and debtor is that a person can be both at the same time."

While it is possible and in some ways useful to apply the labels directly as we do with simple stereotypes, I think that getting too nitpicky at the margin misses the point of the dichotomy. For example, you could say the same thing about Marx's dichotomy: "But one of the problems with labels like capitalist and laborer is that a person can be both at the same time." Or, "A person could be a worker for a period of their life and a capitalist/investor at another time in their life." This, I think, is misusing the model in an attempt to discredit it. You also wrote:

"In other words what I’m trying to say is that I think we need something more “elevated” here than morality plays."

I have always tried to make it clear that, unlike Marx's dichotomy, the Debtors and the Savers is not intended to imply any morality. It is simply a way to view the monetary conflict that naturally arises whenever lending is denominated in savings or reserves. It is the conflict we are calling FOFOA's dilemma, and as in any conflict there must be two sides.

From the post: "Now would probably be a good time to restate that "the debtors and the savers" is a dichotomy, not a moral judgment." If it was a morality play there would be a call for one side to triumph over the other. But that's not what it's about. If there is any moral theme here it is that both sides are equally entitled to be who they naturally are.

Lastly, to illustrate your issue with the Debtors/Savers model you quoted from a post in which I was explaining the difference between savers and investors, not the easy/hard money camps:

"A saver is different from an investor or a trader/speculator…"

I'm not sure where you are leading us with this discussion, but I do have an idea. I'm not trying to stop or discourage you! I just wanted to make it clear to others that I think you are misusing my Debtors/Savers model in order to appropriate it for a different mission for which it was not designed, a mission on which you and I disagree. That's all. ;)

Sincerely,
FOFOA

costata said...

Blondie,

I agree with you 100 per cent. And credibility = liquidity. No credibility = no liquidity. In this new system the only "money" with full credibility at all times and over all periods of time will be gold. Sitting right below gold will be the most stable currency or currencies. The most barterable good will sit above the second most barterable good and so on down the line.

I think the act of saving is really just a decision to store future spending power. One can argue all day about why people decide to do so. The paper delusion is that people think they are storing purchasing power when they are not. I think this is the power of that differentiation described by the Yeti. It challenges you to ask yourself: Am I actually saving or doing something different?

I would argue that buying any other hard asset is investment. Here's a little test we could apply. Ask the owner of any hard asset: How liquid is this asset? One can afford to move beyond saving into investment when you have so much stored purchasing power that you never have to liquidate a relatively illiquid asset in a hurry.

Our short term spending money will be currency. It will circulate and be spent because the purchasing power decays over time due to inflation. Deflation in the currency can't be permitted because it would cease to circulate so we can assume inflation as a given.

No currency manager/issuer can permit an exponential curve to develop in the bank generated money supply if they want currency stability. The way to stop that curve from getting out of control is ridiculously simple. Force the repayment of debt by the banks who in turn must force customers to pay down their debts.

At the same time the currency issuer/manager has to put some constraints on the third currency emitter. The governments who borrow and increase the money supply through interest payments. From a currency issuer's perspective the threat of rising interest rates for a government isn't a social issue. It's a money supply issue.

Once you get these factors under control you can then balance supply against the "shrinkage" of the currency money within the larger context of the growth or contraction of the economy and exchange rates with your trading partners. And gold will help the currency issuer/manager to deal with the issues arising in that larger context as well.

Gold will sit outside this circuit (or on the edge of it) as a storage device. No nation state in control of it. No bank lending it into existence. No gold issuer. No currency pricing it. Just exchange ratios. The concept of price in regard to gold will be meaningless.

If we look closely I think we can see that the ECB Eurosystem has embarked on this task of getting their arms around the problem of controlling the money supply. I'm not saying that this is the ideal system of all possible systems either but I think it is workable.

Cheers

costata said...

Hi FOFOA,

I think I was posting my last comment at the same time your comment went up. So don't take any of that comment as a reply to your comment.

I will think about what you have said and respond (hopefully later today).

For other readers I want to make something clear. Don't assume that I'm going to defend any of the arguments I'm advancing if it becomes clear during the course of discussion that they are simply wrongheaded.

Cheers

Edwardo said...

Pindar wrote:

“Water is best. But gold shines like fire blazing in the night, supreme of lordly wealth.”

I used to have a connection to a few eminent classical scholars who would have provided some insight into those ancient words and how they are best understood. However, through a variety of life's circumstances those connections no longer exist.

AdvocatusDiaboli said...

A,
In my view, because gov cannot force producers to produce if it's not in their interest and can not force foreign producers to produce if they cannot have MEANINGFUL (to them, not to gov) profits, that this wide highway to hell will end suddenly at the bottom of a canyon.
I like that approach, lets take a look at it: "meaningful profit", can we agree that this is the essential expression? I personally deeply believe, that today most humans have completely lost any kind of touch to the concept of value. Print up some funny numbers on paper and they are happy (bread&circuses will work as well). Meaningful profit relates directly to that, since only in valuation you can determine if your profits are "meaningful".
To give you a real life example: The crappy €. When talking to german CEOs, they are just happy to have the €. They love it, since they are so glad that they and their employees are now able to work and ship their goods to the consumers in the south..... by now Germany already accumulated more than >>3trillion net "savings" of that "value"...sounds like a real "meaningful profit" to me....
Got it? ;)

And to give you another metaphysical parabel: You should have/observe animals. When you have chickens or goose, you get the maximum number of eggs, when you take away the laid eggs. But in case you want that they use the same nest again, so you dont have to search all over the farm, make sure, that you leave at least single one in the nest. Amazingly never a chicken discussed with me about austrian economics or her "meaninful profit" ;)
Greets, AD

Blondie said...

@jojo,

"What effect do you think freegold will have on the chains on Capitalism? "

FG is the removal of the chains. The coercion is the fixing of the value of gold, and this enables all other coercion.

AdvocatusDiaboli said...

costata,
you wrote such a nice post.

"The way to stop that curve from getting out of control is ridiculously simple. Force the repayment of debt by the banks who in turn must force customers to pay down their debts."

But than at the end you completely screwed it, proving a complete lack of reality:

"I think we can see that the ECB Eurosystem has embarked on this task of getting their arms around the problem of controlling the money supply."

Who has and how is the majority of the ECB board determined? Yep, one vote per country, with the majority of easy money champs, guided by GS crooks...
In case I am wrong, please show me one occurance in the history of the ECB, that is the opposite of choosing the easy way.
Greets, AD

costata said...

Hi FOFOA,

You covered a lot of ground in your comment and I'm still working through it. This part is straightforward:

So how do you back up your statement that paying off debt does not reduce the money supply?

Paying off the principal does reduce the money supply. It's only the interest component that persists after the principal has been repaid.

Blondie said...

FOFOA said:

"From the post: "Now would probably be a good time to restate that "the debtors and the savers" is a dichotomy, not a moral judgment." If it was a morality play there would be a call for one side to triumph over the other. But that's not what it's about. If there is any moral theme here it is that both sides are equally entitled to be who they naturally are."

... just not at the expense of the other.

Blondie said...

Motley Fool said, regarding Indian BOP:

"The system is crazy, but their import of gold is imbalanced no matter the system."

Their import of gold is not imbalanced. Small net-producers buying gold with their surplus. The imbalance comes from some part of their economy over-consuming, and unless the gold-buyers are racking up debt then the imbalance doesn't lie with them.

Jeff said...

Indian government seems to want to develop the financial sector at the expense of savers, but Indian housewives refuse to go along.

http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=155071&sn=Detail&pid=110649

DP said...

The apex bank has also set up a working Group, headed by K U B Rao (a senior RBI official) to examine the linkage between gold imports and pledging of jewellery with gold loan companies like Muthoot Finance and Manappuram Finance that have witnessed enormous growth in the past few years.

Go go gadget #GELOC!

DP said...

It expressed concerns over the issue as households investing in the metal could reduce the availability of funds for the financial sector and thus shrink economic growth.

Oops! (smile)

DP said...

How come none of the smart cookies at Occupy seem to have worked out how they can collectively starve the banks from the peace of their milking stool back at the yurt, while seemingly every housewife in India has figured it out?

AdvocatusDiaboli said...

"Gold imports have been a substantial part of the current account deficit."

See, that's the proof, it's evil, only uncivilized morons or vienna jews buy that stuff, and even it works for you, you're a jerk...

What makes me wonder, how that dude knows so well, that it must have been the gold imports, but no chance, that it could have been maybe the Ipads, Notebooks, BMW, CocaCola, Mercedes, overpriced GE equipment and Monsanto&Nestle "gifts"....

Jeff said...

Indian housewives demonstrate the flaw in AD's lalala theory. The government is unable to simply print and steal their way to limitless power when even relatively poor people refuse to save in the expandable medium.

'But they will force you to save in the currency!' he screams. Yet he also claims to be a Giant uber alles, so obviously they haven't managed to force him to stop buying gold. So both rich ADs and poor indian housewives have managed to outsmart the Orwellian government. Who knew?

costata said...

AD and Indian housewives have something in common,

they both save outside the currency.

(And neither of them use caps lock anymore.)

JR said...

Hi Costata,

Thanks for sharing some more ideas. If you will indulge me, I am a bit confused and just wanted to get a little more color on this:

"Paying off the principal does reduce the money supply. It's only the interest component that persists after the principal has been repaid."

I assume you are on board with one of big ideas from Moneyness concerning the dichotomy between credit money and the base money to which the credit references.

The monetary base is only the banks' and governments' money, except for that little bit of cash you keep in your wallet for emergencies. Let me explain.

Today's monetary base is a clearly defined thing. It is all physical currency plus reserves held at the Fed. We the people cannot have electronic base money. We cannot open an account at the Fed. Only banks and the government can. We use commercial bank credit and private credit to keep the economy churning. The reference point of our credit is the base. We reference that base when we transact in "dollars".

Private and commercial bank credit appears and disappears spontaneously all the time, all throughout the real economy. This is what actually lubricates the economic engine; having a base of stable value to which we refer in monetary transactions. Private credit is generally cleared using bank credit. And bank credit is cleared using the monetary base. But all credit denominated in dollars refers to that base and relies on a stable unit value or price stability.


And like private credit that appears and disappears all the time, base money too can contract:

That's because raw government-created money through deficit spending is fundamentally different than "our money." Government spending adds one unit of credit money (our money) to the system as well as one unit of base money (their money). The bank receiving the deposit gets a reference point unit asset to match the liability it takes on.

So the volume of the base is expanded when the government spends, and it is likewise contracted when the government taxes and/or sells Treasuries to the private sector (including our trade partners like China). But when the government spends in excess of those two operations (taxing and debt selling), the base volume is simply expanded.


So QE process is one of replacing credit money with expanding base money, of:

removing newly created credit money (debt created by the USG) from the system and replacing it with newly created base money. By increasing the volume of the base which credit references for value, simultaneous with a constant inflow of necessary goods, we are in essence devaluing—or more precisely debasing—the credit money flow that flows in the opposite direction of the goods flow.

So we have credit money and base money, and both can grow or contract, yes? So where does this "interest" you speak of fit in:

""Paying off the principal does reduce the money supply. It's only the interest component that persists after the principal has been repaid.""

If credit and base can contract, that this interest must be something different, yes? What is it?

Thanks, J.R.

AdvocatusDiaboli said...

Jeff,
no it's the opposite: The government does not care for the tokens (in this case gold), just as I always pointed out. Only the banksters do care about the gold, because they would prefer to sell their products.
But still governments get's their way: Nuclear bombs, one of the biggest standing armies, but their own citizens starve in the streets without water, without electricity.
Simple as that.
Greets, AD

Clyde Frog said...

If the RBI stopped and looked within themselves, they might find the answer to why the "Gold imports have been a substantial part of the current account deficit."

Turn off the rupee tap for a while and maybe they wouldn't disappear down the plug hole quite so fast.

costata said...

JR,

And like private credit that appears and disappears all the time, base money too can contract

The interest doesn't disappear. It adds to the money supply.

Edwardo said...

"How come none of the smart cookies at Occupy...."

The smart cookies at OWS (which seems all but defunct now) aren't so smart?

DP said...

^
|

XD

jojo said...

@Blondie

"FG is the removal of the chains. The coercion is the fixing of the value of gold, and this enables all other coercion."

Agreed. I came to same conclusion.The phrase "too good to be true" pops up in my head though.

Could we (superorg) really be on the verge of shedding those chains?? Does my cynicism place me in AD's camp now??
I'd like to think this is normal, next step evolution of the super organism.

JR said...

Hi Costata,

"The interest doesn't disappear. It adds to the money supply."

What is the money supply? Credit money and base money, yes? What else is there?

What is interest - credit or base money, or something else?

Base money and credit money can disappear, so interest must be something else if it is eternal, yes?

J.R.

P.S. - What do you get paid your salary in? Like bankers, I get paid in credit money for the services I provide, yes? Bankers don't get paid in something different, do they?

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