Happy New Year!

2013
Year of the Window

It is tempting to believe that extraordinary events must have been carefully orchestrated by someone. This is the main ingredient in conspiracy theories—denial that extraordinary events are caused by the ordinary.

The reason I bring this up is to help you put Freegold in the proper perspective to understand my use of the term "window" as in "window of opportunity". Freegold will certainly be a high impact, extraordinary event as I understand it, and completely unexpected by most people. But that doesn’t change the fact that it could be, and was, seen coming a mile away.

Extraordinary events are caused by the ordinary all the time, and Freegold will be a good example. It has been rolling in like the tide longer than most of us have been alive. If there was a "conspiracy" surrounding Freegold, it was a conspiracy to forestall the inevitable, by those who had the most to gain, until structural foundations could be retrofitted enough to withstand the storm of transition.

With a long view, we can see several times when massive amounts of resources were expended to keep the wheels on the bus at times when it looked like they were falling off. A popular view is that central bankers do this to retain their own power and influence. But a different view exposed by the Gold Trail reveals that it was being done for a purpose: to buy time in order to retrofit the system to withstand the inevitable transition to Freegold.

Look at this chart of the 1980 spike in the gold price. Notice the steep climb in September 1979 with a spike on October 2nd.

(Click to enlarge)

The wheels were coming off the bus. The general fear among European central bankers gathering on October 1st for an IMF meeting in Belgrade was that the global financial system was on the verge of collapse. You might recognize the names of some of the central bankers at that time. Jelle Zijlstra was the President of the Dutch central bank (DNB) and the BIS, and Alexandre Lamfalussy was an advisor to the BIS, soon to become its General Manager.

Fed Chairman Paul Volcker arrived in Belgrade early and left early, departing on the first day of the meeting, "his ears still resonating with strongly stated European recommendations for stern action to stem severe dollar weakness." [1] But don't think this was about the price of gold. Gold is the linchpin of the system, but that spike in gold was to the collapsing system like a fire alarm is to a raging inferno. You can't put the fire out by simply turning off the alarm.

Those central bankers looked into the abyss, and then took emergency measures to buy the time needed to retrofit the global monetary and financial system so that it could weather the storm they saw coming. One thing was that Volcker was pushed to take quick action that, reportedly, was not embraced by the Executive Branch. But that wasn't even the half of it. Those European central bankers also decided to support the dollar's exchange rate by buying dollars:

FOA: "My point was that their actions can only be justified from a position of "buying time". Most of the major World and European countries had economies and currencies that could stand on their own in a competitive world. Yes, their transition from a dollar reserve would have been painful. But, compare that loss to the percentage of lifestyle gain they paid as a tax to the US by artificially maintaining the dollar exchange rate. Their Central Banks support polices were a decision to waste their citizens' productive efforts in a process that held together a failing currency system.

[…]

It seems the only explanation for the continued support of the dollar came in the form of "buying time": time to recreate a world reserve currency. But this time, make it subject to a whole group of diverse nations of conflicting political wills. In this format no one country can call the shots for the world. In addition, take away the need to compete with gold. Let gold be a supporting "reserve asset" that trades in a free market, unlent and non monetary so as to circumvent its manipulation."

You can see that post-1980 European CB support for the dollar in stark relief here. And the other thing they did was to encourage and support the development and expansion of a vibrant and explosive paper gold marketplace for the purpose of absorbing the demand for gold in support of the dollar. Again, this was the European central bankers supporting the status quo in order to buy time for...

FOA: "On January 1 1999, the Euro was born. On the headlines of almost every paper, the new Euro currency immediately became the topic of speculation. How high or low would it go,,,,,,, will it last,,,,,, what good is it,,,, and on and on. Yet, completely hidden from view and outside most speculator interest, one important item was overlooked. Once this competing reserve currency was formed, the two major power blocks of the world no longer shared the purpose of maintaining a paper gold market! Established, maintained and supported for the purpose of absorbing the demand for gold, its price damping effects were no longer needed."

This is a good example of a major, multifaceted, coordinated, long term (20 years!) European central bank effort to forestall the inevitable transition for the good of the entire global monetary and financial system, and by none other than those who stood to gain the most from the transition. Evil bastards! ;D

ANOTHER: "The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold flowing during a time that trading would have locked up… Westerners should not be too upset with the CBs actions, they are buying you time!"

Then came the 90s when, as ANOTHER stated above, those European CBs became suppliers to the gold market as the whole "paper gold thing" didn't work out quite like they thought it might:

ANOTHER: "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. But, without a major increase in gold supply, the paper created by this "gold control operation" will either be paid by, 1. new supply. 2. the central banks. 3. rollover existing. 4. cash? 5. or total default! As the Asians started buying up everything last year ( 97 ) , number 5 and 5 started looking like the answer! When the CBs started selling into this black hole of demand, the discussion of #5 started in their rooms also."

For example, Wim Duisenberg, who followed Jelle Zijlstra as the head of the Dutch CB and later became the first President of the ECB, oversaw the sale of Dutch gold in two significant tranches of 400t (announced January 1993) and 300t (announced January 1997), and by decade's end had allowed for the lending of up to 15% (150t) of CB gold reserves.

But then, in a surprising policy reversal, he led the European central bankers in their Joint statement on gold, also known as the CBGA or the WAG. This statement was a very simple press release which, in essence, reversed the gold policy of the previous two decades and put the paper gold market makers on notice that they (the European CBs) would no longer be the lender of last resort for gold:

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.

2. The undersigned institutions will not enter the market as sellers, with the exception of already decided sales.

3. The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tons and total sales over this period will not exceed 2,000 tons.

4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.

5. This agreement will be reviewed after five years.

One could say that a window of opportunity for something had just opened. That was 9/26/99. On 9/29/99 the paper gold market imploded. The price of gold quickly rose 22% over a two week period (which would be like gold spiking to $2,030/oz. next week) and, for a brief moment in time, the lease rate spiked and the GOFO plunged signaling backwardation in the gold futures market.



There was a rumor that the Fed and the BOE were active in silencing the fire alarm that time:

"In front of 3 witnesses, Bank of England Governor Eddie George spoke to Nicholas J. Morrell (CEO of Lonmin Plc) after the Washington Agreement gold price explosion in Sept/Oct 1999. Mr. George said "We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake.

Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K."

In 2004, the European CBs renewed their "Joint Statement on Gold" as promised, but for some reason the BOE didn't participate this time:

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.

2. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2004, just after the end of the previous agreement. Annual sales will not exceed 500 tons and total sales over this period will not exceed 2,500 tons.

3. Over this period, the signatories to this agreement have agreed that the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the date of the signature of the previous agreement.

4. This agreement will be reviewed after five years.

Then, in 2008, something happened.

2013 – Year of the Window

I'm pretty new to this trail. I only started hiking it in 2008, a year that, like 1979 and 1999, the wheels almost came off the bus. Were massive resources expended at a loss just to keep the wheels on the bus that year? You be the judge.

I have relayed my own personal experiences buying gold from my local dealer in October and November of 2008 as anecdotal evidence of a tight supply (that I encountered) while the price was plunging from $900/oz. down to a low of $713/oz., and then plentiful supply at the bottom. I don't know. Did someone go massively short physical and long paper gold (or futures) in November of 2008 in order to support the paper gold market as the linchpin holding the wheels on the bus? Did somebody willingly take losses in order to delay the inevitable a little bit longer?



These charts are like a seismograph that records an earthquake, an explosion or some abrupt disturbance in the force. I do not think they are predictive. I do not think they are even descriptive enough to tell us what happened. They simply show us, in hindsight, that something happened. It is up to us to decide what we think happened.

So what happened in late 2008 as a result of the financial market collapse that began two months earlier? And did the European CBs do anything to forestall the transition once again? I don't know. But it is noteworthy that when they renewed their Joint Statement on Gold eight months later the #3 line about limiting gold leasing was gone and in its place was a line about IMF gold sales:

In the interest of clarifying their intentions with respect to their gold holdings the undersigned institutions make the following statement:

1. Gold remains an important element of global monetary reserves.

2. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2009, immediately after the end of the previous agreement. Annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes.

3. The signatories recognize the intention of the IMF to sell 403 tonnes of gold and noted that such sales can be accommodated within the above ceilings.

4. This agreement will be reviewed after five years.

One thing that I was missing back then (2008-2009) was the wider perspective of someone who had been hiking this trail a lot longer than I had been. Then, in late 2009 or early 2010, Belgian put me in touch with Aristotle and we started emailing.

Ari had been following ANOTHER and FOA since their very first comments on Kitco back in 1997, and he is also the only person I know of who exchanged private emails directly with FOA during the Gold Trail years. He is also the one commenter from "back then" who, in my opinion, "got it" better than anyone else.

Somewhere around the turn of the century, or perhaps even right after FOA disappeared, Ari decided to subscribe to the Central Banking Journal, a quarterly trade publication put out by and for central bankers. It costs about $800 per year to subscribe. He has read every single issue of this boring trade publication, cover to cover, for more than a decade now. And I mention this simply to illustrate for you his extreme focus on central banking policy discussions, at least since FOA went away.

Ari has been hiking this trail a lot longer than I have, he understands it better than I do, and he thinks that central bank policy discussions are relevant to the potential timing of FOA's "changing world financial architecture" aka Freegold. As I mentioned just last week, my July 2010 post Timing Is Everything came directly from a curious email exchange in which Ari introduced me to the idea that, perhaps, the European central banks are somehow supporting the paper gold market at certain times.

Then, later in 2010, he introduced me to another idea: that 2013 might be the new "window" being targeted by the central bankers for transition to the new "world financial architecture" (aka Freegold). So, yes, I have had my eye on 2013 for two years now, and I decided on this name (year of the window) back in November. Fonoah can vouch for that since I mentioned it in an email.

What I'm trying to do here in this post is to share with you the nuances of my perspective and my reasoning behind the chosen name. Being a "window of opportunity" does not mean that I think they plan to "pull the trigger" or "push the button" or whatever. Nor does it mean that I think the wheels will fall of the bus this year. It's more a question of whether "they" will sacrifice valuable resources in an increasingly costly attempt to forestall the inevitable next time the wheels start to come off this 100 year old bus. And as I mentioned last week, we may get a glimpse of their state of mind in this regard by the end of the week.

If you think that the IMF can unilaterally forestall the inevitable with more gold sales, consider that the IMF has "pledged" gold, similar to the ECB and the BIS. It is not a sovereign nation with its own reserves. When we see sales by these types of entities, they are likely the visible result of a group decision rather than a unilateral action, which would explain the mention of IMF sales in the most recent CBGA.

Could the Fed do it? No, only the U.S. Treasury could, and as FOA said they eventually would, that would be the sign we are looking for—the U.S. Treasury selling U.S. gold to defend its dollar! What about the BOE? What's Gordon Brown up to these days?

I'm going to share with you Aristotle's thoughts on this, beginning with that email back in 2010. I haven't heard a peep out of Ari in a few months, so I can't speak to his latest thoughts, but the following covers roughly the last two years on that ever-elusive topic – "timing":

ARI (via email Dec. 2, 2010) - For the past half-decade, many international policy stirrings gave every indication to me that 2010 was to be the targeted year for assertively rolling forth the freegold paradigm. But as I've said previously, I feel that the ongoing financial crisis that began with the subprime fiasco has caused instability of such magnitude that the central bankers have been forced to delay briefly and "play it safe" -- one does not dare rock the boat (if there remains any choice in deciding the matter) when the financial waters have become so turbulent and choppy. As for the new timeframe, I'd say that the reported EU plan "to make private bond holders shoulder some of the pain from any sovereign debt restructuring after mid-2013" is as good an indication of a benchmark as any I've seen. Plus, that timing nicely accommodates my additional view -- embracing a culturally significant standpoint -- that the December 2013 conclusion to The Hobbit will forever cement the desire for gold into the minds of all western moviegoers, resulting in a perfect storm of the golden variety. ;-)

On the point of the midyear "benchmark" mentioned above, it's almost spookily funny that the song lyrics mention "You just gotta ignite the light and let it shine; Just own the night like the Fourth of July". Indeed -- 2013. (Or sooner, if *necessity* precludes all freedom of choice in the matter!)

--Ari

ARI (hinting at his "timing thoughts" in a comment on Mar. 14, 2012) - Gather up the last easy bits of your treasure seeking exploits... the next 24 months will bring reverberations through our (global) culture as profoundly as is yet possible in this largely jaded and detached age of ours. Even now, can you hear the distant pulsing of air beneath the dragon's wings?

Gold. Get you some. --- Aristotle

FOFOA (via email May 11, 2012) - In that 2010 email, I believe you had your eye on the ESM set to begin in July 2013 when the EFSM is set to expire. But did you know that the ESM is expected to be ratified this July and run concurrent for a year?

I was curious if you still had your eye on the ESM as a “window of opportunity” and if this hastened timeframe portends an earlier window.

ARI (via email May 20, 2012) - Spurred on by the inquiry of your May 11th email, I took some time to read the latest progress on these treaties (both the 2011 original and lately amended 2012 ESM, plus the auxiliary Treaty on Stability, Coordination and Governance in the Economic and Monetary Union) last weekend, but somehow failed to get back with you on my thoughts. Probably because I came away with nothing very sound or profound as a result of my reading. I can't bring myself to imagine that the hastened timeframe for start of the ESM necessarily portends a more imminent transition to our freegold environment so much as it strikes me as a sign of how much the ongoing European ructions have kept the euro area member states focused and in frequent contact. Avenues for earlier-than-expected adoption were thus available and easily taken.

I took (and still do take) the facility of the initial European financial stability programs to make somewhat expedient new loans for the benefit of distressed euro member states until mid-2013 as an emergency measure and temporary bridge to give legacy bond holders (especially the banks) some time and space to regather their wits and come to better grips with the new reality. With the sunsetting of these expedient funds, the relatively cushioned ride of old bondholders on the backs of the stronger taxpaying populations should be nearing its end as any new funding (to be arranged now through the ESM) will come with stricter conditionality and will ensure the ESM holds preferred creditor status -- secondary only to the IMF.

Thus, banks (and any other sensible parties) who hold, or are potentially in the market for, European sovereign debt will be well advised to consider their place in the overall pecking order going forward, and of the real risk posed by national bonds after all.

A snip from The Telegraph today shows the likes of HSBC and Deutsche Bank still trying to think through it all and work out how to cope...

(Telegraph.co.uk) -- A note from HSBC staff this week said they are increasing their holdings of the yellow metal in the face of “deteriorating” economic momentum, in addition to adding cash and Treasuries (US government debt).

“In the continuing absence of plausible alternative growth drivers, we believe that this increases the chances that central banks will engage in further QE,” explained Fredrik Nerbrand, the bank’s global head of asset allocation.“This is likely to be accompanied by increased inflation expectations; hence, we increase our exposure.”

Not all are convinced gold is about to climb again, however. Analysts at Deutsche Bank think the increasing speculation about a Greek exit from the euro adds to the downside risks.

The argument is that, with gold showing a strong opposite correlation with the US dollar at the moment, if the euro falls, the dollar rises and gold drops backs.

However - stay with it - they see an actual 'Grexit’ as bullish for the euro. By implication, it would be for the gold price too.

The City is not singing gold’s swansong yet, but it is certainly braced for more volatility.

FOFOA (via email May 27, 2012) - Here’s a passage from your 12/2/10 email:

"For the past half-decade, many international policy stirrings gave every indication to me that 2010 was to be the targeted year for assertively rolling forth the freegold paradigm. But as I've said previously, I feel that the ongoing financial crisis that began with the subprime fiasco has caused instability of such magnitude that the central bankers have been forced to delay briefly and "play it safe" -- one does not dare rock the boat (if there remains any choice in deciding the matter) when the financial waters have become so turbulent and choppy. As for the new timeframe, I'd say that the reported EU plan "to make private bond holders shoulder some of the pain from any sovereign debt restructuring after mid-2013" is as good an indication of a benchmark as any I've seen."

Regarding the highlighted portion, check this out:

Sweeping reforms to shift the burden of rescuing failing banks from taxpayers to bondholders

It's from this…

Fresh fears as EU finalises reform plans
May 25, 2012 7:08 pm

Sweeping reforms to shift the burden of rescuing failing banks from taxpayers to bondholders are to be unveiled by the European Commission, despite fears it will further rattle nervous bank investors.
When a bank is deemed to be failing, regulators will win extensive powers to write down non-guaranteed deposits and senior unsecured bondholders, according to draft proposals obtained by the Financial Times.

While the broad thrust of EU bank resolution reforms are well known, its publication has been delayed for more than a year over fears the so-called “bail-in” tools would make it even harder and more expensive for banks to raise money.

There remain extreme sensitivities over the details. The FT has seen three recent drafts that show fundamental elements of the scheme are still being rewritten, with just a few weeks before the expected publication date.

The latest version includes one big political concession. Rather than forcing banks to raise an EU minimum of debt that can be “bailed in”, national authorities will have discretion to tailor requirements.
If approved in the final version, the increased flexibility could leave a patchwork of different regimes and requirements across Europe.

However, it would placate some countries opposed to the original commission measure, which forced big banks to raise bail-in debt covering 10 per cent of their liabilities. To meet this, Barclays Capital estimated listed banks would need to issue €600bn-€1tn of debt that can be bailed-in, which is more risky for investors.

Michel Barnier, who oversees EU financial services, is determined to unveil the plan in early June, within days of the Greek elections and at a time when most European banks are shut out of funding markets. He said the plans were “well thought through” and would not unsettle markets because they were “long term”.

“This is not a bad framework,” said one big European bondholder. “But it’s not going to be well received. This is a terrible time to release it.”

Experts on the reforms say the response will be unpredictable. “The commission may have decided that things are already so bad that nothing can make them worse,” said Bob Penn, a partner at Allen & Overy.

“But it is not going to help share prices or funding. It is not going to help ratings or funding costs. It will help the regulatory arbitrage business, as people duck and dive to avoid things.”

Under the plans, when a bank is judged to be failing and at the point of collapse, regulators will assume emergency powers to sack the management, restructure the bank’s assets and write down unsecured creditors.

EU members will also be required to establish resolution funds, which would be mainly bank funded and could include existing deposit guarantee schemes. National funds would, under normal circumstances, be required to lend to other country’s schemes if necessary.

Other draft changes include setting bail-in implementation for 2018, a later date than expected. Short term debt of less than a month maturity is protected, along with guaranteed deposits.

Regulators are also given some leeway in sparing derivatives counterparties should closing out positions during a debt writedown threaten financial stability or put a clearing house in danger.

ARI (via email May. 27, 2012) That article is a good catch, FOFOA. Much more so than the considerably less-consequential ESM treaty timeframe and implementation that we knocked about a few days ago, this article truly bites at the meat of the original matter mentioned in that 2010 email. And here we see how interminably these things can remain in flux, such that there is now in draft an extension of the timeframe from 2013 to 2018 as cited near the conclusion. You know... I can see where language to that effect could be more popular (among the banks and bondholders) from a simple delaying standpoint, but I would seriously question the likelihood that such a stretch could/would actually be made -- given the greater benefits to be had with fully-fledged freegold in the meanwhile coupled with the favorable cultural and political inertia to be had respecting the timeframe that commences mid- to late 2013 and into early 2014. But if we're looking at a serious attempt to hold the current course for five more years... jesus, that's a lot of stimulus and geopolitical rhetoric and nonsensical economic posturing just to get there -- not to mention five whole more years of the same ol' jaggedy march higher in MTM gold... (which is surely great for the young acquisition-minded, but equally frustrating for the established/retired gold holder.)

-- Ari

Well, there you have it, the full extent of my "timing" discussions with Ari. As most of you should know by now, I don’t do timing anymore. But seeing as the beginning of a new year is the traditional time to make (mostly failed) predictions, I do dip my big toe into the hazardous river of broken crystal balls once a year. And now, hopefully, you understand my reasoning for calling this The Year of the Window.

As for my specific prediction, here it is again from last week's post:

If the recorded price on Friday, January 4th, 2013 is EUR 1,246 or lower, it's game on for Freegold meaning that the window of opportunity is now open because official support for paper gold has apparently ended. In other words, there may be no system support the next time something breaks. But if the recorded price on January 4th is EUR 1,389 or higher, it's six more months of kick the can. And if it's anywhere between EUR 1,246 and EUR 1,389 (which it is today) then the €PoG will be too ambiguous to be predictive one way or the other.

For the full explanation you'll have to go read the post. But even if the €PoG doesn't hit one of those targets, whatever it does between now and Friday is still interesting to me (and I normally couldn't care less about the price of paper gold). So once again, here's a chart of euro gold so that we can keep an eye on it this week:

Once in a great while, perhaps, extraordinary events, say, caused by a century of the ordinary, cannot be delayed anymore, even by the most extraordinary efforts.

[1] federalreserve.gov/pubs/feds/2005/200502/200502pap.pdf

__________________________________________________________

New Year's Party Music!

This year I'm featuring the videos of Freegoldtube that I used in posts throughout the year. If you watch only one, make sure it is his magnum opus, The Ecstasy of Gold, at the bottom. And if you appreciate the very time consuming work he puts into these videos, please be sure to let him know because I think that his drive to continue making Freegold videos may have stalled. How many blogs have someone like Freegoldtube making videos like this?

From Peak Exorbitant Privilege:



From Fallacies — Paper Gold is like Paper Anything:



From Four:



From Deutsche Bank explains why we hoard gold:



From An American Horror Story:



From What is Gold?:



Happy New Year to all of you and all the best in 2013... Year of the (now open?) Window!

Sincerely,
FOFOA