Wednesday, February 27, 2013


After my last post, Think like a Giant 2, another gold writer who I consider a friend sent me an email that included a question. I had a thorough answer to his question in mind, but at the same time he said he thought it was basically unanswerable. After considering this conundrum, I concluded that the perspective reflected in the email completely missed the point and was so loaded with hard money preconceptions that the best way for me to frame my answer was by painting a whole new picture starting with a blank canvas. A big task, I know. And he may very well reject my answer, but perhaps it will be of use to someone. Anyway, here's his email followed by my reply:


I enjoyed reading your post today and agree with its premise, though it raised a question in my mind: if one size buyer is able to expose the paper fraud, let’s say by steadfastly trying to take delivery of 25% of open interest on the COMEX one random settlement and then going to the press when the exchange fails to deliver, AND YET, to your point, size buyers do not have incentive to expose the fraud because it’s only a hedge – not a wealth creator – then why should we expect fiat to ever be reconciled with gold? It would seem size holdings of physical that may represent only, say, 6% of a portfolio’s wealth (e.g. Saudi), would much prefer keeping the fiat game going?

Are you implying reconciliation ultimately relies on the disaggregated global masses knowing enough to exchange their paper claims for physical?

Your post raised an issue we've struggled with. I don't know if it's a question with a definite answer. Spontaneous social reactions against power are always possible and have long precedent. My thoughts are it requires general hunger and oppression. I'm sure you'd agree that's where unreserved fiat ultimately leads. As you may know our particular view is that power will preempt that, 1) because they can and 2) because they'll get rich in the process.


Hello XXXX,

First, and for the record, I don't expect anyone to intentionally break the system or "expose the fraud" as you say. I don't think that was ever A/FOA's message. Those who dream of blowing up the system simply aren't capable of doing it, and those who are capable wouldn't dream of actually doing it.

In your COMEX example you imagine someone trying to buy more of something than is obviously available at that time and then crying foul (or fraud) when the market can't deliver more than it has. Giants know that the best way to accumulate something at their level is slowly, over time, and within the volume offered on the market. And they also know what happens if they use their oversized weight to rock the boat:

FOA: While so many of our gold bulls salivate at the prospects of some player calling for delivery and driving the gold derivatives market to the moon; it ain't gona happen! Our world of dollar based gold derivatives has grown so large and become so integrated into supporting (hedging) international dollar assets, the central banks will band together to crush any delivery drive.

This is in the ECBs interest as I will explain in a moment.

If some big player said he was going to take 100 million ozs out of the paper gold market, the Central Bank systems would just order him to trade out for liquidation only and go to the cash market to buy his gold. Don't think I'm confusing Comex positions and their rules as being different from the rest of the world gold market. What works on comex works everywhere when the system is at risk. The controlling governments, who's domain Bullion Banks reside in, would, could and will force those holders of bank busting positions to simply cash out for the good of their system.

By the way; not only does a liquidation market send baby gold bulls running to sell, also, the BBs would be selling enough additional paper to temporally send gold down $100 bucks so our boy would trade out with a little less cash (smile). Then he would find an opposite "premium" spike in the cash markets, waiting for his order.

I hope my little dose of reality drives some sense into our gold community. This is the reason Another says only fools try to buy their gold all at once on the paper markets. "NOONE" is going to exercise their "corner" until the dollar based gold system is changed.

That said, it is an important distinction to keep in mind that aggressively attacking a system in that way and defensively withdrawing your support for an outdated system are two different things. Any Giant who has "done the math" as FOA said, and therefore understands change to be "a political certainty", would be properly positioned for change and would therefore be indifferent to the timing as opposed to trying to influence it.

I do think, however, that there have been massive efforts to influence the timing, but I think that they were efforts to support the old system rather than to quicken its demise. And this view reveals a fragile system in need of support as opposed to a resilient system impervious to attack. This is my view which I gained from A/FOA, and I'd like to take this opportunity to try and explain the big picture as I see it.

I plan to turn this into a post, so my apologies for the length and I'm not necessarily writing all of this specifically for you. But I would like to challenge you to temporarily set aside everything you think you know about the gold market while you read the following. That's not to say I'm trying to change your mind, but I'd like you to see the picture I'm painting as separate and different from the picture you already have in mind. I think it might just be that different. So rather than trying to reconcile the ideas below with what you already know, like morphing two pictures into one, I'd rather have you walk away with two distinct pictures that you can then compare and contrast to one another.

Another Big Picture View

Let's think about all of the physical gold in the world. If we include above and below ground gold, we can imagine a fixed amount, every ounce already owned by someone in extremis. Even undiscovered deposits are owned by the sovereign if push comes to shove. This is a handy view because it's like poker chips on a table. There are a fixed amount of chips and they simply get moved around the table, changing ownership, location and value from time to time. We could even think of the gold in the ground as a reserve of chips locked away in the dealer's tray.

But the thing about physical gold is that it very rarely moves. Let's switch to thinking only about all of the above-ground gold in the world. Perhaps 95% of it lies very still for very long periods of time, often spanning generations. Some may wonder how this is possible. It is possible in the same way that any piece of physical property, be it real estate or an old piece of jewelry, can stay in the possession of a wealthy family for generations, even centuries in some cases.

As long as a family (or country or any unit in aggregate) is producing more than it consumes, or at least receiving an income greater than its expenses, it can accumulate property without the need to ever sell it. Physical gold, in this case, is accumulated and held for the possibility of resale at some point in the unknown future which could be decades, generations or even centuries from now. It has always been this way, but for the last century or so it has not been this way so much in the West. As Another said, it is mostly the "third world no ones" who keep the physical market "bought up." "The Western public," he said, "will not hold an asset that is going nowhere, at least in currency terms."

So we have (very roughly) 95% of the world's physical gold lying very still, but what about the other 5%? Perhaps half of that is recycling plus new supply coming out of the mines that "moves" (i.e., changes ownership and/or changes physical location) on its way to its final (long-term) resting place, and the other half, perhaps, is us shrimps trading coins and jewelry along with a few "big" changes of ownership. Like chips on the poker table, 95% is sitting very still in the big stacks while maybe 2.5% new chips are added each year and, perhaps, another 2.5% are moved around (churned) "in play" each year.

Again, I'm only talking about physical here, and I'm only guesstimating the numbers while allowing for a large margin of error. The gold market is so opaque that it's the best I can do in order to explain the big picture.

Now as you know, we have our (in very general terms) "developed economies" in the West, and the "developing" or "emerging" economies of the East. And the status quo (net-consumption) of the West, at least for the last 40 years, relies on the net-production of the East as is clearly evident in the balance of trade and capital accounts over that period. The only problem is that "the East" still likes physical gold even as "the West" lost its taste for "dead assets". So while Eastern products (including oil) flowed west, some amount of physical gold had to flow east. Here's the second line from the first post in ANOTHER (THOUGHTS!):

It was once said that "gold and oil can never flow in the same direction". If the current price of oil doesn't change soon we will no doubt run out of gold.

I wonder if he was talking about the price of oil in dollar terms or gold terms there.

An interesting question is why the dollar reserve-based IMFS (international monetary and financial system) didn't fall apart at some point after 1971, and how it miraculously stabilized in the early 80s. In fact, the European central bankers feared that the $IMFS was on the brink of collapse by 1979, and what I've learned from A/FOA is that there were basically two things that held it together. We could call these things the "two legs of support" for the dollar system. One was organic or natural, and the other was inorganic and intentional, for a purpose and to an end.

The first leg of support, the organic one, was what FOA called "a new era of efficiency" brought on by technological advances, leaps and bounds really, throughout the 70s, 80s and 90s. As long as productivity expansion (a natural deflationary force) was keeping up with or exceeding monetary inflation, it acted as a leg of support for a dying monetary system. Here is FOA in January of 2000:

FOA: This system balanced, as the value received from oil by the goods producing world outran the loss from price inflation initially created from rising oil prices. This does not explain everything, by any means. But, it does at least give us a handle on the dollar transition throughout the 70s and 80s. Looking back one can see that "money theory" wasn't thrown out the window, only reworked a great deal.

It wasn't by pure chance that this "new era of efficiency" coincided with the end of the gold standard and thereby acted as a leg of support for continuing the dollar system. In fact, the "new era" was partially responsible for the 1971 monetary transition from a gold-backed dollar to an oil-backed (or productivity gain-backed) dollar.

FOA: The old system was built on a much slower creation of production efficiencies and couldn't accommodate this modern surge of wealth (and debt). Let's face it, the world has no precedent for the last 30 years of growth. By adhering to the fixed money supply, currencies would have risen in value creating a deflationary effect on the debt created from this growth.

But the East, and especially the Saudis, still liked their physical gold. And they still got it, even with the gold window closed. These guys in the East don't care about the currency price of gold, they just want physical gold at whatever price in exchange for their net-production to hold for the unknown future. Only the West cares about the currency price and won't hold it if the currency price is going nowhere, but will scoop it all up if the currency price takes off.

So the second leg of support for the troubled $IMFS, the inorganic and intentional one that began around 1980, was a two-pronged effort by the European central banks to give both the Americans and the East what they wanted in order to buy the time needed to launch the euro. The two prongs of the approach were 1) supporting US debt and 2) promoting and supporting changes to the gold market that would allow the physical to flow where it needed to go without a premature gold revaluation that would have blown up the current fiat system and disrupted international trade as it reverted back to a hard gold standard. And it worked, for the most part.

FOA: In practical theory, oil now backed the dollar as world oil payments were settled in dollars. In return, gold now backed oil from a US guarantee of an open market for the metal. Over time, a portion of oil dollars could be replaced with real gold through actual physical purchases or in participation with evolving world gold banking (paper gold). Even though the dollar gold price had surged, the higher oil prices were allowing a percentage of those dollars to be converted back into gold at the old gold/oil rate.

Now here's an interesting concept. If the price of gold and oil rise in tandem, then the oil producers who like their physical can still take the same volume of gold (by weight) out of circulation even though the currency price is rising. No revaluation of gold versus oil has occurred. But there are a couple of problems with that. In a gold bull market (rising price), Western traders will snatch it up in order to stick it to "those who like their physical" in currency terms. And the more physical the market is, the more this feeds back upon itself leading to an upward spiral of all prices like we saw in the 70s, something that is avoided in a revaluation.

In fact, the US Treasury could have revalued its gold in 1971 like it did in 1934 rather than closing its gold window, but it didn't. And more to the point, the other CBs (BIS) didn't lobby them to do so because they thought the system needed to change more broadly than a simple dollar devaluation in order to accommodate the "new era of efficiency".

FOA: By adhering to the fixed money supply, currencies would have risen in value creating a deflationary effect on the debt created from this growth… This is the reason the BIS did not lobby the US to officially devalue the dollar in gold (raise the dollar gold rate from $42 to say $200) and continue the system. Even though many people were hurt from this, the system was failing and had to change. The tactic was not to stop using dollars if the gold was not delivered, but rather for the US to just stop shipping the gold. In reality the dollar is still a receipt for $42 in gold, but it will never be connected to gold again. Ever!

There are a few big differences between a gold revaluation and a gold bull market (rising price). The first one that I already mentioned is that in a bull market Western traders will hoard gold in order to stick it to those in the East who really want it (stick it to them in currency terms). A revaluation, on the other hand, happens by surprise and overnight so there's no bull market for Western traders to take advantage of those who want the gold for long term reasons. Plus, if revaluation had happened in 1971, then we would have still been on the gold standard, at least throughout the 70s. So once again, the price would have gone nowhere during that time and, as Another said, "the Western public will not hold an asset that is going nowhere, at least in currency terms."

The second big difference, also already mentioned, is that the volume (by weight) required by those in the East who like their physical would have been reduced by a revaluation whereas it stayed mostly the same for the next 30-40 years with no revaluation in oil terms. The third difference is that normal correlations hold during a bull run because it is gradual which allows the time necessary for arbitrage to prevent any revaluation in real terms. The instantaneous nature of a revaluation denies arbitrageurs the time they need to react. This applies for both planned and unplanned revaluations. For an idea of what unplanned revaluations look like, check out some of the bubble collapses of the last 300 odd years.

The fourth difference relates specifically to 1971 since the choice to not revalue also meant the end of the gold standard. In a gold standard, surplus currency used to redeem gold from the gold window was taken out of circulation. But in the "free market" that resulted from closing the gold window, those same dollars continue to circulate even after being traded for gold.

So here we have a slightly different picture emerging than the one I read about most places. While the US certainly had self-serving reasons for closing the gold window (for one, a higher oil price without too much inflation made strategically valuable but more costly North and South American oil reserves more viable), the European CBs went along with it in order to get off the gold standard. "Even though many people were hurt from this, the system was failing and had to change." And a simple revaluation of the gold within the gold standard was apparently not the change they thought was needed. But the 70s were still a turbulent time, as transitions (and feedback spirals) can sometimes be.

FOA: Initially this created instability in the financial system. Throughout the 70s players ran into gold, trying to regain the monetary security the dollar had lost without it. Soon, everyone realized that no amount of conversion would ever replace all the foreign dollars outstanding—the dollars stayed in circulation even as they were traded for gold. Further, the dollars were still being received by ME oil producers in return for oil. Dollar price inflation was bad, but in no means did we see the "runaway price inflation" that should have come from a reserve currency without gold backing.

Getting back to the two-pronged approach of the second leg of support for the troubled $IMFS which began around 1980, I said that the first prong was support for US debt. In essence, the European central banks recycled all those foreign dollars that continued to circulate by soaking them up and then lending them back to the US. Much like the PBOC has done for the last decade, Europe did all throughout the 80s and 90s until they finally launched the euro in 1999. This had the effect of keeping global dollar-denominated inflation in check while allowing the Americans to keep on spending a seemingly unlimited flow of magical (inflation-resistant) dollars.

The second prong was the creation and promotion of a new type of gold market in the early 80s. To understand the goal of this new market, let's go back to my guesstimate of the stock and flow of physical gold. Remember that I am guessing that about 5% of all of the physical gold in the world moves (changes ownership and/or changes physical location) each year. In fact, that guess may even be high. Today about half of that, 2.5%, is coming from recycling and new mine production. The other half would be one owner selling and a new owner buying. So let's think about this in terms of gross aggregates that we'll call the West and the East.

In general, we should expect to see a net flow of physical gold from the West to the East, especially during times when the currency price of gold is flat (i.e., "going nowhere"). This flow could be achieved in two ways. One way is Westerner owners dishoarding and the other way is from the Western mines/recycling. But if the price of gold is rising, as it does during a bull market, then the Western traders will be hoarding rather than dishoarding, and may even be taking some of that Western mine supply. This would tend to put stress on the flow needed to keep the East happily net-producing especially without a gold revaluation in oil (real) terms.

Imagine now, if you will, that "the West" (or more specifically Western goldbugs aka Western gold traders, so as to exclude Western mines, scrap recycling, governments, CBs, and perhaps even Western old money Giants who appear to share the same long term taste for physical as "the East") is always, in aggregate, in one of three states of physical gold ownership. It is either accumulating, dishoarding, or simply churning amongst itself some amount of physical gold. Ignore paper gold, mining shares and whatever else here, I'm only talking about physical gold.

Now imagine that you are a European central banker in 1980, or at least a Giant-sized mover/shaker in consultation with them, considering and discussing this view of the East and the West, the gold market, the troubled $IMFS and the future prospects of a "euro" currency and how to buy enough time (thought to be one decade at that time but it turned out to be two) to get there. This group, of which you are a part, consists of (in my estimation) between 30 and 300 souls. You are one of them. And the fact that they confronted Volcker with fears of a dollar collapse in 1979, and that a few days later Volker took bold action, is not in doubt. Both sides confirm this confrontation, so there is no question about the level of influence this group possessed.

What would you do to secure the necessary flow of gold from the West to the East? Well, here's what they came up with:

ANOTHER: It truly started with Barrick, in Canada in the 80s. It was a "thin market", but grew big in oil.

FOA: One of the first signs that a new gold market was being created was when bullion banks were allowed to sell Central Bank gold "ownership invoices", for cash to the benefit of Barrick. The CBs got only a very small rate of return for this risk. The money set in a bank account and interest was made. The new owners of the gold paid cash but let the gold set in the CB vault. All that happened was that Barrick could earn interest on its unmined reserves and call it "the higher price they were getting for gold"! In addition, the CBs said they could roll it forward for ten years +/-, if the price of gold rose! Really clear eyes could see that the CBs were paying mines interest on unmined reserves if they would replace the CB real gold with mine collateral. Because the gold didn't really leave the vault, the new securities were used to match the mine future assets against the new owners of the gold! Neat trick. After the public bought it as "the CBs earning interest on a nonpaying asset", the gates were opened. It wasn't long before gold was lent without any gold at all! No different than "fractional reserve" banking. The mines were (are) being used to expand the gold trading arena and they don't even know what is happening. Now, as the price has fallen, all mines must earn interest on reserves, just to survive. The dollar bears are, in effect, nationalizing the mines gold reserves at ever lower prices. Tell me the CBs are dumb???


One of the reasons this trend worked so well is because the US went for it, early on. A falling gold price encouraged a strong dollar and offered Western dollar holders an avenue to hold gold in leverage form. An action they will, no doubt regret, later, as it has taken the form of stripping gold from western hands. For them, this new allocation allowed for free dollars to earn a return. Do not confuse these entities with non-western dollar reserve holders, as they (mostly) purchased straight gold future certificates (with CB backing) using resources as the leverage, not gold. Usually, this was the actual gold in the CB vaults as it was leased out, but never moved. Truly, this was the source of the same money that went into mine forward sales (barrick?). The gold and the money stayed in the CB house and control. The entire above outline is why some analysts (Ted Butler?) cannot understand why the gold doesn't physically move, yet physical demand is being supplied. This conversion process was accounted for in the LBMA volume, as it became evident after gold fell below $360US. It was then, and only then that LBMA announced these huge monthly transactions.

So here we have a genuine "central bank gold price suppression scheme" beginning in the 80s. Only the collaborators, motives, purpose, mechanism and end game are all different from the ones I normally read about from Western gold writers. It's not the Fed or the ESF/PPT meddling in the paper markets or dumping physical like the Treasury auctions in the 70s. In fact, the suppression mechanism is the popularity of the gold market itself, including the mines! The irony here, which Another pointed out, is that Western gold trader enthusiasm caused the very effect about which those same traders incessantly complained and concocted conspiracy theories to explain. Brilliant irony I must say, if one can step back and view it from afar.

The purpose of the scheme was so that the physical coming out of the Western mines could flow to those in the East who really like their physical while the Western gold trader taste for physical was held in check by a price that went nowhere for two decades. But we didn't hear those in the East complaining about the price, only the Western traders who were unwittingly complicit in their own frustration as they bought into this new gold market hand over fist.

The end game of the scheme was to make it to the launch of the euro, at which point the central bank leasing could be capped and unwound, and the costly support of US debt expansion ended. Gold would then be free to rise and/or be revalued against oil which was long overdue. It was never a sustainable scheme meant to last forever as these European CBs had to put their own gold on the line in order to support the fragile dollar system to keep it from self-destructing prematurely. Apparently, according to Another, even all of the new gold coming out of the mines each year was not enough to satisfy the East's taste for physical without an eventual revaluation.

ANOTHER: The Western governments needed to keep the price of gold down so it could flow where they needed it to flow. The key to free up gold was simple. The Western public will not hold an asset that going nowhere, at least in currency terms. […]

To avoid a spiking oil price the CBs first freed up the public's gold thru the issuance of various types of "paper future gold". As that selling dried up they did the only thing they could, become primary suppliers! […]

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. […]

People wondered how the physical gold market could be "cornered" when its currency price wasn't rising and no shortages were showing up? The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold flowing during a time that trading would have locked up. Westerners should not be too upset with the CBs actions, they are buying you time!

Let's try accepting Another's words at face value and see where they lead. Barrick switched from oil to gold mining in 1983/84. Annual global gold mine production in 1985 was just under 50 million ounces. If technology and the new paper market could have helped expand that "five times over" it would have eventually reached 250 million ounces per year. But that didn't happen. In 1990 annual production had increased 20% to about 60 million ounces, 72 million ounces per year by 1995 and about 82 million ounces in 2000 where the growth cycle ended. A total increase of 64% rather than the 500% increase they had hoped for. But even that should be enough gold for the East, right? I mean, how much useless metal do they need?

ANOTHER: Gold is cornered. Plain and simple. No complicated theories, no options problems. The commodity value of gold was forced so low in paper currency terms that all of the new mined gold, going out some 10 years is spoken for.

Now the CBs will have to sell 1/3 to 1/2 of their gold just to cover what's out there. To use the Queen's English "it ain't gona happen dude"!

If the current price of oil doesn't change soon we will no doubt run out of gold.

That was in 1997. "All of the new mined gold, going out some 10 years is spoken for." You can do the math. So how much useless metal do those barbarians in the East really need? I mean, this sounds crazy, doesn't it? Well, apparently it got so bad around the time of the first Gulf War that they had to cut a deal with the biggest or at least most important player (threat) at that time if they wanted to make it to their goal of a clean euro launch party.

ANOTHER: Ever notice how many important middle eastern people keep a residence in London? It's not because of the climate. The most powerful banks in the world today are the ones that trade oil and gold. It is in the "city" that the deals are done by people who understand "value"! Westerners should be happy that they do because the free flow of oil and gold has allowed this economic expansion to continue this past few years. […]

What quantity of GOLD, paper or physical, has OIL traditionally purchased on an annual basis? From 1991, appx. 20m/oz./yr., now it is more.

This was the gold for oil deal in 1991, 20 million ounces per year. For that to be a deal, it must have been a decrease from what otherwise would have been sought. Why would "we" get a deal? Perhaps someone explained the plan/scheme (or "gold control operation") as I have done so far. You blow it up now, what do you get? A lot less in real terms. But if you play ball, you still get a good percentage of the annual mine supply. And 20 million ounces per year would have been about a third of annual global (not just Western) mining supply in 1991, all going to just one single player in the barbaric East where, for some reason, they like their useless metal.

But by 1997, the cost of maintaining this deal had apparently tripled!

ANOTHER: For the monthly amount to be taken off the market has changed from $10 in gold ( valued at $1,000 ) /per barrel to the current $30 in gold /per barrel still valued at $1,000! Much of this gold was in the form of deals in London to launder its movement. Because of some Asians, these deals are no longer being rolled over as paper!

Oh no, you mean it's not just the Arabs that like useless metal in the East? We've got to worry about the Asians too?

ANOTHER: Asia put an end to a sweet deal for the West! From the early 90s it was working very well.


The Asians are the problem, by buying up bullion worldwide and thru South Africa they created a default situation on all the paper for the oil / gold trade! Now the CBs are selling in the open to calm nerves but it's known that they will never sell enough. It was never their intent to provide the gold, only the backing until new mining technology could increase production. Over time the forward sales, such as ABX's should have worked. But LBMA went nuts with the game and the whole mess has now accelerated. […]

The oil "understanding" was broken by the Asians. More gold has been sold than can ever be covered!

Damn. First the Arabs, now the Asians… who's next? And what the heck do these Eastern barbarians do with all of that useless metal anyway??? What if they do nothing with it other than stick it in a vault somewhere where it will sit as long as they keep net-producing until some unknown time in the future when they are forced to net-consume? If that's the case, then maybe the actual weight-volume they receive in exchange for their surplus currency doesn't matter. In fact, the greater the weight, the larger the vaults they need to build or rent. I wonder if they would be just as happy receiving a lower weight-volume of revalued gold. Here's an appropriate quote from my 2010 post It's the Flow, Stupid:

[T]he price of gold does not matter to the [East], only the flow of gold matters. I'll say it again. The [East] doesn't care about the price of gold, only the flow. To the [East] the price doesn't matter because it is a straight currency exchange, like exchanging dollars for euros.

Did you see it in the article? Aramco owed the Saudis $3 million a year, but it had to be paid in gold. They didn't owe 2.67 tonnes of gold per year, but that's what they had to pay because the US fixed the price of gold at $35 per ounce. The US could have raised the price of gold to $100/ounce and then it would have only had to ship .93 tonnes of gold to the Saudis! Would the Saudis have been displeased with such a move? No. The guaranteed price of gold only matters to the printer of paper gold. To the producer/savers, all that matters is the guaranteed flow of physical!

Let's now jump forward to 1999 and look at three important events that happened that year. The first and most important one happened on January 1st when the European central banks successfully launched their new euro currency. Then, in May, Gordon Brown pledged to sell half (~400 tonnes) of England's physical gold over the next three years. Some say this was a move meant to suppress the price of gold. Others say it was simply a mistake of bad timing. But perhaps it was neither. Perhaps it was necessary to feed the flow a little while longer. Then, in September, the European central banks collectively and publicly announced their intention "not to expand their gold leasings and their use of gold futures and options" for the next five years at which time the agreement would be reviewed.

Bull Run versus Revaluation

I want to discuss the significant differences between a bull run and a revaluation because we got one and not the other after the euro was finally launched and European CB support was removed. As I already mentioned, in general, revaluations are usually quick and surprising while bull runs are gradual which allows more and more people to get onboard at different points in the run. With a revaluation, you're either onboard or not when it happens.

Another big difference is that the singular nature of a revaluation (one single item revalued/devalued) means that the item is revalued in real terms vis-à-vis everything else while a bull run is often merely a rise in nominal terms because other related (or correlated) items, more or less, usually go along for the ride. We could say that the whole group of correlated items (e.g., commodities) is revalued in real terms vis-à-vis another group (e.g., S&P500) during a run, but I hope that you can see the difference between the "gold bull market" of the last decade and a gold revaluation in real terms that is long overdue. It is the latter that Another and FOA explained.

Even though we've seen orders of magnitude swings in the nominal price of gold, from $35 up to $850, back down to $250 and then up to $1,900, the price of gold in oil terms (the "gold/oil rate" that FOA mentioned above) is the same today as it was in 1947, 1974 and 1999 at the launch of the euro. In other words, there has been no revaluation… yet. So when we think about the incredible bull market run we've had in gold since 2001, I think it is also important to keep in mind how little has actually changed in real terms. Here is the GOR (gold oil ratio) data going back to 1946, from

Annual Average
Gold and Crude Price
# of bbl Oil 1 OZ Gold will buy
Year Average $/bbl Average $/oz Ave bbl / oz
1946 $1.63 $34.71 21.294
1947 $2.16 $34.71 16.069
1948 $2.77 $34.71 12.531
1949 $2.77 $31.69 11.440
1950 $2.77 $34.72 12.534
1951 $2.77 $34.72 12.534
1952 $2.77 $34.60 12.491
1953 $2.92 $34.84 11.932
1954 $2.99 $35.04 11.719
1955 $2.93 $35.03 11.956
1956 $2.94 $34.99 11.901
1957 $3.00 $34.95 11.650
1958 $3.01 $35.10 11.661
1959 $3.00 $35.10 11.700
1960 $2.91 $35.27 12.120
1961 $2.85 $35.25 12.368
1962 $2.85 $35.23 12.361
1963 $3.00 $35.09 11.697
1964 $2.88 $35.10 12.188
1965 $3.01 $35.12 11.668
1966 $3.10 $35.13 11.332
1967 $3.12 $34.95 11.202
1968 $3.18 $39.31 12.362
1969 $3.32 $41.28 12.434
1970 $3.39 $36.02 10.625
1971 $3.60 $40.62 11.283
1972 $3.60 $58.42 16.228
1973 $4.75 $97.39 20.503
1974 $9.35 $154.00 16.471
1975 $7.67 $160.86 20.973
1976 $13.10 $124.74 9.522
1977 $14.40 $147.84 10.267
1978 $14.95 $193.40 12.936
1979 $25.10 $306.00 12.191
1980 $37.42 $615.00 16.435
1981 $35.75 $460.00 12.867
1982 $31.83 $376.00 11.813
1983 $29.08 $424.00 14.580
1984 $28.75 $361.00 12.557
1985 $26.92 $317.00 11.776
1986 $14.64 $368.00 25.137
1987 $17.50 $447.00 25.543
1988 $14.87 $437.00 29.388
1989 $18.33 $381.00 20.786
1990 $23.19 $383.51 16.538
1991 $20.19 $362.11 17.935
1992 $19.25 $343.82 17.861
1993 $16.74 $359.77 21.492
1994 $15.66 $384.00 24.521
1995 $16.75 $383.79 22.913
1996 $20.46 $387.81 18.955
1997 $18.97 $331.02 17.450
1998 $11.91 $294.24 24.705
1999 $16.55 $278.98 16.857
2000 $27.40 $279.11 10.186
2001 $23.00 $271.04 11.784
2002 $22.81 $309.73 13.579
2003 $27.69 $363.38 13.123
2004 $37.41 $409.72 10.952
2005 $50.04 $444.74 8.888
2006 $58.30 $603.46 10.351
2007 $64.20 $695.39 10.832
2008 $91.48 $871.96 9.532
2009 $53.48 $972.35 18.180
2010 $71.21 $1,224.53 17.196
2011 $87.04 $1,571.52 18.055
Average 14.771

Another big difference between a bull run and a revaluation is the absolute impossibility of the paper market or the structure of contractual obligations and liabilities going along for the ride. Think about the 1934 gold revaluation. The dollar at that time was the paper proxy for physical gold, and the revaluation was vis-à-vis that paper proxy. Today, the paper gold market is analogous to the dollar in 1934.

A bull run certainly puts stress on the paper edifice, but because it is gradual and drawn out and because other items that may have been used to hedge exposure generally remain correlated during a run, the various counterparties do have the advantage of time to make adjustments. Here is FOA in 1999 when gold was $280 an ounce talking about Barrick trying to get out of its paper commitments if gold rose past $600 (oh, the foresight!):

FOA: As the physical price rises well past the paper price, every miner and user in the world will be trying to get out of their commitments. Even Barrick now admits (finally) that above $600 they have to start supplying margin. After all this time of telling everyone that they could defer their contracts for 10 or 15 years. This goes back to my post about "Westerners" not thinking that gold will rise. Because investors thought it was impossible for it to go above $600, to consider that long term gold lenders would not ask for margin was nuts. If gold hit $5,000 does a lender just depend on ABX's good word?? It shows the beautiful evolution of "Western investment thought". Again, LBMA will not be in a position to advise anyone as this plays out. Truly, this relic of London's past will be put on a shelf.

Here's a short article from AEP in 2009 that I'll post in full as it is relevant to this discussion in several ways:

Barrick shuts hedge book as world gold supply runs out
By Ambrose Evans-Pritchard
11 Nov 2009

Global gold production is in terminal decline despite record prices and Herculean efforts by mining companies to discover fresh sources of ore in remote spots, according to the world's top producer Barrick Gold.

Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10pc as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run.

"There is a strong case to be made that we are already at 'peak gold'," he told The Daily Telegraph at the RBC's annual gold conference in London.

"Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore," he said.

Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa's output has halved since peaking in 1970.

The supply crunch has helped push gold to an all-time high, reaching $1,118 an ounce at one stage yesterday. The key driver over recent days has been the move by India's central bank to soak up half of the gold being sold by the International Monetary Fund. It is the latest sign that the rising powers of Asia and the commodity bloc are growing wary of Western paper money and debt.

Now think back to the view I presented of the period from, say, 1985 through 1999 regarding the flow of physical from West to East. During this period we had a number of factors which combined to "supply the demand". We had a price that "went nowhere" along with a new paper market that encouraged Westerners to give up their physical gold in exchange for leveraged trading paper. When that ran out, we had the European CBs becoming the "primary suppliers". We had a deal in place with one of the larger "Eastern barbarians". We had a gradual increase in mining supply from 50 million ounces up to 82 million ounces per year, and we also had the mines selling their "future assets" up to ten years out backed by CB gold. And finally, we had almost 400 tonnes of physical from Her Majesty's Treasury "given to the cause" at the tail end of this period. All of these factors are gone today.

What we have instead today is a stagnant mining supply, a declining scrap supply, CBs adding to their gold in aggregate, Westerner traders hoarding physical in places like GLD and PHYS and a price that rose more than "five times over". You'd think that would "stretch" the available supply relative to demand some five times over, but you'd be wrong. Only a revaluation in real terms can "stretch" the flow sufficiently and sustainably.

Just like FOA said about the 70s, "the higher oil prices were allowing a percentage of those dollars to be converted back into gold at the old gold/oil rate." The old gold/oil rate has fluctuated narrowly but hasn't changed in 67 years. Another said, "Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises." One more piece of data to support this point. The LBMA publishes its clearing volume monthly. If we go back to the beginning of the bull run, around mid-2001 when the price of gold was in the $260s, and compare it with the clearing volume today, we see that demand in currency terms rose right along with the price. So much for "stretching".

Also, I am still operating under the assumption that the East didn't lose its taste for gold just because the currency price started rising. And in case you thought "oil" was a bigger player than "the Asians", that's not the picture Another painted:

ANOTHER: This whole game was not lost on some very large buyers WHO WANTED GOLD BUT DIDN'T WANT IT'S MOVEMENT TO BE SEEN! Why not move a little closer to the action by offering cash directly to the broker/bank ( to be lent out ) in return for a future gold note that was indirectly backed by the CBs. That "paper gold" was just like gold in the bank. The CBs liked it because no one had to move gold and it took BIG buying power off the market that would have gunned the price! It also worked well as a vehicle to cycle oil wealth for gold as a complete paper deal.

Are you with me?

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

That was the 90s. I don't think "the game" is the same today. In fact, I think that "the game" needed to change in 1997, and that may be why Another took his story public in the only way he could. Ari once told me that he thought Another's reason for going public with this story was to telegraph a message to certain people. I won't expand this thought any further because I would only be speculating, but I will tell you that my speculation makes perfect sense to me. And check this out, from FOA in 2000 when one of the regulars on the forum questioned the credibility of what he was saying. I'll post Cavan Man's message in full because I think it reflects a lot of the skepticism we see today right here on this blog, and then FOA's reply. Notice the highlighted sentence:

Cavan Man: Dear FOA,

I am not certain how many visitors here carefully read and digest what you write. Furthermore, I am even less sure how many of us really believe what you write. With my simple mind, I see the common cents of it all. Perhaps my mind is simple because I have not the formal education nor experience level of many, consequently my simple mind is also very open to new Thoughts; it is not so encumbered with preconceived notions. I'm a long ways back but still following you on the trail

I have read your posts from this morning which filled in some blanks for me generated by my reading and re-reading of Aristotle's five part series of last summer. I have just taken the time to read Aristotle once more. Each reading provides keener insight. Each reading gives me a greater sense of concern for future events as you seem to project them.

Here is my question:

Can the international monetary system transition to a new form; can ME oil be satisfied; can the international currency value of gold be reconciled with even the modest expectations of traditional (western)thinking gold market analysts; can individual, sovereign economies remain "whole" and healthy; can the paper gold market leverage be unwound; etc. without the advent of violence and aggression? How so?

Perhaps I should stop reading USAGOLD and go back to the comic section of our local and very poor newpaper?

Thank you.....Cavan Man

FOA: Cavan Man, Yes, I think you are right. There really is no point in going back so far. Nor is there any gain in diving so deep to explain political strategy just ahead. Mostly we want to understand the short term. Another warned me about this once before. Saying I should stay on the surface and discuss events as they apply. Looking back I see why he doesn't send me anything now. The point has been made and the correct people have seen it. Now wait for events and discuss the market response. So be it. I'll ride the soft river and stay off the hard trail. Thanks Cavan Man, your words have helped, I presume too much, FOA

As you can imagine, the forum begged FOA not to stop "diving so deep." You can read the responses to FOA's comment here. But the point is that something changed. "The game" today is not the same as it was in the 90s. To be honest, without the guidance of an "insider" like Another and his confidant FOA "discussing events as they apply" "to explain political strategy just ahead," I struggle to understand how the gold market has gone on without a revaluation in real terms as long as it has. But I do have a theory that I think fits what we've seen so far.

Incidentally, my theory comes from a 2010 email exchange with the only person I know of who had direct email contact with FOA, and who I believe gleaned more insight from Another and FOA than anyone else, Aristotle. But don't judge it on that; judge it on how it fits into the big picture painted above.

I will repeat what I said at the top. I don't expect anyone to intentionally break the system. I don't think that anyone with a big enough footprint capable of breaking the system would ever dream of actually doing it and then living with the stigma that would come from such an act. Instead, I think that the system is fragile, in need of support, and without that support it will crumble on its own. It is not just "their" system. It is your system, my system, everyone's system. It is a global system, and yet it is an old, fragile and failing system. But as FOA said, "everyone that is positioned in physical gold will carry this storm in fantastic shape."

Why did he write "physical gold" and not just gold? Because he wasn't just talking about a bull run, he was talking about the inevitable revaluation that'll come when the old and fragile system crumbles under its own weight. But today there's a new system already in place, functioning under the old system, but built to withstand the failure of the old gold market. Nothing need rise from the ashes. It is already here. And it is "anti-fragile" meaning that it will not only withstand the shock, but be improved by it.

This is checkmate. And it is not a gold standard. But even so, to use your words at the top of the post, we can "expect fiat to be reconciled with gold." Not just once, but on an ongoing basis. Here is the rest of what FOA said:

FOA: This not only has "everything to do with a gold bull market", it has everything to do with a changing world financial architecture. And I have to admit: if you hated our last one, you will no doubt hate this new one, too. However, everyone that is positioned in physical gold will carry this storm in fantastic shape. This is because the ECB has no intentions of backing their currency with gold and every intention of using gold as a "free trading" financial reserve. None of the other metals will play a part in this.

Now let's look at what we know has happened since Another and FOA stopped writing. First, the "Brown's Bottom" UK gold auctions ended in early 2002. From that point, the rest of the European CBs sold some 1,650 tonnes, which ended in early 2009:

The time period of the sales in that chart includes the addition of four new Eurosystem members, along with their gold, so the total sold by the European CBs is actually higher than 1,650 tonnes. And whether these sales went to fulfill past obligations or to satisfy new customers is an interesting question, but I doubt if it really matters much because we know the general direction of the necessary flow.

I suppose it is somehow possible that the output from Western mines and scrap recycling, topped off by a few Western central bank sales, supplied GLD, PHYS and other toys of Western traders while also satisfying the insatiable demand for useless metal from our Eastern barbarian trading partners on whom we rely for their continued and selfless net-production, these last 14 or so years. Meanwhile, we more physically inclined Western shrimps traded (churned) our coins while our Western CBs punched one tonne at a time into new discs giving us the illusion that it's business as usual.

If not, then perhaps the above was supplemented by the discreet (and discrete) "pairing up" of buyers and sellers of a more, shall we say, Giant size, those whose footprint would have left a distinct mark, perhaps even a trail of destruction, if it had landed in our gold marketplace. If this was the case, as was (at the very least) implied by Another, then it would have included some sort of a promise of inevitable revaluation, backed not only by logic, but also by history, a long-term plan of action, and some measure of past success. In other words, the checkmate scenario.

In any case, we now know that the European CB gold sales have ended, Western mine/scrap supply is in decline, and the USG is still spending like there's no tomorrow, even as it has to print up new dollars! ;D And, thankfully for the West, the songbirds are singing the end of the bull run, gagging GLD into puking up a hairball or two for the cause. All is well in Oz, right?


The game of chess ends before it is over. It ends when a player can legally declare checkmate because the losing player is destined to lose on the next move. But good players know when a game becomes "hopeless" much earlier, and so these "expert" games often end before checkmate can even be legally declared. They end when checkmate is inevitable, when the losing player acknowledges defeat.

In practice, most strong players resign an inevitably lost game before being checkmated, and it is considered bad etiquette to continue playing in a completely hopeless position. But there is some small hope for those players who haplessly continue playing rather than resigning. The hope lies in the remote possibility of a mistake by the other player.

Weak players, on the other hand, seldom resign. At a competent level it is considered discourteous to play on in a clearly lost position. But while it is bad etiquette to refuse to resign in a completely hopeless position, if you are ignorant as to whether your position is hopeless you should play on.

The dollar game was lost on 1/1/99 and we're just playing out the remaining moves right now. I think this is the correct perspective, even if it doesn't give us any actionable timing information other than "yesterday was the best time to buy physical gold, today is the second best and tomorrow is a distant third."

The gist of my theory (for those who haven't been following my blog closely) is that at some point support for the old edifice will be withdrawn, and then it will crumble under its own weight. But it is so big and heavy that, when it finally gives way, it will come down faster than you can react. There will be no warning. The only warning you can hope for is to look for signs that support has been withdrawn. And I should add that those whose only net-production is of the paper variety (e.g., the US, UK and Japan) cannot offer structural support to this failing edifice.

So that's basically the big picture as I see it for the last 40 years or so. But before I wrap this up, I want to briefly recap this view within the larger context of a 100-year time frame in order to add a little more perspective and grounding.

The Big, Big Picture in a Nutshell

If we look back to the monetary conference in Genoa (1922), I'd say that conference really set the finite timeline of the dollar in motion, much more so than the creation of the Federal Reserve System in 1913. The creation of the Fed simply put the US on equal footing with the rest of the world in terms of the ability to have a flexible monetary base, which helped make the international move in Genoa possible. From Peak Exorbitant Privilege:

And so even though the U.S. wasn't directly involved in the European monetary negotiations that took place in Brussels in 1920 and Genoa in 1922, it was acknowledged that any new monetary order was likely to be a U.S. centered system. […]

The Roaring Twenties was not just a short-lived period of superficial prosperity in America, it was also a time when a great privilege was unwittingly granted to the United States that would last for the next 90 years. And I say "unwittingly granted" because the U.S. did not even participate in the negotiations that led to its privilege. As Jacques Rueff wrote in his 1972 book, The Monetary Sin of the West:

"The situation I am going to analyze was neither brought about nor specifically wanted by the United States. It was the outcome of an unbelievable collective mistake which, when people become aware of it, will be viewed by history as an object of astonishment and scandal."

The next thing I look at is the evolution of thought that transpired after 1922, mainly through Jacques Rueff who wrote a Freegold-sounding piece decades earlier than anyone else. It's chapter 2 in The Age of Inflation and, while it's not perfect Freegold, it sounds a lot more "Freegoldish" to me than his contemporaries in the more formal economic schools of the time. And by "Freegoldish" I mean realistic and practical with a focus on the balance of trade and how the flow of gold is an integral part of its monetary adjustment mechanism as opposed to some sort of theoretical economic idealism.

I always thought that Freegold (free market gold) thought originated with French thinkers like Jacques Rueff and then took hold with a wider European contingent throughout the 70s as part of "the road to the euro". After all, it was the French that ran on the gold window in the 60s, and then they were the first to mark their official gold reserves to the market price in the mid-70s.

Following the evolution of thought beyond France, from 1969 I have a speech by Alexandre Lamfalussy, a European central banker from Hungary, that fits quite well. And then in the 70s we can add Jelle Zijlstra, a Dutch central banker who really gets it early on. So we can see signs of an evolution of thought that spread throughout the European CB community in, perhaps, the late 60s and 70s. The ECB itself marks the beginning of "the road to the euro" in 1962.

That doesn't mean that everyone involved in creating the euro understood Freegold, particularly those who had spent more time in America, like Robert Mundell and Robert Triffin. But you've got to understand how big of a project this was, creating a new international currency in just a few decades. A lot of people were involved in the effort in many different capacities, and not everyone would have been privy to the discussions that resulted in the CBs leasing their gold to buy time for others involved to complete their part.

In terms of the dollar's finite timeline, I think we can view the point at which the US had about 20,000 tonnes of gold as the top of the hill. That was 1950 through 1957, the period directly following Bretton Woods, a monetary conference in which the US not only participated, but ran the show. From 1957 to 1961, the US gold stockpile lost more than 25%, dropping from 20,000 tonnes down to 15,000. Having peaked, it would be natural for those who could see the end far off in the distance to start thinking about what would come next. And as if a kind of natural selection or survival of the fittest ideas took place, perhaps Rueff's ideas took hold in the early 60s among some who could actually make a move.

We do know that Rueff was one of de Gaulle's economic advisors during the 60s. So I think it is fair to imagine the "Nixon shock" as a move forced by the French. It forced the creation of a "free market" for gold by the same entity that had been running (controlling) the previous fixed market. Perhaps getting the gold wasn't the French goal as much as it was to force the creation of a new "free gold marketplace" in which CBs could openly (rather than covertly as in the London gold pool) participate.

What better way to force a permanent bank holiday on the old system than for a giant (like France) to run on its own bank (the US Treasury) while holding a press conference about it? Incredibly, France demanded its gold from the US while it was still covertly involved in the London gold pool. And then France was the first to back out of the gold pool. And then France was the first to mark its gold to the market price in 1974. From Once Upon a Time:

From 1965 through late 1967 the gold pool was expending more and more of its own gold just to keep the price in its range. Seeing this, France (who was one of the insiders and knew of the price fixing operation) began demanding more and more gold from the US Treasury for its dollars.

And as this trend progressed, the world was flooded with more and more dollars that were backed by less and less gold, creating an extremely volatile situation. Public demand for gold was rising, the war was escalating, the pound was devalued, France backed out of the gold pool, and in one day, Friday March 8, 1968, 100 tonnes of gold were sold in London, twenty times the normal 5 tonne day.

The following Sunday the US Fed chairman announced that the US would defend the $35 per ounce gold price "down to the last ingot"! Immediately, the US airlifted several planeloads of its gold to London to meet demand. On Wednesday of that week London sold 175 tonnes of gold. Then on Thursday, public demand reached 225 tonnes! That night they declared Friday a "bank holiday" and closed the gold market for two weeks, "upon the request of the United States". (So much for "the last ingot", eh?)

That was the end of the London Gold Pool. The public price of gold quickly rose to $44 an ounce and a new "two tiered" gold price was unveiled; one price for central banks, and a different price for the rest of us. Even today official US gold is still marked to only $42.22 per ounce, $2 LESS than the market price in 1968!"

I think it's fair to say that today's particular game of chess began around 1962, and by 1968 the French, following Jacques Rueff's advice (who was probably already writing The Monetary Sin of the West which he would publish four years later), put the dollar in check. Not checkmate, mind you, but just check which forced Nixon to make his "shocking" move in 1971 (a move that would have been fully predictable by any competent player).

Then, in early 1979, the European central bankers created the ECU (European currency unit-currency code XEU) which was to be eventually replaced with the euro. But by late 1979, they feared the current system was on the verge of collapse which, they thought, would send the world right back onto a hard gold standard. So, what to do? I guess you'd quickly figure out a way to support the failing system long enough to complete your mission. And guess what, it worked!

So I think we can view 1971 as an important inflection point in the finite timeline of the dollar that began in 1922. How long could the Bretton Woods gold standard have continued if the French hadn't demanded their gold and backed out of the London gold pool? We'll never know, because that wasn't how this game was played. And then, I think we can say that the dollar's gameplay has been on life support ever since 1980 when it would have otherwise ended. Kind of like when an expert poker player lets a "fish" win once in a while just to keep his money in the big game.

The real question is, at what point did checkmate become inevitable. At what point could an expert player have called the game over? That point was the launch of the euro. As FOA said, everyone was betting 10 to 1 against the euro right up until launch day! Even Another was apparently worried that the gold market was going to blow up and ruin it just a year or two too early. I think that's why he started contributing to the Kitco forum. Can you imagine the tension in the room? You're on the final stretch of a 37 year project, with less than two years to go, and something as stupid as the Eastern barbarian's love for physical gold is threatening the completion of your project. This puts the whole ANOTHER (THOUGHTS!) in a bit of a different light, does it not?

Perhaps the initial message Another wanted to telegraph was this: "ALL PAPER WILL BURN" and "the CBs will never cover all of the paper gold that's out there. To use the Queen's English, ain't gonna happen dude."

Remember, he said that the Asians broke the deal and were the big new threat, and he said that they "never ran out of money", yet they were buying up all of this CB-backed paper that was being offered by the BBs run amok. So was the intended recipient of the message the Asians, or just Giants in general (who tend to have lots of paper kindling of all kinds), or was it the BBs? Whoever it was, FOA said they got the message and, as we now know, they made it to launch day so it must have worked.

So why not push for checkmate once the game is already won? Well, just because you expect and want something doesn't mean you want all of the negative side effects that go along with it. If the dollar had collapsed in 1999 then the euro would have forever carried that stigma, which might have been less than preferable to its parents. Furthermore, it was a brand new currency system in its infancy. Exactly how much confidence did they have in its resilience, its "anti-fragility", especially if the US currency collapsed immediately in its wake?

They had the base money, inflation and the MTM gold under control, but some elements of the 1993 Maastricht treaty, namely government finance through the private banking system, were still flapping in the wind. This is something that the ECB would have known earlier than the rest of us. Yet as of 2013, that part is mostly secured.

On top of that, we had 9/11 in 2001 and the GFC in 2008. I can accept that Europe decided to support the US for a period after 9/11. That fits and it is about the time that the European CB gold sales began, ending in 2009. This goes against the theory that those sales were simply booking the physical loss of previously leased gold. But I never liked that theory much because it goes against what Another and FOA wrote about the leases, and the mines should have been able to fulfill those obligations since more than 10 years have now passed.

Then again, if the mining supply of the last decade went mostly to those who purchased it in the 90s, what physical supplied the East (in addition to GLD/PHYS) over the last decade? And therein lies a mystery that can only be solved, as far as I can figure, by some sort of discreet (and discrete) deal-making that would have included a promise of inevitable revaluation. Also, Ari told me that from at least 2005, according to his readings of the CB journal, it seemed that 2010 was being targeted to be the new transition window:

"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."

I imagine that the "official support" from 2009 onward could have been more derivative oriented than physical because I imagine they realized in Oct./Nov. of 2008 that the greatest threat now is a falling price for paper gold. The East doesn't care if the price falls, in fact that's when they like to back up the truck because they get more bang (tonnes) for their buck when that happens.

I think that the "gold" market today is largely driven by the currency trade (XAUEUR, XAUUSD, etc…) which dwarfs the physical side. It's so big that the BBs can control the price of gold by controlling the extent to which they hedge on COMEX/GLD/etc. versus how much they hedge in correlated derivatives. That is, they can easily control the price whenever there is too much demand, but not so much if the demand for their paper evaporates. They'd be buying their own paper and going short in the physical market or correlated markets, a suicidal exercise.

So official support could have been as simple as the CBs entering the FOREX markets and buying up XAUWHATEVER when needed. This makes sense because in the 2009 CBGA they excluded the line about leasing, futures and options. This could have opened the door for them to engage in the derivatives market.

Note also that John Paulson was rumored to have sold a large XAUEUR position (paper gold hedge that allowed him to denominate his fund in gold ounces) back in December. That was reported as him simply selling "gold", and it was cited as one of the reasons for the decline in price which led to my Dec. 26th post and question about whether "someone" would step in just before Snapshot day. Soros was also rumored to have sold half of his "gold" around the same time.

The point is that no one stepped in. The BBs would have then had to remove their long hedges which would take the price down. And that's roughly how I think the much larger paper market runs the "gold" price these days, through the selective hedging activities of the BBs. But there's nothing they can do if the price falls too fast like it did in 2008. They can't buy their own paper and the Eastern demand for physical (by weight) explodes when that happens.

Lastly, I will leave you with a puzzle. I predict that, upon revaluation, global gold mining supply will undergo a sudden and dramatic contraction. But why would that be? If the value and price of gold is suddenly so much higher, wouldn't the mines run at full steam? I don't think so, and there's the puzzle.

So there you have it. The game is already won, has been since 1/1/99, but checkmate has not yet been declared so it continues. And that's why I named 2013 the year of the window. What do you think so far? Have you seen any signs yet that this is not the year of the window? I haven't. And no, I'm not expecting the "disaggregated global masses" to suddenly wake up and exchange their paper claims for physical. Nor am I expecting some kind of "spontaneous social reaction against power" that will "expose the paper fraud" and bring down the house, forcing the reconciliation between fiat and gold. I do, however, expect reconciliation, just not in one of the ways described in the email at the top of this post. ;D

Oh, and I expect it soon.


PS. If you appreciate and enjoy what I do with this blog, then please read Defending the Precious and support my efforts here. I won't be selling any of my barbarous relics at the worst time to sell in all of human history. So it's either your support or I take another offer. And I do have another offer, but I'd prefer to keep doing this. ;D


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Aaron said...

Tyrone, Reveal Thyself!

Tyrone said...

FreeGold, Reveal Thyself!

RJPadavona said...


Given his name, Tyrone sounds like someone who's quite possibly very well endowed. So be careful what you wish for. Your request might lower your self-esteem a little ;)

Great post, FOFOA! Using chess as an analogy will make things clearer for many readers.

I urge everyone reading to donate what they can. Our boy works hard and doesn't live a very extravagant lifestyle. He spends most of his time coming up with new concepts for our reading pleasure and chatting with his BFFs about gold and dirty jokes.

He's working on an honor system here, so have some honor about yourselves and come off with some of that rusty money!

And for anyone interested, CNBC had a pretty decent segment about paper gold today. Santelli kinda gets it and actually explains how paper gold defeats the purpose of owning GOLD.

memorable quotes:

Lesh (not Phil, JR):
"Gold has turned into a security with the evolution of ETFs"

"Paper gold allows a lot of people to participate in this gold market who never would've been in it"

"There's only a few people who really wanna own gold bars. How many coins do you really wanna have?"

"We trade as a currency in gold, trading against other currencies"

"Paper gold took the complication out of investing in gold"

"Doesn't it take the whole point away from owning gold?"

"If you're trading paper, the notion that if the financial world comes to an end, the goldbugs are gonna have the gold. If you're playing an ETF, you're gonna have a piece of paper."

"Yes, because you're not gonna be able to get at that gold after a crisis"

"That's one of the things we're seeing right now, liquidation of this paper asset."

Even the dummies watching CNBC have been warned, although I doubt they're listening. Not everybody was born with a golden spoon in their mouth, but your kids can be.
GOLD-get you some.


One Bad Adder said...

Great effort FoFoA - may you live long and prosper ...hereabouts ;-)

Nickelsaver said...

Awesome Post!

The answer to the riddle:

Upon the revaulation of all things against gold, the mines will be controlled a/o owned by the CB's/Governemnts/Currency issuers. And as such, the need to regulate the flow will be an essential aspect of maintaining the currency. Zones with a strong currency are likely to halt production altogether. Zones with a weak currency may boost production to get within range, but will ultimate enjoy the advantages of have a weaker currency for international trade.

End result, gold production will stay about the same.

Reality Show said...

Anybody want to buy some silver?

I read Another's Thoughts! several years ago. Although his writings felt honest and sincere to me I didn't really understand the message and ended up wandering off in a different direction.

It was actually the way that VtC conducted himself on some other site that drove me to reconsider the Freegold perspective, so thank you Victor.

It never really made sense to me that fixing the price of anything can create sustainable solutions and so I instinctively lean towards Freegold, with the help of FOFOA's guidance and the excellent contributions from many in the comments section my intellect is gradually catching up with my instinct. Now I need to work out what to do with my lesser metals.

A heartfelt thank you to you FOFOA and to everyone that contributes, I am really enjoying my studies.

Motley Fool said...

Reality Show


In reasonably functional times, of which the present could qualify, anything has a price. I have no doubt you will be able to sell your silver at this juncture, though I do not expect you will find many takers here (at anything close to market value), haha.


Nickelsaver said...

I'd like to edit my answer to the riddle, typo's and grammatical errors to remain intact :-)

Gold production in strong zones will halt or slow to a crawl. Gold production within weak zones will probably stay the same. Total mine production should be less than now.

ein anderer said...
This comment has been removed by the author.
FOFOA said...

Hello Nickelsaver,

From the post:

"Let's think about all of the physical gold in the world. If we include above and below ground gold, we can imagine a fixed amount, every ounce already owned by someone in extremis. Even undiscovered deposits are owned by the sovereign if push comes to shove. This is a handy view because it's like poker chips on a table. There are a fixed amount of chips and they simply get moved around the table, changing ownership, location and value from time to time. We could even think of the gold in the ground as a reserve of chips locked away in the dealer's tray. […]

Like chips on the poker table, 95% is sitting very still in the big stacks while maybe 2.5% new chips are added each year and, perhaps, another 2.5% are moved around (churned) "in play" each year."

Some players in this game have big stacks. Of those, some also have large in-ground reserves (like the US) and other don't (like Europe). Other players are "winning" at the moment, so the size of their stack is less relevant, and even LESS relevant is the size of their in-ground reserves. And other players have a small stack, lots of in-ground reserves, and are either "winning" or "losing" at any given time. Here's a game card, and here's a larger view. Which players do you think will run their mines at full steam (in Freegold) and why?


Robert said...

Another thought provoking post from FOFOA, but one that I have trouble reconciling with some earlier posts. FOFOA draws a distinction between attacking the system and withdrawing support. But what does it mean to attack the system? As I understand it, every withdrawal of physical gold from the LBMA is an attack on the $IMFS. As I understand from earlier posts, the Freegold trigger is the final run on the BBs, the day when the first Giant runs out of the bank screaming "The bank has no gold!"

FOFOA says: "I don't think that anyone with a big enough footprint capable of breaking the system would ever dream of actually doing it and then living with the stigma that would come from such an act." Yet sooner or later, if support is withdrawn, the bank run is going to happen, no? In an earlier post FOFOA suggested it might already be underway. That means there will eventually be withdrawals of physical gold that push the system to the limit. Will anyone care about stigma if history will judge that the outcome was inevitable anyway? Doesn't the collective goldbug community already believe the outcome is inevitable -- even virtuous? Will anyone really condemn the person who finally pushes the system over the cliff?

For those in the East who are accumulating, I can understand the reasons to remain patient and keep physical flowing. For hedged Giants with ample physical gold savings and income-generating businesses, I can understand the indifference. For the orca opportunists of the world, I cannot fathom hesitation because of potential stigma. The system as a whole is too Darwinist for that.

DP said something in the previous thread that got me thinking. I always used to think of the secret backroom deals as between private sellers. But DP made a comment that made me realize that the CBs might be paying Freegold prices from private sellers -- perhaps to keep the gold flowing and the system afloat. That makes a lot more sense to me than the idea of potential buyers who are too noble and concerned about their reputations to intentionally crash the system.

ein anderer said...

All my heartfelt thanks, FOFOA and contributors.

You have managed to preserve my wealth. Now it's time for me too to defend the precious in "the worst time to sell".

Hope to meet again here or hereabouts ...

( Puzzle: Did not understood the question correctly as F.’s answer to Nickelsaver revealed; therefoere deletion of my first comment. Sorry. )

KnallGold said...

Feel almost exhausted, but I have this irresistible feeling that today is a Great day!

x took delivery of those Valcambi chocolate bars, its called ComiBar and weighs 50g with dimensions 5.1cmx7.3cm. You can break off a 5g row which can be further breaked into 1g pieces.This is fully compliant with FreeGold and this Swiss refiner thinks the same. Check 1

x there was neither a follow through in POG nor anything substantial coming from the other (political) side. Check 2

x had to clear an insurance thing. Check 3

Now that completes my list to put that check on the FreeGold button below

x Go!

Unknown said...

Another salient post, congruent with past and present discussion.

While shopping at the "Walmart Super Center" yesterday, I did notice an unusual span of empty shelves ... then I peeked behind a "hedge" only to see this.

As this dollar based monetary plane fails to support the global physical plane, we could see the tipping point in a just-in-time supply chain failure.

Why not position the Euro as the savior, if you can rather than the bringer of doom?

For a giant, "soon" is as in "this generation" of the many. But for shrimp on the hamster wheel, "soon" is "yesterday already".

In the end, time will at last prove all.

Bjorn said...

If you have a big stack, you don´t have to buy more chips from the dealer until you run low...

So.. Loosing players with small stacks must dig for chips?

Lisa said...


Consider this perspective - withdrawing gold from GLD is not so much an "attack" on the system, as it is a "defensive move" by the person who is switching from paper gold to physical gold. It is the last players finding their seats in a game of musical chairs.

ein anderer said...

Fetekes Gold-Eagle post from January 27th now in German.
He says Germany needs a "Goldmark" again: This would prevent the world (!) from a "new dark age".
His justification (via Wilhelm Röpke, 1899-1966):
"It is not the gold standard that failed, but those in whose care it was entrusted."

Edgar said...

GLD lost another 12 tonnes today! Looks like someone is using GLD as their private bullion bank to obtain physical in size for as-close-to-the-paper-price as possible.

I also expect the window not to be closed as long as GLD is in the game.

Pat said...

Bjorn, let's take it one step more. Let's say you have a big stack, but want to keep that big stack intact as is ( playing with a big stack is a big advantage, certainly in Hold'em tournaments ). And let's say you are on a really bad losing streak ( like say, if your trade deficit is never-ending ). Well, if allowed, you might just keep your stack and buy more chips.

So I think the mercantile nations with a positive trade balance will not mine, keep it where it is, and their increased gold stack will come from excess goods production. Nations with trade deficit had better get mining.
Ah, chess and poker. Love it.
2013- The Year of Fahrenheit 451

Pat said...

Answer to puzzle. Nations with trade deficits will mine, to keep their above-ground stacks intact. Nations with net excess production can add to their stacks ( if they desire to ) by using the excess income to save. No need for them to touch the in-ground reserves.
2013- The Year of Fahrenheit 451

RevolutionOfNations said...

Great stuff as usual. There's one thing I miss in the freegold story, though.. Namely what to do with that huge warmachine of the US of A? Don't you think all that military might will be used when push comes to shove? I don't think they'll just sell all that to China(or anyone else for that matter), because they lack the funds to keep it going... Maybe they'll try to get their gold back?? No? After all what resistance can these desert dwelling "giants" possibly pose to the mighty US of A?
Antal Fekete wrote an interesting article about Germany aksing for repatriation of gold. I believe him, those are the spoils of war.. After all the US won that round. You can read the article here:

Reality Show said...

Hello MF, thank you.

I feel very overweight in silver, I can swap for gold now with my dealer here in the UK, I can sell for fiat and wait for lower gold prices, I can wait for the GSR to become more favourable.....

What to do? :)
Hehe, I have to work that out for myself, but any guiding thoughts from the community would be welcome. FOFOA hints that we might be close to something, Jim Sinclair (who I have watched with interest recently promoting the words of Another and FOA) is hinting at turbulence through March...

My heart tells me to swap now, my head is suggesting that I try to maximise my gold holding through the timing of swaps, but then I'm just playing paper games again...

MnMark said...

Pressure on gold has resumed due to investor appetite for risk assets; however, physical demand for the metal is picking up, says Standard Bank. Gold fell Wednesday as equities strengthened. “This trend has continued this morning, taking gold another step lower after briefly pushing above $1,600/oz--currently around $1,590/oz,” the bank says. “This has occurred despite a continuation of the strong physical buying that we are seeing out of Asia. Our Gold Physical Flow Index has made a dramatic recovery over the past few days moving from just below zero (below zero indicates net selling) to a value of 150 today, which by historical comparisons indicates particularly strong buying.”

Anonymous said...

'So it's either your support or I take another offer. And I do have another offer, but I'd prefer to keep doing this.'

Of course he'd prefer to keep doing this. A few posts a month, all of them rehashes of previous posts. Easy money!

Except the money isn't flowing! Why would readers pay for repeats and ever more wild speculation as the years pass?

A true dilemma.

Go out and get yourself a proper job with the ex-GS boys I say, in the real world, where those hearing your long-winded speculations might take a different view, and your loyal pack of hounds won't be there to attack. But, you wouldn't last too long out there would you?

Most freegold chat is on Twitter these days anyway, your hounds are costing you dear. How ironic, they've become bored commenting amongst mortals, and it threatens the dear leader's living. ;)

DP said...

#JustTrolling with FOA:

Merrill Lynch, et al, don'tgrasp the gold valuations by the BIS. Gold is valued by the number of outstanding claims against it. Kind of like a house for sale with ten bidders. Each bidder thinks the house is, in the bag because they have a valid bid ticket. Each one thinks he can have the house at any time,even thought nine others want it to, because all I have to do is bid alittle higher and take it! Insane, but that's what is going on! Somehow, the BIS and the major private gold holders know the total claims, as does Another. The Euro group is going to force those claims into real bids instead of just claims!

Gabriel said...

Fofoa, your analogy to watching a checkmate running its course is truly well timed.
I recall that you also discussed the topic of backwardation in Gold, an anomaly which would testify of an unwound of paper gold.

now Gold has been in backwardation for quite a few years, but only for the month forward. It would be incorrect to attribute it to anything else than simple account roll-over.

However today after reading your post, I decided to check again. And a surprising phenomenon is appearing there:
First, the next months are now also in backwardation (both April and June), but more importantly October also! Below 1/1000 yet, but growing...

could it be it?

Polly Metallic said...

This was a great post! It really tied together many earlier themes and made the FG transition clearer. I need to read this once or twice more.

No matter how well FG concepts are explained, some people simply suffer from Normalcy Bias, and it will take time for new ideas to seep down deep into their understanding. I really loved this portion:

"But I would like to challenge you to temporarily set aside everything you think you know about the gold market while you read the following. That's not to say I'm trying to change your mind, but I'd like you to see the picture I'm painting as separate and different from the picture you already have in mind. I think it might just be that different. So rather than trying to reconcile the ideas below with what you already know, like morphing two pictures into one, I'd rather have you walk away with two distinct pictures that you can then compare and contrast to one another."

Beautifully stated! I find that invitation both non threatening and enticing. What can it hurt to drop one's defenses for a moment and play "just suppose." After opening one's mind to new possibilities and examining them without a negative bias, a better analysis and comparison can be made between the new and old views.

Nickelsaver said...


Point taken.

The math seems incalculable as to which entity would need to "dig for more chips". The USA has a lot of chips, but they also have the majority of debt and a zero bound dollar on the horizon. Much will depend on how the dollar is resolved. SA is small in proportion to their gold resources, so I wouldn't think they would need to produce much for themselves.

When you put ALL THE GOLD in context, the picture seems to indicate that the above ground GOLD is going to need to flow and settle out the forex before we know which mines will be working hard or at all.

I can see that equalization process taking a bit of time. And in that time, the world adjusting to this new view of gold, not as a means to achieve a profit, but as a means of wealth storage.

Also, wealth in the ground is a lot easier to store securely than wealth above ground.

Woland said...

My Dear Nickelsaver;

That was truly awesome! You are indeed worthy of the finest "banana
flavored tidbit" mankind has yet produced. I solute you, sir! Greetz.

milamber said...


Very nice post. Among others, it really fleshed out one of the concepts that I was trying to say (but failing miserably) back here

I don’t think ANYONE completely realizes how absolutely devastating a reserve currency collapse will be. And if I am a CB, I am doing anything and everything to stave it off. Or at least mitigate the damage to my printing press as much as possible.

This post also reminded me of Woland’s comment here

I also think you have laid out the case very well of why trying to predict timing on this is a fools errand. To paraphrase everyones Dad on a long car trip, “The $IMS will COLLAPSE when it COLLAPSES!” And you can be damn sure it won’t happen on anyones well reasoned (or not) schedule.

I like Kyle Bass's approach here

"...When you think about the end of this 70-year debt super cycle, it would be naive of anyone to say they would predict it with any kind of precision. What i'm telling you is all of the component of the equation are in place for all of a sudden this to go off."

As an aside, I am making my 2nd trip through the blog right now. But this time, I am also reading the comments. My 1st time through, I just read the PDF’s. It is amazing watching your mind work as you have progressed and matured over the years in your understanding of where we have been, and where we are going (or at least attempting to go) :)

Knowing the little that I knew back in 2008, and knowing the little that I know now, I can’t help but be impressed by your growth on these matters. Kudos to you sir!

To paraphrase (again),

“If your "THOUGHTS!" are theory; they are good theory. If they are speculation; they are reasonable speculation. If they are supposition; they are well-grounded supposition.”


Anonymous said...


I don't believe a single word of what Fekete writes.

IMO the German CB is systematically being underestimated (W-speak: misundererstimated). As we have learnt from Another, in 1997 it was them who lead the BIS CBs into the new direction to stop the leasing. They definitely took the risk of killing the dollar at that time. Another (who was most likely not from the Bundesbank) was honestly concerned whether the gold market would survive until 1999, but apparently the Bundesbank was willing to take that risk. They directly confronted the BoE (and USG) with the Washington Agreement in 1999, put the Brown government into a corner in which the Brits had to sell half of their gold while the Bundesbank at about the same time shipped some 900 tonnes of theirs home from London to Frankfurt.

A couple of weeks ago, they released the location of their gold holdings plus all past transactions, showing everyone that they are now fully allocated. At the same time, they are announcing to repatriate a (suspiciously) small amount from New York, as MF explained, thereby causing the biggest possible damage to the credibility of the U.S.

Doesn't look like a U.S. operation to me. Much more a not-that-passive withdrawal of support.

Also, Fekete is completely missing the point of the Euro. Yes, perhaps permanent gold backwardation (in dollars) would kill the dollar. But why would the Bundesbank care. They just need a liquid cash market for gold in Euros. Let the London market blow up.

(Btw the U.S. could also let the London market fail at any time of their choosing, and the dollar would not necessarily fail provided they immediately create a liquid cash market for gold. What Fekete doesn't get is that even the dollar price of physical gold floats freely.

It is only XAU (=London unallocated) that is fixed to (physical) gold, but the USD is not. So they can safely let XAU fail and rescue the USD with a cash market for physical gold in USD if they want.

Fekete is a gold standard person. In his world, there must be a paper XAU that is linked to physical gold. It seems he cannot grasp that you would want to dump XAU (i.e. no longer lend and borrow physical gold) in favour of a physical cash market (i.e. spot, no credit in ounces involved).

Finally, it seems the USG don't think they are already checkmate. Their queen is still on that black square at the Gulf and helps their king home in DC fix the dollar price of oil and restrict the flow of Brent to the ROW. As long as the queen hasn't been taken by the ROW, the checkmate isn't a done deal yet. The key question is whether it's *their* queen at all. So far, it has been.


Polly Metallic said...

Reality Show,

I understand exactly how you feel. Let's look at it this way, though: How much extra might you benefit by slightly better selling/buying timing verses how much would you forfeit if you are a day late and left with your silver while gold is revalued beyond your purchasing power?

We still have our share of silver, some to "defend the precious" in a transition, and some just because we like old silver coins such as old Morgan silver dollars. Even though I like silver and think it could do reasonably well as an industrial metal and even as a financial investment (short term) we just came back moments ago from the UPS shipping office after having phoned in a trade exchanging silver for gold.

If the ratio gets better, more will go, but at least we are making progress now in accumulating gold. All these gold "pukes" lately are making the hair on my neck stand on end.

I think part of your decission may also be based on how much gold you already have. If you have a boatload now, maybe you can shrug off leaving a few hundred thousand or a few million dollars lying on the table if Freegold happens before you've dumped the silver!

Knotty Pine said...

The best post yet!

Time to come off of some of this rotting fiat!

As others have stated it seems well managed, productive currency zones can hold some pawns for defense as gold flows to them. My question is what amount of credibility does 8000+ T of gold buy the US? Is it used up quickly post transition or do the currency managers see the light rapidly?

Great Post, FOFOA!

Tony said...

@ Reality Show

Why not hedge a little by doing both? Trade some now to get a core position and gamble a little by trading some later. Of course, if you have no gold, I'd stop playing roulette and go in heavier.

Anonymous said...

Knotty Pine:

If my math isn't too far off, then assuming a post-transition gold price of $55 000/oz (present-day dollars, of course), 8 000 tonnes equals about $14 trillion. With the current US budget deficit, that will last about a dozen years. So that's how long they'll have to get their act together! And every improvement in the deficit buys them more time, so they should be able to manage it.

A thought I find interesting (and somewhat alarming) is that if and when the US do get their act together, many countries that have a big trade surplus today may struggle to keep it that way. The US have acted as a "buyer of last resort" for all sorts of goods over the last couple of decades, but few countries will be willing to play such a role in the new order. Everyone will probably drift towards a more or less balanced trade, running neither very large deficits nor large surpluses. This will be a challenging adjustment for everyone, and not just for today's big spenders.

Edwardo said...

Victor wrote:

So they can safely let XAU fail and rescue the USD with a cash market for physical gold in USD if they want.

Care to hazard a guess at what price the bid/ask will have to be in this prospective/theoretical cash market in order to make it work?

Aquilus said...

This post ties many different concepts together to paint a fuller picture.

I want to point out one part. I think it's important because it talks to the fact that the euro was not "ready" to be trusted right after its founding, and it's only common sense.

I mean, if you were asked to switch your country's future from the devil you know (dollar) to the devil you don't know (euro), wouldn't you "measure 10 times before cutting once"?

Here's the relevant piece of the post:

So why not push for checkmate once the game is already won? Well, just because you expect and want something doesn't mean you want all of the negative side effects that go along with it. If the dollar had collapsed in 1999 then the euro would have forever carried that stigma, which might have been less than preferable to its parents. Furthermore, it was a brand new currency system in its infancy. Exactly how much confidence did they have in its resilience, its "anti-fragility", especially if the US currency collapsed immediately in its wake?

They had the base money, inflation and the MTM gold under control, but some elements of the 1993 Maastricht treaty, namely government finance through the private banking system, were still flapping in the wind. This is something that the ECB would have known earlier than the rest of us. Yet as of 2013, that part is mostly secured."

Note: As of 2013 banking regulation for major institutions removed from individual states (no more assured debt buying by local banks) and balanced budget agreements passed.


Aquilus said...

This is a response to comments originally made by Biju regarding the influence of Japanese QE on the fate of the dollar.

Time did not permit me to respond earlier, and I chose this format of presenting my perspective instead of a point by point back and forth because I simply won't have the time to engage in that kind of discussion these days.

In summary, I think Biju maked very good points for the immediate transaction. What I'm trying to show is that there is a much bigger picture out there of how the money flows.


Here are Biju's original comments:

Regarding Aquilius comments, I made a small event chart showing how a Deficit nation can buy UST and still not cause dollar inflation, if another net producer picks up the slack.


This is assuming Japan buys $50B US Dollars/month, prints corresponding Y50,00/month, buys UST worth $45B/month and
uses remaining $5B USD /month to a net producer who picks up the remaining slack of $5 B UST/month. In this way there is no excess US Dollar, but yen gets trashed.

Since Japan is like a satellite of US, and also trying to create some inflation, this is a route Japan may take.

Aquilius :

While USG spends the cash received from primary dealers and puts it into economy via Fed expenditures/ salaries/ entitlements/military etc, at the same time, Japan is removing the same amount of USD from the system and finally gets destroyed at FED. So net there is no dollar inflation.

This was the neat trick USG did for the past decades while all UST buyers/producers experienced inflation. Countries like Japan who were net producers for several decades were able to buy UST as well as have a strong internal bond market to withdraw the yen printed locally corresponding to the received USD.

February 20, 2013 at 9:22 PM


So Japan did not experience inflation locally also. But looks like now they want
to go in the other direction - induce yen inflation but at the same time, soak USD and destroy it by buying UST. The Yen and it's bond holders are going to be sacrificed ? While saving USD. Maybe they will trash yen and but I don't believe they will be competitive because they are importing(oil/raw materials) a lot to enable export.

February 20, 2013 at 9:34 PM


Aquilius said
What do the other states do with their extra dollars if not buying Treasuries? Because it's those dollars that need sterilization.

If Japan plans to buy $500 B/ year and USG have $1 T/year deficit, I think the rest of countries can pick the slack of say $300 B UST, then FED can expand it's balance sheet by $200 B / year. So as per this calf only this $200 B/ year causes the hot inflation - nothing serious in my opinion.

Aquilus said...


"New Base Money" (QE) from foreign central banks increases the float of dollars (the amount of dollar liquidity).

If producer nations (dollar importing nations) do not reduce this dollar liquidity and support the dollar by investing their dollars into USG instruments, this increased dollar float leads to and increased flow of dollars in the physical plane.

Why not deficit nations? If a nation is in deficit, that means the real economy of that nation already cannot service the existing amount of currency, never mind any additional purchasing power introduced by QE. Therefore new QE finds its way in the monetary plane, from which it morphs in one form or another into dollars as the internationally accepted currency

Note: the above refers to currencies that have floating FX rates (UK, Japan for example) - so for example not China’s yuan which is tightly controlled in both value and fx transaction size, and the Bank of China can control yuan-dollar movements, and can also peg.


Aquilus said...

Step by step follow-through of the money trail

Let’s take Japanese QE of Y5000B (5 Trillion Yen). At an easy conversion rate of 100 Yen to 1$ in the FX market at the opening sequence, in theory Japan QEs the equivalent of $50B.

Let’s also take Japan at its word that it intends to use all the "New Base Money" above to buy US Treasuries. The stated reason is that they want to debase the yen and create internal inflation.

Given the reason stated above the best avenue for BoJ (Bank of Japan) of converting the QE yen to the dollars needed to buy Treasuries with would be to use the FX market to sell Y5000B and buy a corresponding amount of dollars. (The alternative for getting the dollars would be a swap with the Fed, but that would not achieve the stated goal).


Step1: Bank of Japan creates Y5000B

Step2:FX Market: Sell Y5000B and buy $50B (Note: technically the selling would alter the Y100=$1, but for easy math purposes we’ll leave it unchanged here).

Step3: Bank of Japan deploys the $50B to buy Treasuries in the open market.

Let’s have a look at the players we have up to this point:

Player1: "Bank of Japan": holds no cash, just assets ( $50B worth of Treasuries)

Player2: "US Government": has $50B in cash to spend (technically it obtained that cash from the Primary Dealers, who got the cash from BoJ and passed it on minus a small commission. For our purposes we ignore the commission)

Player3: "FX Market Participants": have the Y5000B in yen liquidity that replaced $50B in dollar liquidity.


Aquilus said...

So let’s look at what the players do next:

Next Step(s)

Player1: "Bank of Japan": Sits tight. It has assets, and no plans of selling them. They’re done until next QE injection.

Player2: "US Government": has $50B to spend, and that money is spent in the real physical plane (not going into financial assets). (Technically this money puts pressure on the real world prices unless a different central bank relieves that pressure by taking these dollars, issuing local currency (and create local inflation in the local currency) and gives the dollars back in return for USG assets back to the US Government.)

Player3: "FX Market Participants": are the proud owners of Y 5000B (yen currency).

This is the important part!

What to do with them?

As the yen is not a reserve currency used for trade settlement and for major CB foreign reserve, these yen are spendable in Japan or in buying Japanese real/financial assets.

3-1: They could buy Japanese bonds, but the point of QE is that these yen are in excess of the bond sales, so no dice there.

3-2: They could buy real goods/services, but we see Japan is in deficit so no dice there. (since Japan imports more than exports - deficit)

3-3: They could enter the stock market. This is more do-able, and would certainly absorb the yen. So one might think this is the end of these yen, but it’s not.

Why Aquilus?

Because for each yen spent by Player 3 to buy Japanese stocks (financial assets), there is a Player 4: "Owner of those stocks" (financial assets) that sold them. Player 4, now sold the stocks and got the cash, and now has the same problem as Player 3 did. Recursive loop here.

3-4: They could enter a carry trade / derivative swap by which they use the yen as collateral for acquiring dollars with which to purchase stuff from the rest of the world. Why dollars? Because that’s the currency needed to buy things for most things outside Japan: commodities (oil, nat gas, etc), derivatives, etc.

But wait, you say!!! Maybe they don’t want US$ denominated things! Maybe they want Australian bonds (Australian$ needed) or Brazilian oil field shares or French tire companies on the cheap! Well, as Australian and Brazilian currencies are in the same non-reserve boat as the yen, think of it as a recursive loop again from here with the word yen replaced by that currency.

But the Euro you say!! Ah, the Euro is a semi-reserve currency already. Player 4 will just acquire and spend the euros (to Player 5: "The guy with Euro assets", and see? No dollars spill out. Pretty neat, huh? But guess what? Look around you and you will see that selling European bonds is not the national pastime any longer after 2012(ECB regulates banks =no captive debt national buyers + 3% deficit agreements), so those euros that Player 5 got can’t really be neatly tucked away under an ever increasing amount of Euro-nation debt. So what does that mean for Player 5? That means that those euros will (eventually and possible in multiple steps) need to be converted into non-euro currency for purchases because they are in excess of the now pretty balanced overall European economy (politically dyslexic as it is, I know). Ok, so it’s back to dollars eventually for that chunk or euros also.


Aquilus said...


So what do we learn at the end of this exercise?

We learn that the Japanese QE eventually (not immediately) finds its way into international dollar liquidity and that it takes multiple steps to achieve that. Why? Because the dollar is the universal currency that international purchases are made in and the yen is not.

We also learn that these QE yen are liquidity in addition what Player2: "US Government" already spent (because the 50B that Japan bought was already earmarked for spending and the dollars were already in USG possession from the Primary Dealers.

So on the one hand, yes, Japan relieved the Fed from buying that chunk of Treasuries, but the Y 5000B QE still spilled over into the real world. You actually have two streams of liquidity: the USG directly spending $50B, and the Y 5000B that eventually make it and are added to the USG’s $50B. Obviously, it’s not exactly one-to-one that all the Y 5000B become dollars, but it’s the perspective on how the money flows that matters.

Ok, so now where do surplus vs deficit nations fit into this perspective?

Well, there are a few things that could reduce this glut of new dollars. One would be failure of mal-investments through deflation as unprofitable ventures/assets lead to bankruptcies. But if we have learned one thing in this blog, it has been that deflation on a scale needed to reduce the glut is politically impossible in today’s world.

Well, that leaves CB support for the currency of the nations engaged in QE. Can deficit nations just buy each other’s debt and create that support? When a nation is already in deficit, that means the real economy of that nation already cannot service the existing amount of currency, never mind any additional purchasing power introduced by QE. Therefore new QE finds its way in the monetary plane, from which it morphs in one form or another into dollars as the internationally accepted currency

A surplus nation can however reduce that flow and support the currency of another nation by choosing to import inflation (create internal currency to match surplus) and send the surplus to the originating nation by buying its debt. It’s really the act of sending the currency back to the issuer that reduces that glut.

In today’s world, the only way to do that is through debt purchases (that’s what the nation has to sell). In the future, as the reserve becomes physical gold, a nation’s Treasury/CB may choose to sell gold to mop up extra liquidity (in addition to some small debt probably).

It’s the fact that the money "dies" when sent back to the issuer that removes that flow out into the real world. If that currency is sent to buy assets from any other source, that currency gets spent by the seller, and is not "off the market" and therefore does not reduce the outflow.

This is why I commended Biju for nicely describing the initial part of the transaction. And yes, in the very short term it does both debase the yen and provides a buyer. But since the flow of dollars going into the physical plane is not decreased by this action (as it is new money injected, not the US’s deficit money returned), this money ends up bidding up dollar prices of assets and prompting more debt in the next cycle from the US in order to acquire the same amount. Which means either an ever larger spiral or Fed intervention...

It comes down to this: The US Government gets to spend the borrowed $50B and the market ALSO gets the inflow of the Japanese QE money. Result: increased dollar float. It’s not a fast process, but it is damaging to the dollar.


costata said...


This is an instant classic in my opinion. You have brought together many of the most important elements of Another's writings, synthesised FOA's contribution and done it all in your inimitable style.

This post should be required reading for anyone embarking on the "trail". (Early in the journey).


tEON said...

Gary the Good
Just posted by GATA:
Dear Friend of GATA and Gold:
Contrary to the disparagement of its detractors, GATA isn't a "conspiracy theory" organization -- it's a public records, freedom-of-information, accountability-in-government organization that mainly pursues and publishes official statements and documents constituting evidence and confirmation of the Western central bank gold price suppression scheme, evidence and confirmation that GATA's detractors never can discuss or even acknowledge:
But tonight let us call your attention to commentary that -- while not only mere speculation but, worse, anonymous speculation -- is so intelligent and informed (and largely though not completely in tune with GATA's thinking) that anyone interested in the gold market should consider its outline of the scheme and purposes of gold market control.

Of course many gold market followers are already aware of this outline -- drawn more than a decade ago by the anonymous posters "Another" and "Friend of Another" at the now-closed Forum of the Internet site of Centennial Precious Metals in Denver,, and now elaborated upon at an Internet blog by still another anonymous market watcher, "Friend of Friend of Another."
FOFOA's latest elaboration, titled "Checkmate," summarizes and quotes extensively from the "Another" and "Friend of Another" dialogues and offers his own conclusions. "Checkmate" is recommended not as a hard assertion of what is definitely happening but as an idea of what well may be -- and probably is -- happening, an idea that may illuminate future events.
All that any gold market watcher (or journalist) has to do to confirm or repudiate it is to interrogate a few central bankers about their involvement in the gold market. Their refusal to provide information should be evidence enough of profound suspicion. If sufficient funds ever become available, GATA will sue to extract the information from the United States government's side of the scheme:
In any case, that GATA has had to struggle for more than 13 years to establish among gold market participants and the financial news media the most obvious proposition that Western central banks are both primary and largely surreptitious players in the gold market looks awfully small in light of what is probably happening. Indeed, in light of what is probably happening -- control of the world financial system by an unelected and secretive banking elite -- the planet's supposed democracies themselves look awfully small.
FOFOA's "Checkmate" is posted at his -- or her -- Internet site here:

Biju said...

FOFOA said :
What we have instead today is a stagnant mining supply, a declining scrap supply, CBs adding to their gold in aggregate, Westerner traders hoarding physical in places like GLD and PHYS and a price that rose more than "five times over". You'd think that would "stretch" the available supply relative to demand some five times over, but you'd be wrong. Only a revaluation in real terms can "stretch" the flow sufficiently and sustainably.

This last comment "Only a revaluation in real terms can "stretch" the flow sufficiently and sustainably" is beautiful. This statement is validated by the fact that - The metal has not been stretched, hence we see increasing volume demands from Eastern nations in spite of 600% increase in currency terms as seen in Indian demand.

FOFOA said :
And I should add that those whose only net-production is of the paper variety (e.g., the US, UK and Japan) cannot offer structural support to this failing edifice.

Curious to know why Japan is included as a net-consumer here, I thought it was a net-producer running surplus for many decades.

FOFOA said :
Lastly, I will leave you with a puzzle. I predict that, upon revaluation, global gold mining supply will undergo a sudden and dramatic contraction. But why would that be? If the value and price of gold is suddenly so much higher, wouldn't the mines run at full steam? I don't think so, and there's the puzzle.

The production will drop off because there very little Gold is needed to settle trade, after a higher revalued price.
A net consumer nation will need very little high "valued" Gold to settle trade. The value is wrt other real stuff.
For a net producer nation, no mining is required. Gold volume will shrink precipitously.

Even within a nation only little high priced Gold is required for net savers to accumulate. Gold will lie still both underneath and above.
Post free Gold, If anyone wants currency, they can place Gold as collateral to get credit loans from Banks to start business, which is different from Gold lent or borrowed.

Börjesson said:
A thought I find interesting (and somewhat alarming) is that if and when the US do get their act together, many countries that have a big trade surplus today may struggle to keep it that way. The US have acted as a "buyer of last resort" for all sorts of goods over the last couple of decades, but few countries will be willing to play such a role in the new order.

Good comments.

Unknown said...

I would like to second Costata's comment, Fofoa. Thank you.

costata said...


Curious to know why Japan is included as a net-consumer here..

They have moved into a trade deficit recently but, according to some analysts, it will be some years before they move into an overall deficit in their national accounts due to their substantial net income from foreign investments.

If lowering the exchange rate of the Yen causes their exports to increase it could also buy time if the Japanese public doesn't react adversely to the new monetary policy. The big question is: How will the Japanese people respond if prices for consumption goods begin to rise? The recent surge in the Yen gold price seems to have subsided.

RJPadavona said...

FOFOA's "Checkmate" is posted at his -- or her -- Internet site here

Damn those lace curtains!

rndagain said...

thank you so much for the great read.

I too loved the chess game analogy... but I think it misses a bit.

The chess match assumes you have only so many moves remaining. I've been keenly watching the pronouncements of the near-term energy independence of the US (whether it will or will not happen in enough time is the gamble). Whether rhetorical or real, it makes little difference... the outcome may be the same. The west >> east flow of gold for petroleum may be broken.

Don't count on a crash any time soon with that kind of a poker player at the table.

Ramon said...

Where's the Bitcoin donation button? :)

costata said...

For the China watchers:

I think the title is deliberately sensational considering the relative importance of one market in a country as large as China. However the comments from Professor Patrick Chovanec in the article are worth reading.

Elsewhere I'm reading pieces which claim that the shadow banking component of China's financial system is growing at a phenomenal rate. Meanwhile real estate agents in Australia are currently reporting the best results for upscale property sales that they have seen in years. Many of these RE agents are citing Chinese buyers as the driver of these results.

Readers may not be aware that Australia is basically "selling" passports today. If you have $5 million to invest and meet a few other criteria you can qualify under the business migration program.

The official statistics coming out of China paint a picture of a robust economy but the credit stats tell a story of an economy progressing toward a classic debt crisis. That's my take on Chovanec's comments about debt in China from the article linked above.

Sam said...

Fofoa. This is, in my opinion, your finest post

tintin said...

hi costata,
Firstly, the "riskiest" of any market always collapses, regularly;

Secondly, are property price collapses always bad?

The Chinese government has been trying very hard to pressure the property market in China, so a collapse of the "riskiest" potion of the market might be of benefit to that end.

As to the consequences, well there will be a few banks or investors getting burned. But do remember that in China, the banks serve the economy, or the common good of the society, not like in the USA where the economy, the society at large, serves the banking interests.

So, the riskiest part of the property market in China collapsed, I say great!

costata said...


Firstly, the "riskiest" of any market always collapses, regularly;


"I think the title is deliberately sensational considering the relative importance of one market in a country as large as China."

Secondly, are property price collapses always bad?

It depends on who bears the losses. Have you taken a look at the estimates on how much money has been poured into those "private wealth management" funds that the banks have been promoting to customers? It's been reported that most of this money is being loaned to property developers.

I think Chovanec's analysis of the debt position is based on sound economic theory.

So, the riskiest part of the property market in China collapsed, I say great!

I think you need to consider the risk of contagion throughout the financial system. Are any of these regional markets completely insulated from other markets around the country?

tintin said...

"It depends on who bears the losses. Have you taken a look at the estimates on how much money has been poured into those "private wealth management" funds that the banks have been promoting to customers? "

if the lending has violated what have been stated in the the investment funds' prospectus, then a few money/bank managers will go to jail, the investors will bear some losses but not all, the bank will absorb some losses as well.

Also, that kind of property market is almost exclusively for the rich ones and high stakes speculators, the masses are not involved.

"It's been reported that most of this money is being loaned to property developers."

I find this curious. This goes against the central government's edict to curb property speculation and to curb lending to that market. Top managers of the banks are political appointments. They are risking their careers defying government directives, and even capital punishment is possible if heavy losses are incurred. My guess is that this report hugely exaggerating.

"I think you need to consider the risk of contagion throughout the financial system. Are any of these regional markets completely insulated from other markets around the country?"

No contagion. The property market in China is very localized. Also, in China people put 30% deposit on first property they buy, 50/60% on second one, and no lending on third property.

Unknown said...

@ tintin

lol. The Chinese are an unruly bunch. With the immense amount of cash thats been created, Im sure a methods of circumventing deposit restrictions have been devised to some extent.

A friend of mine purchased a property with 5% down 2-3 years ago. And that was in HK (similar rules).

But really, who knows? Time will tell.

Bjorn said...


Broadly agree within the confines of the analogy. But I also find much sense in Nickelsavers comment that it is safer/easier to store gold underground. In Freegold, deficits will not be "neverending" (due to functioning spur and brake forces), and therefore the need for big stacks will, in time, lessen. So perhaps slightly longer term the "digging for chips" will slow to a crawl.

Unknown said...

I agree that these newer posts show an evolving breadth of understanding for FOFOA (which I pronounce to rhyme with Alcoa). But I cannot stress enough the earlier posts which would would be critical to a newcomer, as they are more structural to the thesis (as opposed to current nuance).

All of these writings are superior, and I would donate to this worthy effort, if not for the many outstretched hands that lie before me (following in the footsteps of ex-wives and governments and the many several families that I have supported over the years).

I am but a poor soul myself these days, simply trying to hold onto my little stack, which every month seems to come under attack by the encroaching neo-fascist forces, dark and sinister.

Forces which board directors at the BIS are exempt from, including full diplomatic immunity, complete international security freedom, no taxation of income and a host of other "benefits with friends" that only the keys to the clubhouse symbolize.

When the day comes that we must yield up our sphincters to the police statist billy club, I hope a tenth will buy me a pass and maybe an unforgettable night on the town.

For those who have been in the company of both "old money" and "new" there is a difference--I have always found old money to be less pretentious.

It's the new money that lives by the paper. FREEGOLD is, to quote Another, a return to the "Old World Order". An order that has always worked in times of confusion and panic over the so called New World Order, and it's final failure.

I think even FOFOA himself recently acknowledges that the New World Order everyone seems to be "waiting for" has been in play for over 30 years, just as the hyperinflation everyone is debating about has been ongoing (and recently accelerating) for nearly as long.

Ahh the wonder of it all ...

Anonymous said...

rndagain (February 28, 2013 at 7:58 PM):

The shale revolution and imminent US energy independence is exaggerated. Shale will peak and start to decline already within a few years. Or so some very serious-seeming analysts claim, at any rate! Check out this recent report for the details:
Drill, Baby, Drill (PDF)

Unknown said...

And also Borjesson, it is not a source of "cheap reserve".

There was a recent paper on energy output required to produce new energy under a diminshing flow of cheap energy constraint which attempted to quantify the current energy paradigm as opposed to the former.

It was a good paper. Out of an English based research consortium.

ein anderer said...

Just read Gold: The Ultimate Un-Bubble. Also a marvellous piece: in style, humor, knowledge.

@Reality Show: It’s a MUST READ for all those who are late.

@all: Still trying to understand (and looking for sources):
Freegold will be sudden. But how long do you think it will take until you are able to sell one of your precious at it’s new price? Days? Weeks? Months? That’s important for many since this period has to be covered--for defending the precious.

Pat said...

EA, this will be the best place for opinions on when to sell ( if you want to- I'm just going to hold ) when the great event transpires.

ein anderer said...

@Reality Show: And here is "Un-Bubble" Part II.

Worth reading too for all the "When-will-be-the-best-moment-to-buy-hesitators".

Edgar said...

GLD at 12,254.49 tonnes. Down another 4 tonnes.

enough said...

"CHECKMATE" published at GATA site

Woland said...

Wow, Costata, you Australians ask a lot. Here in USA we sell a
green card with 5 year path to citizenship for "only" $500,000, for
investors able to put that much in a new or existing business. The
hitch is an allotment of only 10,000 per year. You guys have any limits? Cheers.

Jeff said...

Uncle C said: 'The big question is: How will the Japanese people respond if prices for consumption goods begin to rise?'. Good question!


The US doesn't import nat gas from Saudi Arabia. 'Energy independence' is marketing hype; it's always been about oil, and that hasn't changed. The shale scam is looking very played out (hello Chesapeake).

Jeff said...

You GATA be kidding me! Anonymous speculation on the internet? The horror! But yes, GATA knows about A/FOA, and while they arent't exactly in tune with freegold, they will come around after the fact, like a lot of people.

Chris Powell (2/11/2001; 12:32:20MT - msg#: 48009) Is GATA cutting off paper gold's escape? (Corrected version)

Trail Guide (2/13/2001; 9:48:46MT - msg#: 48160)Comment

Chris, your comment saying:

----"But what are we at GATA to do? It didn't seem enough for us to sit back and let nature take its course----"

This intrigued me. You know, you could have said great day for gold, lets all buy the metal and not add any more to our industry investments! If the Cabal wants to use their illegal operations to drive gold into the dirt,,,,, bring it on, yes? You know, no industry ever went broke from people buying it's main product,,,, in mass! It's funny how the industry investors always try to remedy the same dynamic by asking the mines to slow down. Yet, this is something they all fear that new government controls on production would do???? But, jumping to the physical side of the fence is never an option?

Yes, promoting the metal, buying the product, would eventually cut off the paper selling far easier and faster than any legal action. Bill Gates didn't get where he is at by telling everyone that his company shares were a far better thing for the public to buy than his software???? (smile)

You say:

------- Governments and mining companies have responsibilities beyond themselves --governments to the public, mining companies to their shareholders and employees and even,especially in mining-dependent areas, to their countries as well. -----------

Jeff said...

cont. -

True, but these are still businesses, not one's personal reserves. When we "Western Children" told everyone that would listen to stop buying their main product (gold) and buy near product substitutions,,,, what does one expect to happen? Then we blame the government for exploiting the issue and the mines for falling into the hands of manipulators that offer them the only way to stay in business,,,, sell forward.

Just because all this happened to fall in a time period where currency issues are impacting the problem doesn't negate these faults of thought in the industry,,,,, or it's dogmatic promoters. Had gold product been promoted, it's physical demand could have easily overridden any political
motivations,,,,,, hands down. We chose to bet on a lame horse and now want satisfaction because that animal is under an attack it cannot overcome. Physical gold today, even allowing for it's incorrect currency valuations proves that it's the better defense during strange times.

You say:

-----FOA/Trail Guide is right that GATA may accelerate the breakdown of the manipulated paper gold market -- that indeed is our charter, exactly what we set out to do. If GATA helps "cut off the avenue of escape" from the paper gold market, so be it. -----

Why did you not see the physical side of this? My friend, I was referring to the escape from all paper substitutes and the escapees being from all walks of life. Not just the big BBs or trader types. Truly, what you fear is what we embrace; that gold will fall further while physical supplies

I perceive that your actions will accelerate a breakdown in this paper market and that breakdown will not shut down the market. No, it will leave the system mired in legal moralizes while the premium on physical gold spikes well above the paper trading price. Leaving both the gold
advocate and gold substitute bug no avenue of escape.

The longer the physical markets can operate next to a rapidly inflating paper market, the better it will be for gold buyers.

Jeff said...

cont. -

You say:

-----Gold IS special, but the kind of trading that distresses FOA/Trail Guide -- the trading in gold's mere price, as opposed to trading in the metal itself -- is hardly unique. Most markets trade this way, commodities and currencies. Speculators pile on for the ride whatever is being traded. As long as there will be trading in gold, there will be speculation. ----------The difference with gold is that its being more than a commodity -- its being a universal currency in itself, -------

As I said, had the price of gold stayed within a $400 to $600 range, the present system would not be opposed one bit. It would even be suggested that gold is performing it's historic roll of documenting currency inflation. Even though such inflation would be well beyond the commodity price of gold. All is well as leverage players use the very same system to profit themselves at a level equal to the real inflation rate. And doing said profiting as both big boys and small operators alike. Leaving the much larger world public no place to gain an equal share by owing real gold.
We indeed, as Mr. Park's children, stand in a mirror and do not see ourselves draped in Western thought and wearing new world ideals about old world wealth.

"Free markets", the paper traders claim, siting on both sides of the fence. "Free Markets are what we seek, as long as they trade our way".

My perception, Chris
My perception


byiamBYoung said...


Probably the best work I've read from your site. I can't wait to read it again and fill in a few more gaps in my understanding.


"shrimp on the hamster wheel"

Probably your best metaphor ever.


Pat said...

Should have said much earlier, fantastic post, I think it is your best ever. Besides the excellent tying together of past information into one easily digestible nugget, I love the cautious optimism in regards to 2013 possibly being, well, the year.
The chess analogy. Chess is a great game, nothing hidden, no bluffing, everything is out in the open fot the combatants and spectators to see. Nash's equilibrium in play, as we have perfect information, right there on the board. So in keeping within the analogy, thanks go to Another/FOA/FOFOA for first of all letting us even see that this particular chess match even exists, then to help us see more and more of the board ( thanks also to costata, vtc, others digging up cooberative info ), and finally to help us imagine what moves are coming and then endgame. As far as I know, this information is not available anywhere else, at least not consolidated into digestible chunks.

Unknown said...

"If the value and price of gold is suddenly so much higher, wouldn't the mines run at full steam? I don't think so, and there's the puzzle."


Why? Is it because production costs rise in lock step and natural resources can no longer be economically harvested?

Unknown said...

I've been reading about gold from the usual suspects for a few years now, but have read only a couple of articles by FOFOA. Since I am a newcomer to the blog, I'm hoping someone can point out to me to some earlier "must-read" FOFOA entries/subject primers.

Thank you!

Woland said...

I would like to add a footnote to a comment made by Aquilus at Feb
28, 6:11 PM.

"This post ties many different concepts together.....I want to point
out one part. I think it's important because it talks to the fact that
the Euro was not "ready" to be trusted right after its' founding....."

Two points: Think of Boeing's Dreamliner. Even after extensive
testing throughout development, look at the result. And that's a
machine, not a political union of entities which can try to play
"defense". Even if all the Eurozone members had full confidence,
at the time when the new currency became a reality, the prettiest
girl at the dance, Oil, had only recently been wooed over to the
euro, and had ( I believe ) been THE reason for a shift from 5%
to 15% of the ECB balance sheet to gold. Oil certainly needed
to see a successful shakedown cruise through less than perfect
weather before abandoning a relationship which had been made to work over 55 years, hiccups and all.

Biju said...

Aquilius, thanks for replying.BUT

Aquilius said :
So on the one hand, yes, Japan relieved the Fed from buying that chunk of Treasuries, but the Y 5000B QE still spilled over into the real world. You actually have two streams of liquidity: the USG directly spending $50B, and the Y 5000B that eventually make it and are added to the USG’s $50B. Obviously, it’s not exactly one-to-one that all the Y 5000B become dollars, but it’s the perspective on how the money flows that matters.

I don't think Y5000B is added to $50B. There will be only Y5000B. Did you take into account that $50B was taken out from the FX market and gets deposited at FED and destroyed by the FED. After these transaction the supply of USD remains the same, the lines for Mr.Watanabe increases by $50B(ie UST lines). The only Question is what happens to Y5000B. It will cause YEN to devalue ie monetary plane increases, maybe their export market picks up and their physical plane increases not as fast as YEN supply, causing HOT inflation. They will one day have to stop.

Aquilius said :
3-4: They could enter a carry trade / derivative swap by which they use the yen as collateral for acquiring dollars with which to purchase stuff from the rest of the world. Why dollars? Because that’s the currency needed to buy things for most things outside Japan: commodities (oil, nat gas, etc), derivatives, etc.

I don't agree.
As YEN devalues against Dollar, less dollar will be got for that. Again where does this Dollar come from ? from the current availability. When Yen-to-dollar swap is done, Dollar has to come from existing dollars unless the swap is done with the FED. If it is done with FED, then you are correct, it will increase
Dollar availability. otherwise No increase.

Aquilius said :
But since the flow of dollars going into the physical plane is not decreased by this action (as it is new money injected, not the US’s deficit money returned),

I cannot understand here. All USG has to do is issue UST corresponding to their deficit. No new money into circulation, it just sucks the existing money.

One Bad Adder said...

DX looking to take on a bit of Verticality HERE however $PoG is proving it's resilience far today.

Pat EA: "selling" Gold will probably be the farthest thing from your mind once FreeGold - the new paradigm - is established.

One Bad Adder said...

Woland: I'm pretty sure it's similar here in Oz - I was aware of one instance (albeit a few years ago) where A$500K got a Malayasian bloke into a profitable business ...which was then moth-balled ...having served it's purpose. Stiff shit for the several "locals" who were dependent on the business for their livelihood.

Borders are similarly loose as well.

Tommy2Tone said...

I'm broker than broke myself. I see I recently bought my ex wife a new BMW too (smile....puke). I paypal'd $10 to the Fofster though after I collected my 2nd place fantasy football winnings ($20) and then had 2 beers for myself. I felt cheap but hey, it's all I had. And the Fofster made me feel like it was $500.
Point is, even a small amount helps.

Re: "FOFOA's "Checkmate" is posted at his -- or her -- Internet site here:"
Have they not see the debriefs last fall??? Or has Fofoa decided to change genders?

Lastly, did you see what Mr. Bloomberg said?

Whats wrong with this statement:

"We are spending money we don’t have,” Mr. Bloomberg explained. “It’s not like your household. In your household, people are saying, ‘Oh, you can’t spend money you don’t have.’ That is true for your household because nobody is going to lend you an infinite amount of money. When it comes to the United States federal government, people do seem willing to lend us an infinite amount of money. … Our debt is so big and so many people own it that it’s preposterous to think that they would stop selling us more. It’s the old story: If you owe the bank $50,000, you got a problem. If you owe the bank $50 million, they got a problem. And that’s a problem for the lenders. They can’t stop lending us more money.”

soupkid said...

The developed countries own most of the in-ground gold. Once gold is revauled higher, they will have less incentive to produce it. By producing it, they will lose some - they have greater control of the gold inground. Also, by decreasing supply (if leading to a higher price), they increase their relative advantage over the countries with small stacks and low inground.

Tommy2Tone said...

"GOOGLE hoarding $48 billion in cash..."

Is this the Google support leg?
Google Kickstand??

Dante_Eu said...

I have never seen so many concurrent visitors from U S of A. 53 as I type.

Maybe people formerly known as Americans are finally waking up.

Stranger things have happened. :-)

Aquilus said...

@Adam England

Please peruse the PDFs here

MatrixSentry and I are actually just experimenting with such an "intro" PDF. It's called "Aquilus & Matrix Freegold 101- An Introduction" towards the bottom of the page.

Of course you can try Indenture's or JR's reading lists from the same place.


Aquilus said...


I don't think I personally can explain it better than I did. It could be just my style of writing.

I hope others can find a way to explain it better...


P.S. On a funny note, it's Aquilus not Aquilius. Manius Aquilius met a tragic golden fate I hope not to duplicate (smile)

One Bad Adder said...

That'd make you a One-eyed Aquilius my friend ;-)

One Bad Adder said...

THIS CHART ...when it updates today, will again describe a mini-divergence ...telling us all is currently well(ish) with the Fiat Freak-show.
Even Blind-Freedie knows however this situation cannot last.

Aquilus said...


I have a few minutes so here goes... Please don't take these as dismissive, but you need to re-read the material an get these concepts:

1. "I don't think Y5000B is added to $50B. There will be only Y5000B. Did you take into account that $50B was taken out from the FX market and gets deposited at FED and destroyed by the FED. After these transaction the supply of USD remains the same, the lines for Mr.Watanabe increases by $50B(ie UST lines). The only Question is what happens to Y5000B. It will cause YEN to devalue ie monetary plane increases, maybe their export market picks up and their physical plane increases not as fast as YEN supply, causing HOT inflation. They will one day have to stop."

No, wrong. 50B IS spent twice. Jacques Rueff explains it best in "Once upon a time"

2. "I don't agree.
As YEN devalues against Dollar, less dollar will be got for that. Again where does this Dollar come from ? from the current availability. When Yen-to-dollar swap is done, Dollar has to come from existing dollars unless the swap is done with the FED. If it is done with FED, then you are correct, it will increase
Dollar availability. otherwise No increase."

No. The EuroDollar float is based on credit. You need to read up on the eurodollar and on swaps to understand this process. You're imagining that dollars must be subtracted from some account to be swapped. Not the case.


Aquilus said...

@One Bad Adder

Yes indeed, just like you're bad at math. Very clever! (smile)

Biju said...

@Aquilus :
OK, Let me re-read and think again.

if the EURO dollar market is based on credit just like a loan issued by a bank, then yes a Yen-to-Dollar can be create additional dollars.

Anonymous said...

Was in a rush and forgot the most important: FOFOA, this is one of your best.


Biju said...


One Question. If Eurodollar market is based on credit, why did FED do a dollar swap with ECB during the depth of financial crisis ?

I know my half knowledge is worse than no knowledge. But hey this is internet and we can say whatever we want even if it is stupid, which we dare not do in person :-) My opinion - Internet does bring worst in people, who would be otherwise in person.

M said...

As we are well aware FOFOA, you believe the sinking paper gold price will kill the mining stocks. I believe we are actually in the middle of this right now. This is it. We are living the destruction of the mining industry right now.

Gold mining stocks are only held by industry insiders and gold bugs. Thats it.

I made some bets on a mining stock run before its over. Looks like I lost. But its not over just yet. Is this just another "blood in the streets" moment or is this time different ?

Anonymous said...


we have learnt from Another that there have been agreements on the gold/oil ratio. If you take a look at gold/Brent, it is very tempting to think that it is still being fixed at 15 bbl/oz as of today. The same value the ratio already had in the 1940s.

This is the reason why the miners have no chance. Their major expenditure is energy, primarily diesel fuel (heavy machinery in remote locations). So they cannot offer any leverage on the gold price because their production costs automatically increase at the same time.

Who's the patsy at the poker table?
* mining companies (thinking they own the gold and that they can sell it into a "market", but who don't receive the profit they hope because the governments have fixed their costs relative to their revenue.
* countries who let such mines operate freely (rather than reducing output and conserving the precious for the future)
* other countries who sell resources for dollars without receiving the appropriate gold in return
* the UK whose international accounts are even more rotten than the US's but without the natural resources and with a much smaller reserve


Sam said...


It seems that even after you did your video debriefs, the folks at GATA are still not sure if you are male or female. Sorry bud


MatrixSentry said...

Adam England,

I concur with Aquilus. We put together Aquilus & Matrix Freegold 101 for someone who wants to dive into the extensive FOFOA blog archive but are not sure where to start. With that said, understand that everyone learns this material differently and what resonates with one does not necessarily resonate with another. We think that Gold is Money I, II, and III is a great place to start because so many arrive here with preconceived ideas regarding gold and money. We wanted to keep the number of posts under 30 so that a dedicated person could get a good feeling for Freegold in a matter of a few weeks.

Please understand that a deep understanding will only come from reading the entire blog, and then likely re-reading it again. People that attempt to glean meaning without reading the blog can be seen from a mile away and can be quite annoying. Eventually they are told to read the fucking blog (RTFB). We ask you to read the blog in its entirety after you read the primer. It really doesn't matter how you do it, either working backwards from the last post or starting at the beginning and working your way to the present. The yearly PDF compendiums make it easy to read offline as well as on online.

I have read this blog in its entirety at least 3 times. I have read many posts even more than that. I practice what I preach and I RTFB. Then I re-read the fucking blog (RRTFB). I wish you the best and look forward to seeing you out there on the trail.

Anonymous said...


The mining stocks will be fine. What we've seen has been an engineered takedown so that giants can take a position w/o gunning the market. A perfect example was SSRI today. I've been adding to my miners since the HUI went below 450. Government will not nationalize the mines. That gold is going to have come out of the ground to cover all those naked shorts behind the scenes. We are probably looking at 20 year short squeeze. Plus if you go thru the 13F's of some of these giants such as the Queen you'll see a hefty allocation to gold miners.

The Dow Theorist said...

Sam & FOFOA,

The gender error of the folks at GATA clearly shows the way most people stick to their preconceived ideas. It reflects they just give a cursory view with a very closed mind without being really interested in apprehending challenging views. They simply don't care.

Same happens to me when I try to introduce FOFOA to professional investors and money managers (most of them with a strong liking for gold but for the wrong reasons). I send them links, edited pieces,and posts to no avail. But the worst thing is that they even don't bother to read them or, if they do, it is in a dismissing way. Really scaring.

Anonymous said...

There is another thing to consider about the miners. They will become the new utility stocks and the entire world is facing a pension crisis. Miners could solve the problem of PBGC having to pick up the tab. When gold goes into hiding, the miners will be the only game in town for big funds to participate. Is govt going to poo on this parade when its own gold reserves have bailed it out? Politically tough to sell.

Nickelsaver said...


I'm going to strongly suggest you adjust your view from this to this.

Reality Show said...

Throughout my hard money education I felt a growing sense of despair, as I move towards Freegold I feel a growing sense of hope.

That, indeed, is really quite wonderful.

Hello and thank you to Polly Metallic, Tony and ein anderer for your thoughts and the links, plenty to contemplate. I particularly enjoyed The Shoeshine Boy although I hit my limit towards the end of the thought experiment, will have to re-read tomorrow. :)

Anonymous said...

"The BIS will not allow the distribution of all gold to settle claims. The mines of the world will be forced to sell to the BIS at the "locked" existing commodity price of gold. This will happen over many, many years as no other "official" market outside the BIS will exist."

This statement is absurd. This is just as bad as price-fixing. How can we on one hand have Freegold act as a spur 'n' brake for international trade and on the other hand have the BIS price-fix the miners.

costata said...


As far as I know there is no quota limit on the $5 million investment pathway to a visa. OBA is, if memory serves me, also correct about there being other business migrant programs that involved lesser amounts of investment capital. I'm not up to speed in this area these days.

Reports continue to appear about numerous Chinese buyers bidding for property in the prestige segment (say, $3m upwards) of the RE market in Australia. This segment got hit hard by the GFC so it isn't overpriced like most of the RE market here.

A number of segments of the commercial RE market are enjoying a tailwind from overseas investors and cashed up locals looking for yield.

I read an article today about a recent Australian property roadshow in China where the words "safe haven" were mentioned as one of the main motivations of the Chinese attending.

costata said...


You have to take the timing into account when you read quotes from Another and FOA. The statement you describe as "absurd" has to be interpreted in context. Back in 1997 Another was concerned that oil would withdraw support for the US dollar and bid for gold before the Euro was launched.

If that had occurred then the 100:1 leverage the LBMA members had created would not have allowed settlement in physical gold of all claims. Hence:

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

You have some reading ahead of you.


costata said...

Regarding the gold miners, I think the supporters of investing in those stocks need to examine the currency management implications of gold being priced in the tens of thousands under the post-transition IMFS regime discussed here.

If the currency issuer doesn't have control of the in-ground gold in their jurisdiction how do they drain excess currency from the system? Issue bonds?

Unless the currency issuer takes control of the in-ground gold it would be like having three currency issuers in their jurisdiction - the banks, the base money issuer itself and the gold miners. It's hard enough to restrain the banks. I doubt the currency issuers will tolerate a third unrestrained source of new cash. The inflationary impact would be huge.

Another issue to consider is the voting public in the main gold producing countries. The cries for the imposition of a windfall profits tax would be deafening IMHO.

Last, and by no means least, the mining executives might privately welcome the government turning their gold operations into a utility. Guaranteed prices and off-take, loads of incentives to maximize mine life and the extraction of the lower grade ore. Not in the interests of stockholders, of course, but management feathering its own nest at the expense of shareholders is not, erm, unheard of.

PS. I think gold miners will be a rock solid investment post-transition just like the best of the utility stocks. However, utilities aren't usually priced on high PE multiples. They are a safe, boring yield play. It's hard to see any justification for mining stock to trade at a premium to the price of gold under the scenario I'm describing.

Dante_Eu said...

BTW FOFOA always sounded feminine to me so I do understand that folks at GATA are confused.


ein anderer said...

@Pat: Very thank you ;D

But how long do you think it will take until "the" market (or the FOFOA blogspot market) reflects the new price for gold, after FG? Weeks? Months? How long it will take until there will be a gold market again?

Grillo, chief of biggest italian party, sees collapse of Italy’s political system in "6 months" (if there will be no new credit contracts). Afterwards Italy should leave the Euro …

FOFOA said...

Someone asked me by email about my last line in the post, "Oh, and I expect it soon.":

"So you "expect it soon" - and if you had to bet on the "what triggers it" question - what do you see as the "most likely" trigger? I'm sure you ponder this often, and I'm also sure you have already selected your most likely or most appealing "favourite". So how would you like to see the game end?"

I figured I might as well answer the question here.

I think the biggest threat to the system right now is price volatility. That is, prices of real things changing too quickly in either direction. Prices are where the rubber meets the road, where the monetary plane intersects the physical plane. And I view gold as the linchpin that ultimately holds the two planes together.

I think the "most likely trigger" is the price of gold falling too fast, simply because I can imagine that happening at any moment, with little or no warning. It could easily be accompanied by (and driven by) a general market collapse like we had in September of 2008, or it could happen on its own for lack of support from either of the two legs. By looking at the gradually falling price around Snapshot days, I am simply taking note of the apparent lack of "mysterious" levitation we've seen in the past, which could mean that official support has ended if it was ever present in the first place.

Of course technical support levels still come into play even if the bull run is over, so I think it is most likely to be accompanied with some sort of a general market decline. If there's a general market crash that punches gold downward through some of those technical support levels, there may be nothing below to stop the fall. That's when the paper price separates from the physical price IMO.

So will it happen this year? What are the odds that we make it through the rest of the year without a "dramatic correction" in the markets? I mean, the Dow is almost at its all-time high right now. I know my dad's been waiting for this moment for years, to "lock in" what he thought he had back in 2007. I hope there aren't many more like my dad. I remember his birthday party in 2009. When he blew out the big numbered candle I asked him what he wished for and he said "Dow 14,000". True story. Then again, maybe we've just arrived at a new plateau of American prosperity! ;D

If the "gold" bull run continues, a rising price is also a threat because the general price level of commodities (real things) is correlated with gold during a bull run. The USG's spending habit is another place where the rubber meets the road because the USG's addiction is in real terms but its spending is in nominal terms. If "gold" goes to $3,500 and oil follows it up north of $200/bbl, that means some real "cost push" price inflation.

Take a look at the US national debt during the last decade's bull run. It was at about $6T when the bull run started. Today it's over $16T. I don't care about the absolute level of the debt (what I call the stock), I'm only interested in the nominal rate of deficit spending (the flow), which, because it is in real terms, must accelerate with any price inflation. In other words, if the price of oil doubles, so does the rate of USG deficit spending, and these days that will mean the rate of QE.

I believe this will have a feedback effect on commodity prices as the USG refuses to cut its rate of deficit intake in real terms which would be the natural response to inflation. I think that part of the reason we made it through the last decade's bull run was that China, while running a trade surplus, absorbed (sterilized) a large part of the USG's accelerating dollar output. But as has been observed, that mostly ended a year and a half ago, about the same time as the bull run in paper gold stalled out.


FOFOA said...


So once again we have two legs of support which could explain the last decade. Somehow the flow of physical gold was managed while the acceleration in the USG's rate of dollar output was absorbed by a major net-producer. And now we find ourselves stuck between a rock and a hard place. The rock being a falling gold price and the hard place being a continued bull run.

While the feedback effect on commodity prices is merely an academic exercise to us now, I think that in reality it would happen a lot faster than you can imagine.

So there you have it. My "most likely trigger" is a falling "gold" price which leads to the separation of paper from physical. And my "alternate trigger" is a rapid rise in the price of paper gold which leads to imminent hyperinflation. Both ultimately cause the other to happen in short order, but which comes first remains a question in my mind.

Remarkably, the bull run has stalled out for a year and a half now, along with oil, silver and just about everything else that is real. So it seems we have reached a new plateau of stability. Or not. And if not, just imagine the pressure that has been building during this so called "consolidation phase". What if we bust out of this slump to the upside like July and August of 2011? Do you think it will stick? Do you think the bull run can continue to $3,500? I don't.

Do you think the general markets can continue their upward trend without a sudden and dramatic correction at some point? I don't. Do you think that official support for paper gold as well as the paper gold bull run has ended? Looking at the evidence, I think it is possible. Remember, we had Paulson and Soros selling in December along with my bellwether ringing followed by a chorus of others. Today we hear talk of technical levels of support. Even from my bellwether. So what? They have technical support levels in bear markets too. Do you think the East has lost its taste for physical? Do you think the East is instead prepared to soak up the USG's accelerating rate of dollar output indefinitely? I don't. Do you think it has already ended? I think that QE is the proof that it has.

So when I say soon, what I really mean is "overdue". Like the Big One. I use this only as an example of what overdue means. These "Big One" earthquakes have a certain historical geographical frequency of, say, 70 years. So once the 70 years has passed, we could say the next one is overdue. In the case of Freegold it's not about the historical frequency. It's about all of the identifiable elements being already in place. Seems to me they are now in place, so that's what I mean by "soon". Unlike most people (apparently), I don't view the more time that passes as a sign that it's farther away than we thought. That someone has figured out a new and better way to delay the inevitable (or even a good reason to do so). Instead, I view each day that passes as another day the Big One didn't hit even though it's already overdue.

It's one thing to explain how we made it through the last 10 years (let alone the last 30 or 40). It's something entirely different to have a gut feeling (based on what??) that it can be repeated, even as we see clear evidence that the European gold sales have ended, QE has begun (meaning not enough net-producers mopping up the dollar sewage) and paper gold languishing at 17% below its high from 18 months ago. I mean, seriously, anything other than "soon" would be a disservice to everyone. I don't think the actual date of Freegold exists, even with theoretically perfect (godlike) knowledge it doesn't exist. What exists is a probability wave in which "soon" has the highest probability at present.


Dante_Eu said...

Well, If you insist on month and year then, here it is: December, 2013.

Just my intuition.

Take it with no salt, please. :-)

MatrixSentry said...

Somebody hasn't RTFB. Can you see him Adam England?

Pat said...

EA, it has opined here from numerous posters that I respect that the transition shouldn't last to long, they are talking as little as weeks, at most months. Think of it as the final bailout, but not of the current system but the next. Massive QE has held the system together so far ( with great harm, most of which has not been fully felt so far ), but the overused phrase "QE to infinity" is not accurate, there will be a tipping point. FOFOA's beautiful mind answer above on timing should be read and re-read several times. We are way overdue, but the players all continue to dance until the music stops, each with their own reasons to do so. China and Russia for example as net producers are stockpiling gold as fast as they can, CB's as well, I believe all the big players see the needle on the phonograph getting close to the last few grooves.
Folks here recommend stockpiling necessities like storable food, whatnot to prepare for a transition that NO ONE can predict exactly as it will play out. Have some cash available, silver, but if you have enough food and necessities, you should be OK. The point is, get your gold across to the new normal and final settling.
2103- The Year of Fahrenheit 451

Beer Holiday said...

Some light entertainment from Jerry Garcia & David Grisman: Friend of the Devil

@AE Hyperinflation verses deflation was my favorite as a new-comer, but read the whole blog it's awesome.

ein anderer said...

Pat and friends,
FOFOA’s comment came just in time. Thanks.

Now thrilled by a Jim Sinclair interview. "Gold is going into this system, not out of the system. (…) The price of gold is gonna rise to heel the world." Seems to me as an underline of FOFOA’s description of FG triggers?

Thx to @Freegolds.

Beer Holiday said...

Edit: that is meant to be Deflation or Hyperinflation? above

Beer Holiday said...

For our NZ friends: Sharon O'Neill & Dann Hume - Rain (RocKwiz)

Polly Metallic said...

@Costata and Grumps

Regarding Mining stocks:

I still have a 401K with predominantly mining stocks. Naturally, for the last few years I have been waiting for the "mania stage" where these would make me a Goldstock Millionaire, LOL. We all know how well that has played out! I really thought they'd have their day in the sun prior to Freegold. And they should have. At this point, I am content for them to be boring utility-type stocks that spin off a dividend. I just don't want them to "burn" and be worthless.

Yes, I would make a lot more by cashing out and buying more gold, but I always wanted to have the mining stocks as a diversification, and a dividend play, plus I don't have to worry about someone trying to rob me of my mining stocks!

How things will play out post-transition in areas of more geo-political risk is a concern. Currently the bulk of my holdings is in royalty plays like Silver Wheaton, Franco Nevada, Royal Gold and Sandstorm. I'm open to opinions whether royalty plays are any safer than regular mining stocks.

sean said...

very helpful indeed to have the past 40years mapped out by fo/a with a commentary from fofoa so I can understand it too! it's all so beautifully logical laid out like this. one important aspect about this chessgame of course is that there's no rematch. so the loser may well have incentive to prolong the inevitable.

burningfiat said...

Pat, you just made the most conservative guess so far, if I understand correctly:

2103- The Year of Fahrenheit 451


EA, my perspective on the whole "hiding" period: A week at maximum! A couple of days is my best guess.
We will stand in a situation where the old price and pricing mechanism has failed for everyone to see.
There will be nothing gained by the ECB/BIS faction by not bringing "the new market" on the table immediately. On the contrary, if weeks go by without this new physical price be known to all players, confidence in the Euro could suffer.
Remember, this is the Euro architecture's time to shine. This is what the Euro was designed for. To work alongside a free physical gold market.
If the Euro doesn't step up to that role pretty quickly all that was fought for since 1962 will be in jeopardy.
If two months has passed and I still can't exchange my giant (and growing) sack of Euros for physical gold at any price, I will conclude that the Euro is no better than Dollar.
To paraphrase: Ain't gonna happen, dude!

So again: A week, tops!

FOFOA, legendary post! Tying the theme of 2013 nicely together.


One Bad Adder said...

Yes FoFoa, there is a feeling "in-the-air" that a resolution (a-la FreeGold) is nigh.
This (annotated) Chart identifies the "lack of enthusiasm" for FiatGold relative to Fiat alt-money there last several months ...which MAY WELL be a precursor to a $PoG washout.

We'll see.

M said...

@ Victor

I understand your point about the gold/oil ratio. But miners have been working under this ratio for a long time. In the last 10 to 15 years , gold mining stocks have out performed most N American indexes by hundreds of percent. Under this ratio.

There is so much to consider about all of this that who knows where to start. For example, if the action in the mining stocks is an indication of freegold then why is silver and silver miners acting the exact same way ?

You would think that gold decoupling from silver even in the paper markets would be an indication of the chess game coming to an end but it hasn't happened yet.

Mining stocks are dead because people are delusional.

M said...

@ Grumps

I somewhat agree that mining stocks will be fine for no other reason that everyone is trying to figure out why they are gong to zero. If 2008 didn't kill them then nothing will.

I already have a big enough position in physical that I can afford to lose my shirt on the mining stocks.

But for sentiment investors, nothing is more "blood in the streets" then this. Mining stocks are hit harder every week then uranium stocks were hit in the middle of the Japan crisis.Or Carnival stock when that ship was adrift. Or BP's stock in the middle of the blowout. BP's stock went below its 2008 price momentarily yet some mining stocks are going on years below 2008 prices.

Franco said...

I have a question: if during the 10 years after China being accepted into the WTO, the US national debt grew roughly by 10 trillion (from 6 to 16 trillion), but China currently holds about 1 trillion in US paper, then China absorbed only 10% of US debt expansion, right? So why does FOFOA say that "China, while running a trade surplus, absorbed (sterilized) a large part of the USG's accelerating dollar output"? Is this "large part" that FOFOA is referring to only 10% of the output, or am I missing something? Thanks.

The Dow Theorist said...


Your comment is prescient. While making clear that the transition to FG is to be caused by fundamental and not by charts, you are intelligent enough not to dismiss completely technical action in charts out of hand and to take into account other interrelated markets (stocks, commodities).

My two cents on the technical side (and this is a very slippery issue. I am not pontificating, merely trying to stimulate thinking). If I understood Fofoa’s comment properly, we should be paying attention to the stock market too:

a) Scenario A: If stocks managed to maintain the current primary bull market, this would be tailwind for “paper gold”. If a new bear market in stocks were averted, the paper gold charts should follow suit and put an end to the current vicious primary bear market in gold. Then, it seems likely that we will be heading towards (hyper)inflation.

b) Scenario: B: If stocks enter a dramatic correction (i.e. a primary bear market), this would be the last straw that broke the camel’s (paper gold) back. Then “paper gold” would be doomed, and we would see deflation followed by (hyper)inflation.

In any instance, stocks are worth following.

While I can be wrong and there are no guarantees, technically the stocks market is under a primary bull market. However, there are some technical warning signs on the horizon (bearish volume readings and lack of confirmation of new highs).

Paper gold and the gold miners are technically in a primary bear markets and GLD puking gold as if there is no tomorrow.

So it seems that something has to give in. Either gold reasserts itself and starts to go in the same direction of stocks (and the pukes stop) or stocks succumb to a new primary bear market.

It seems we are very near the checkmate, and all kinds of input (even technical) may be helpful.

Anonymous said...

Beautiful piece again, FOFOA:)

Someone's singing this to the Dollar and the old way...

Dare I weep, dare I mourn.

bartend said...

Great insight FOFOA. I will go back and read older posts but I have a question. Does GLD survive or should one just buy physical gold?

Edgar said...


freegold might still be a few years away. After all, GLD still has 1253 tonnes in trust, and there are attempt to coax the people in India to ditch their yellow bricks in favor of stocks.

Reality Show said...

Yes, from his description, it would appear that Mr. Sinclair has been researching the Freegold thesis of late. MTM Map

Anonymous said...

Off topic, but for a fun read in the things that make you go hmmm, imagine THAT vein, ZeroHedge has just posted an article reporting the "secret" locations of gold vaults in NYC. JPM's gold vault appears to be linked to the NY Fed's. Conspiratize away!

milamber said...

Costata & TinTin,

In following your conversation regarding the Chinese Property market, I thought I would recommend a book that I am currently reading. It is about the Chinese Development Bank and (so far) does a very credible job (heavily sourced) of explaining how the land expropriation model works as well as how it is being applied in regards to resource nationalism/funding.

I was going to wait till I finished it to add here, but it is too good and very relevant to the conversations at hand. Both the Chinese property bubble as well as some of the implicit assumptions that FOFOA writes about in Checkmate.

It can be found here

China's Superbank: Debt, Oil and Influence - How China Development Bank is Rewriting the Rules of Finance (Bloomberg)



milamber said...


Having read through Checkmate twice, I think higher praise is in order. I think it may actually be your best all encompassing post yet. And that is saying a lot!

A question I have regarding your recent two part comment about the triggers. When you write,

“...My "most likely trigger" is a falling "gold" price which leads to the separation of paper from physical. And my "alternate trigger" is a rapid rise in the price of paper gold which leads to imminent hyperinflation...”

you are still seeing a likely scenario that a Giant (or a Super Producer Paper Saver that has decided to move their claim tickets to payment in full), runs out of the bank screaming, “There is no more gold!”, correct?

And that would trigger one of the above triggers? Or are you saying that we won’t see a scenario (or it is highly unlikely) where a large gold purchase is denied?

Specifically, I am thinking back toA Classic Bank Run when you wrote,

“...When a small Giant runs out of one of the Bullion Bank's front door announcing "the bank is out of gold," as Fekete puts it, all offers to sell gold against irredeemable paper currency will be abruptly and simultaneously withdrawn....”

Many thanks,


bartend said...

As this system gets revalued will GLD survive and deliver if all heck breaks loose. I have heard that GLD and SLV wont be able to pay because it is margined to the hilt.

Motley Fool said...

Reality Show

There are two really nice things about understanding FG. The one as you mentioned is the bright outlook; the doomer goldbug community view really was quite soul deadening.

The other is the peace of mind one finds when you reach an adequate level of understanding. Sure, goldbugs have some good reasons, but one is never quite certain, there is always the search for more, while the natural way FG falls into place in the real world removes that seven year itch.


Anonymous said...

If govt taxes mines too high then they'll just hibernate until govt becomes reasonable. When Another was posting miners were hedged. That isn't the case anymore. The BB sold about 60,000 tons of paper gold. If there is honor in the system then this paper gold will be made good. That means mines will need incentive to work. It will be much easier just to print the money to buy it proper w/o the hassle of enforcing a punitive tax.

This is the weakest point of Another's forecast. It could be what we are seeing in paper gold market is not withdrawn support but a calculated operation to drain physical from the western CB's. Every takedown is being met with thick wall of Eastern CB bids that stand for delivery. Perhaps the Asians have decided they will control the gold market. If so then what does that mean for Freegold? Will the Asians let it trade freely or will they manage it?

Anonymous said...


Just be mindful that royalty companies will be less profitable when interest rates start rising.

byiamBYoung said...


While we wait for someone who actually knows what they are talking about to answer your question, I'll pass on what I found when looking at the holders (in size) of US debt.

The fed and the Social Security trust fund appear to have absorbed the most debt, followed by China, savings bonds and similar investments, Japan, Pension funds, mutual funds, Medicaire trust funds etc.

China's participation, I think, is most notable in the 2000's because they rose from virtually no buying to very heavy buying and picked up the slack left by Euro purchases waning.


costata said...

For the newcomers, I'd like to present a brief history lesson to reinforce FOFOA's comment about the price of gold and timing. Then I'd like to make a few observations flowing from that history lesson.

Over the years it has been noted at this blog that when the price of gold rose strongly the demand in currency terms in India, for example, remained more or less constant. To be clear, the volume of gold received for the currency contracted in proportion to the price rise. Most Eastern buyers displayed a similar pattern to India.

The flow-on effect was to make more gold available to other purchasers outside India (in volume terms but not necessarily in currency terms if the exchange rate of their local currency had fallen against the US dollar).

See if you can find fault with my logic in the following sentences. The currency demand for gold remained fairly stable when the price of gold rose. Therefore we can assume that the currency demand for gold will remain stable as the price of gold drops. So even if there is no gold rush occasioned by, say, a collapse in the spot price of gold then a halving of the spot price functions like a doubling of existing physical demand in volume terms. No new buyers are required to make this happen.

That demand could not be met with a ramping up of supply of virgin ore like some of the commodity metals. It would have to be met from the existing above-ground stock. Long term holders would have to sell into falling prices. Also we can discount the possibility of people who own gold in the Eastern countries (who are actively seeking to buy more gold from the flow) selling any of their existing stock of gold. That would make no sense at all.

Hence for gold - Price = Supply! Playing the short side of gold is an increasingly high stakes game. If Jim Sinclair is correct, at some point the manipulators will switch to the long side using the same trading strategies he described recently. The mirror image of the short side strategies.

If this new development in the gold bull market begins to play out in the near future then many of the discussants here will be watching the gold:oil ratio even more closely. A steep rise in the price of oil has been the precursor to economic recessions for several decades. The only variable has been the depth of the recession.

During these recessions the price of oil invariably fell hard and stayed down until the recession ended with only one exception. It didn't happen in the most recent recession. This is a multi-decade anomaly which, along with other evidence, leads me to the conclusion that the price of oil is "managed" (along with gold).

Peak cheap oil might be a factor as some claim but I don't subscribe to this view. The shape of the supply bell curve (if it is a bell curve) could have been changed simply by bringing forward production. The effect of the foreign policies of the USA and its allies has had the opposite effect. It has reduced the supply of oil from Iraq, Libya and other producers.

I, for one, do not believe that this "high-wire act" can be sustained indefinitely but (and this is merely my opinion) I think it can continue for a while longer if the ME oil producers and Russia are prepared to accept a higher gold:oil ratio. So I expect to see the paper gold price played to the upside before the curtain is drawn on the final act of this drama (and silver to run with gold again).

FWIW I agree with OBA. I think we are not in the final act just yet. So I think there is still time for the silver rollers to execute their chosen strategies but, as FOFOA noted above, this whole system is on borrowed time. As my old granny used to say: "never look a gift horse in the mouth". This may be your last chance to exit.

Good luck!

The Dow Theorist said...

I listened twice Sinclair's interview with king world news. I have mixed feelings. While he has certainly adopted several Fofoa's tenets (gold going into the system, gold being priced by the market and not by edict), I still find his arguments far less cogent than those made by Fofoa. I get the feeling that Sinclair gets 99% of the picture, but the vital 1% is still missing. No mention about the transition and other crucial issues discussed in this blog. No mention to GLD puking and other related issues either. I feel he focused too much on market manipulation (i.e. COT) and a market bottom within a bull market, but too little on the euro architecture and revaluation versus bull.

Anonymous said...

Sir Tagio,

ZeroHedge has just posted an article reporting the "secret" locations of gold vaults in NYC. JPM's gold vault appears to be linked to the NY Fed's. Conspiratize away!

Old. Explained, for example, by Jeff Christian, see here.


I am fairly certain that GLD does have the gold - otherwise the puke indicator wouldn't work. I am also fairly sure that this gold is fully allocated and free of any third party claims, not lent against and not hypothecated.

So what would happen to GLD if there was a problem in the London gold market? I would be worried about several issues:
1) The custodian (HSBC London) is under UK jurisdiction. The trustee (Bank of NY Mellon) under US jurisdiction. Doubles the political risk. Both countries are the main beneficiaries of the old system and initially very vulnerable under the new one.
2) GLD is a soft target. If there is some restriction to gold trading or ownership, even if this is only temporary and later revoked when gold is widely recognized as the international reserve, GLD will always oblige the governments.
3) If there is a problem in the London market, the trustee may decide to wind down GLD. In this case, the investors would receive $ cash according to the last recorded share price whereas the physical gold would be sold OTC. To whom is your guess. Not to you, gentlemen, that I am quite certain of.
4) I learned from Bron that the GLD creation and redemption mechanism works through LPMCL via their custodian HSBC and involves the deallocation and then reallocation of gold. I.e. the AP doesn't transfer physical directly to the trustee, but they rather pay in unallocated and then the trustee immediately allocates. So when the allocation mechanism is ever suspended (your guess as to how the problems in the London market will manifest themselves), the creation-redemption mechanism will have to be suspended, too. This tells me that GLD is unsafe even for large investors who own multiples of baskets.


In the last 10 to 15 years , gold mining stocks have out performed most N American indexes by hundreds of percent.

Granted. But the miners underperform the London price of gold.

The reason why goldbugs recommend the mining companies is that they would outperform gold. But they don't.


If govt taxes mines too high then they'll just hibernate until govt becomes reasonable.

I don't think so. All in-ground resources do belong to the people. The arrangement that private companies are allowed to extract and market these resources as if these were their property, is not the rule, but rather an exception. In fact, it may turn out to be a historical anomaly that is not going to persist.

The fact that the governments still fix the gold/oil ratio basically tells you that this is empty words already today. The mining companies do not "own" the precious. They just receive a fee for the digging. Today, this is implemented by adjusting their cost base (oil) relative to the sales price (gold). Once the gold/oil ratio goes up to 10000, this arrangement will have to be renamed to something that reflects reality more honestly. The mining companies will operate under a mining license that awards them a regulated fee of, say, $800/oz, from which they have to cover their operating costs and pay shareholders.


Indenture said...

Totally off subject: I am currently on a small vacation with my family. My son is in Third Grade and because we live in Virginia and because Third Graders here in the Commonwealth study the early history of our Nation it is suggested by the school system that we visit historical sites within our state. Today we visited Jamestown the first permanent English settlement in the New World. The reason I bring this up is because as I was walking around the palisade thinking about the souls who sailed to the unknown I couldn't help but wonder how the Average American would fare under those conditions. "In the "starving time" of 1609–1610, the Jamestown settlers were in even worse straits. Only 61 of the 500 colonists survived the period."

But it was when I thought about the coming 'Transition' that I realized how utterly defenseless most people are, how entirely dependent they are on someone else to provide for them and if we as a Nation were forced to regress to a lifestyle close to that of Jamestown just how many of us would survive. If 12% of the people of Jamestown could survive how many Americans would make the cut? I had a personal glimpse at post EMP or Societal Collapse and it is plainly obvious to me why the Giants would never allow the system to collapse too far. We would never, in their lifetimes, make it back to a semblance of where we are today.

I have a garden, chickens, bees and feel fairly confident in my abilities to 'make it' but now, deep, deep inside me I am eternally thankful Reference Point Gold and The Euro exist. FOFOA, you have brought me peace. My understanding of Freegold has brought me peace. I wish the same peace for everyone.

tEON said...

ZeroHedge has an article:
Hedging Funds And Physical Vs Paper Gold:
The total disconnect as paper gold positioning - ETF holdings and net futures/options speculative positioning - has had no correlation with the price of Gold since August 2010 when the world started anticipating QE2 (and beyond).
and this chart :

byiamBYoung said...


You articulate my own thoughts. I am simultaneously comforted by the view I gain from these pages, and terrified by the clearly unprepared state of those I love, and people in general.

I received an unexpected and welcome bit of news three days ago that my son, 22, has decided to begin accumulating physical gold. One of my four "gets it."

It certainly feels as if a paradigm shift is drawing near. Rick Santelli sounded rather freegoldish the other day. We are living in unusual times, to be sure.

Although I am quite threadbare at the moment, thanks to the US government feeling quite entitled to an unexpected lump of my earnings, I am on my way to hitting the tip jar.

I suggest others consider doing the same!


Ken_C said...

I am still working my way through all of the writings of this blog and those articles by A/FOA. For a long time I was in the hard money "gold bug" but it seems as though Freegold type transission makes the most sense. I am somewhat of a "prepper" but from the view of most of those that I am close to I should really be wearing a tin foil hat.For this reason I keep what I do very low profile. I expect in the long run that my concerns will be vindicated. This blog and some others that I frequent offer some solace in knowing that I am not alone in my thinking.

Following up on what some others have mentioned about the society in general not being ready for any significant "reset" I think that it will probably be quite ugly for sometime after the entitlement checks stop coming. Too many people expect too much from the government and it just will not be there as they expect. When the .gov can't supply their needs any longer I fear that some (many) will feel justified in taking what they need/want from you and me.

Even though this chess match seems to have but one eventual outcome it appears that the opponent will sacrifice all of its pieces one at a time before the final capitulation because that will extend the game and delay the ugly consequences.

P.S. I did send a little donatin along to help in the cause of defending the precious.

Anonymous said...

How can we have gold acting as trade settlement vehicle at one value, but the miners will be in this apartheid extracting gold for another value? We can't. They won't mine it for a regulated fee. Gold production would shut down and wait it out.

What Another posted should be separated into an account of what had happened to keep the oil flowing cheaply and his prognostication of how this naked paper gold would be settled. The former is a plausible explanation, but the latter is his opinion.

Yes, govt will control the mines through high royalties. But not so high as to be confiscatory. The Laffer curve illustrates that more punitive the tax the less blood you get from the stone.

If miners aren't allowed to enjoy some success, then nobody is going to explore for new projects. Grades that would be economical at Freegold prices, won't be bothered for a regulated fee that may change at that whim of govt--too much uncertainty.
So now how is all that naked paper going to be honored? The CB's sell their gold? War?

The Spice must flow.

One Bad Adder said...

EVERY Oz of 24K Gold has an absolute beneficial owner ...whereas EVERY chit of FiatGold can (basically) be deemed a proxy Fiat currency.
Ultimately (in extremis) these will be Cash settled - at $1200 / Oz ...or perhaps $12,000 as Freegold valuations rocket into the stratisphere.
Positioning onself as an absolute 24K Gold owner is (still - currently) easy however it's not expected to remain the case for much longer IMHO.

Anonymous said...

Oops. Did you notice the typo?


Dante_Eu said...

I read this today:

U.S.A a banana republic

And I think to myself:

“How dare he call U.S.A a banana republic?!”

No, I won’t have that! Those who live in banana republics must surely eat bananas and those who eat bananas must be alert, active, bright and healthy people.

You think I’m joking? Have a look for yourself:

Monkeys better than College students at remembering sequences of numbers

So, don't you dare to call it banana republic ever again! Hamburger republic, Pizza republic, Chicken McNuggets republic...pick and choose...

Mad as hell\Dante

PS Yes, he or she would beat me or you also. :-)

Woland said...

WE LUV $5 PER BL OIL! Greetz

Anonymous said...

Exactly. There was one extra zero. But you'll get $50/bbl oil (in today's purchasing power). At least if you are outside the U.S.

Btw I disagree with Michael Pento. Energy related investments will be the disappointment of the decade (even before silver).


ein anderer said...

A few know, some are calculating, many feel. My feelings get stronger and stronger that there are now huge Euro and EU problems very near ahead. ( The necesary France / Italy / Spain debt and unemployment data are obvious. Not to speak of Greece. )

Which reading you would recommendate for understanding the relevance / non-relevance of a healthy Euro/EU in regard to FG?

For those who understand german here is a long actual must read piece about the situation in Greece.

Indenture said...

Grumps: "They won't mine it for a regulated fee. Gold production would shut down and wait it out." ... "Yes, govt will control the mines through high royalties. But not so high as to be confiscatory."

Ok. So tell me why man would stop digging in the ground if he can make a buck? So he doesn't make 100 bucks but man will still dig for a buck. I don't understand your reasoning.

"So now how is all that naked paper going to be honored? The CB's sell their gold? War?" Question? Is the 'naked paper' denominated in Dollars?

ein anderer said...

And don’t forget Germany. New party „Alternative für Deutschland“ with "huge potential"? Quote: "We see the collapse of the european currency, and there is no party which knows anything else but ‘More of this irregardless of the costs‘."

Anonymous said...


I'm referring to the gold on Eastern CB balance sheets. Not all is physical in their vaults. Some is still in Western vaults. Problem is that Western gold has alot of claims on it.

The paper gold that will burn is the unallocated held by shrimps. Allocated gold held by shrimps has been stolen to help fulfill obligations to the East. The Swiss are trying to keep a lid on this.

What Another said is that paper sold to the Asians will be honored if possible. If the Anglo-Americans are defaulting then that could explain the price action we've been seeing. The bull market is over and the Asians are manipulating the price as well in order to drain the West. I wouldn't be surprised if gold never gets past 2000 before revaluation.

There may be an agreement in place to hold off gold operations until China and Russia have enough so that a revaluation would give them 15% gold in their reserves.

Another's prescription for solving the naked short to the East is a clue his background. He's probably an academic technocrat involved in dealings with the BIS. The idea that mines will knuckle under and produce 2500 tons/year for just a fee is a central planner's wet dream.

ein anderer said...

Europa II:
You see, the huge differences between stromg and weak EUR nations demand currency translation rates which existed in the pre EUR ear. EUR filed CTR away. Now the weak nations can not compete anymore and have to get subsidized via a giant Brussel/Strassbourg bureaucracy.
Anymway: If the EUR fails what will be the outlook for FG?

milamber said...


Just a technical FYI. W/ this post, as w/ all, I subscribe to the email updates. They are not working like normal. For example, I have received none of costatas posts & most of the others arrived all at once yesterday.

Don't know if you can fix, but wanted to let you know.


bartend said...

With the recent news item that states "Goldman Sachs see gold going to 1250" is this just a trial balloon before gold does take off or do they carry so much weight that just this news item will shake weak longs out

RevolutionOfNations said...

Victor, don't get hung up on Fekete, I only used his writing to demonstrate a thought which I think is very real. Namely that there is a reason for the 1000+ US military bases throughout the world and a military spending that is equal to or larger than the whole rest of the world combined.
Let's say Mr. A has a gold coin and Mr. B has a gun. Mr. A trades his coin with Mr. B for his gun, but Mr A is dishonest... Isn't it plausible, knowing Mr. A to be dishonest that he may use that gun to take the coin from Mr. B? This should not be much of a problem after the coin trade that disarmed him.. Same thing with the Saudis(and a lot of other countries) who rely on the US for "protection". What when the US decides it's no longer in their interest?
Maybe there will be more Libyan gold stories to tell in the future?

Anonymous said...

“So I think there is still time for the silver rollers to execute their chosen strategies.”

I don’t see a 50/1 ratio anywhere between Silver and Gold, do you?

What do think will happen when the Silver’s stock to flow equalizes with Gold’s stock to flow ratio about 20 years from now based on current mining/consumption rates?

For us younger SoV seekers holding some Silver in addition to Gold makes a lot of sense IMHO.

Besides riding the 50/50 ratio has been a great way of acquiring more gold for me so far. If or when gold shuts down then I’ll still have silver to cover necessities until freegold. When gold opens back up at the Freegold price, I’ll then diversify back into silver.

The fact that silver is ‘also’ more useful in the modern age than gold is not a bad thing.

ein anderer said...

1253 t = round about two days trade volume of GLD?
What’s the worldwide papergold volume/year?

KnallGold said...

-Nice sunny Sunday here, good to retune your chronobiology as this Feb. was one of the darkest winter months since long. Sunshine hours were very low here which caused a couple of illnesses stemming from out of sync circadian rythmus and low Vitamin D levels etc.

-big thanks to Mr. Götte and its team from the Shamal garage, finally got my Fiat 127 back with rebuilt engine :-) . extremely hard to get the cylinderhead gasket, they built 4 millions of that car but finding parts is difficult. Good training for his apprentice, even a son helped out. Good to have brilliant handworkers we you need, really appreciate this!

-as for the timing of that Freegold event, now this might be a bit crazy but I'm going out on a limb here with a prediction of before end of March! Events appear to have accelerated very fast the last days and weeks, don't know if we have already crossed a tipping point. Need to expand a bit here.

We remember FOFOA's inverted waterfall graph and judging from similar patterns/fractals of developing parabolas, there is always a tipping point which when crossed sets off the chain reaction. It cannot stopped then, I know this also from chemical reactions. A good example for illustration is the synthesis of Nitroglycerine.

I remember a procedure which said that you have to add your nitration acid mixture to the glycerine between a temp. of ~18-23°C, with good external cooling. If in the upper range, stop the addition, let cool again etc. At the end of the procedure, they wrote: if temperature rises above 25° IMMEDIATELY LEAVE THE LAB!!!

You can hardly see anything different in the appearance of your reaction if its at 20° or 25°, yet, at a certain rather narrow point, it becomes a self feeding auto oxidative process which cannot be stopped anymore. Of course its also experience from brave experimenters but the important fact here is that it happens from WITHIN!

The same is evolving in the Gold/financial markets, you cannot tell the tipping point by simply watching the POG # - this is the first time in the history of mankind so there's simply no experience! A gut feeling might be there, sure, we all can feel this, plus we have several fundamentals.

I sensed we crossed something at 25. February with that full moon (Mike Kosares did a study about a possible correlation POG/lunar circle), there is this threat of a euro crisis.3 , Cypria, an Italian politician warned of a systemic collapse triggered from Italy, back to Lira, etc etc. --> chain reaction if euro fails, right back with light speed to barter town as per Anothers forecast.

Of course there are more signs - and there looms that (maybe more esoteric) ides of March phenomenon, something in the collective psychology.

Along the lines of that GLD pukes, my local bank wanted to send that old CSFB 100g bar back with 2 other similar. Just their plain schedule or a sign that there was sudden and strong demand coming for whatever bars. Usually the banks were quite picky with bars with wrong and old logos.

Something diffuse was on that 25. when looking at peoples behavior, I had my own "full moon happenings", my best female friend (no names, just call her an odd fellow) had to go to hospital for surgery for a Bandscheibenvorfall (sp? luxation). No news since, crossing my fingers for her.

After the Italian election, there was again this stare into the abyss which developed quite quickly into a horrible week. Somehow I began to relate with that feeling of the power elite waking up with fear and the cold sweats, not nice :-(

Only in hindsight we'll be able to judge when the line was crossed.

To close with the analogy of the Nitroglycerine synthesis, if it was a small scale, we had to just clean up the lab from a spillover, inhaled some caustic and toxic nitrose gases, maybe we lost a hand from an explosion. Or, if the scale of the reaction was very big - now I don't want to think further about that :-(((

Best Regards,

Jesse McL said...

Hmmm, I wonder if GrumpsLabastard just solved FOFOA's riddle (without realising it)?

Michael H said...


Did you take into account that $50B was taken out from the FX market and gets deposited at FED and destroyed by the FED.

Didn't the dollars go to the treasury, and not to the Fed?

Edgar said...


that chart at ZeroHedge ( tells us that something is terribly wrong.

Caveat Emptor Charta Pecunium!

MatrixSentry said...


How can we have gold acting as trade settlement vehicle at one value, but the miners will be in this apartheid extracting gold for another value? We can't. They won't mine it for a regulated fee. Gold production would shut down and wait it out.

Well that is the issue isn't it? You arrive here with your preconceived ideas of what is and isn't possible. Your baggage if you will. You haven't read the blog, you do not understand the underpinnings of Freegold, and you post here what is and isn't possible and ask how it is that we do not see value in mining stocks?

Oh, did I say welcome, we're glad your here?

Dante_Eu said...

Here comes professor Antal E. Fekete part II:

Antal E. Fekete at Keiser Rapport part II

Every silverbug should be obliged to hear the first couple of minutes! Nice history lesson by professor. Silver removed my silverbug friend...


Professor Fekete: "What world really needs is a system with 2 monetary metalls but not at fixed ratio. The ratio would stabilize in my opinion once you put that in practice. But it should not be legally fixed the ratio. That is what the trouble was."

Max: "...bla bla bla la la la...and you can have an economy where's a reference point that is based on something of intrinsic value...bla bla lalala..."

Well, there you have it my fellow brainwashed cult members, exchange "2 monetary metalls" with fiat currency and physical gold, and you have...freegold. I'm honored to say that Fekete and Keiser are hereby officialy welcomed to our cult, **cough cough**, I mean our club.

Welcome and feel free(gold). :-)

Indenture said...

Grumps: "They won't mine it for a regulated fee."
Why? Why won't gold be mined for a profit at a regulated fee?

Aaron said...

Hi Victor-

I noticed your typo, but didn't want to bring any attention to it in case you had come up with some new figures and were quite serious about your thoughts. ;-)

None the less it did make me smile if for only a brief moment.

Anonymous said...


The idea that mines will knuckle under and produce 2500 tons/year for just a fee is a central planner's wet dream.

Matrix already told you. You just used your common sense and solved the FOFOA's riddle: They won't. Now you just need to take your own thinking seriously.

Who cares? The Euro zone doesn't. The above-ground gold as of today is perfectly sufficient in order to settle international balances (provided that the gold price is a market price). Mining is not required unless you are having the Hard Money Socialist's wet dream of fixing the gold price in currency terms. Quite obviously, the BIS/ECB don't.

ein anderer,

Anymway: If the EUR fails what will be the outlook for FG?

Each individual one of China, Russia, ECB, BIS, OPEC, Germany, France, Italy, Switzerland would trigger it well before that point has been reached. Without that threat, they will most likely wait until the dollar dies on its own.

I have thought a lot about which option I would prefer and which option they must prefer. Sometimes I think they should have triggered it in 1999 and a certain part of the world would have been left in peace.


Same thing with the Saudis(and a lot of other countries) who rely on the US for "protection". What when the US decides it's no longer in their interest?

On that day, the dollar will be toast. Either way. The U.S. absolutely need Saudi Arabia in order to (a) manipulate the dollar gold price up and (b) guarantee that everyone can get oil for their dollars. Two scenarios:

1) The U.S. no longer protect Saudi Arabia and leaves them alone. Nice. Then everyone will be free to do business as they prefer. At some point, the oil producers will have a business interest in switching currencies, and this is the day on which the oil price will begin to fall. End of dollar as a cling-to-the-power-for-too-long reserve currency.

2) The U.S. no longer protect Saudi Arabia and make sure that Saudi Arabia is drawn into a military conflict that puts their production out of operation for several years. This would be the destructive way of saying goodbye to the old world order. Problem is, even in this case the dollar is doomed. Why would China hold dollars if the U.S. can no longer guarantee a free flow of oil for dollars (at a 'fixed' price perhaps, but the oil does flow, still).

Someone should write another article titled "Checkmate".


Anonymous said...


Once govt becomes an overbearing presence in an industry, capital withdraws. Confidence is lost b/c the rules may change. Take what's happening in China. All the gold mined is staying in borders, because the govt needs it either in citizens' hands or on PBOC reserves. They need that gold fast b/c the USG wants to dine'n'dash on its treasuries. Now they are paying the miners market price ( less any royalties). China knows command & control doesn't work. They've been there done that.

For another example, look what's going to happen under Obamacare. Doctors are withdrawing their labor b/c govt wants to dictate income.

For Freegold to work someone who wants to short gold must be confident that he can cover or get the gold back. If new mining supply collapses due to govt intervention then gold will go into hiding, it won't bid for dollars. Now fiat can't serve as MoE and trade collapses until a barter or stupid gold standard arises where gold is hampered by taking on MoE function. That 2500 tons/year of fresh supply is necessary for Freegold.

When Little Leto cornered spice production by donning the new skin and terraforming the desert so that he was the sole source of future production. Spice went into backwardation for 3508 years. Interstellar trade collapsed. The spice didn't flow. The power players CHOAM (BIS), Bene Jesuits, Landsraad (Black Nobility), and Guild (technocrats) had to make do miserly with their hoards until the ole bastard died.

Mine supply is our Arrakis. It should be treated well or else...

Tyrone said...

A spirited discussion about gold as a resource. (?)
Video: Gold is a Resource
(AKA Our Money is a Joke)

Anonymous said...

Oops. Type: The U.S. absolutely need SA in order to manipulate the dollar oil price up.

Grumpy Lambastard,

For Freegold to work someone who wants to short gold must be confident that he can cover or get the gold back.

Now it is getting seriously cool. Under freegold, I'd be happy to short as much gold as possible. Simply because the idiot who goes long won't be able to enforce it. But you can be sure they'll learn quickly.


Franco said...

Sorry to be repetitive, but won't anybody address the question I asked earlier? Since China joined the WTO, the US national debt grew by about 10 trillion, but China only absorbed about 1 trillion, or 10%. Not a negligible number, but not substantial, either. So why does FOFOA say that "China, while running a trade surplus, absorbed (sterilized) a large part of the USG's accelerating dollar output"? Thanks.

Anonymous said...

It seems Grillo is perfectly Euro/freegold compatible. No wonder the Economist calls him a clown.


tEON said...

Perhaps it is telling us that the market is smarter than we (I mean 'I') give it credit for. The separation seems only to expand ala FG. Maybe FoFoA's 'sudden drop' in the Paper Gold price is imminent? The market will know or rather 'tell us' before we can guess. I am naturally impatient but let's see what happens the month of March... on a Personal note I am keen to keep my eye on the SGR... although I think in the week I will 'switch up' more regardless. The coin shop seems less friendly to do the swop each time (3 times in two weeks)... :) I just tell them with a smile 'You KNOW you will be making money of this!' and they probably will in regards to their definition of 'money'.

Anonymous said...

How is the paper gold sold to the Asians going to be honored w/o new supply?

If no new supply comes onto market how can I be confident of making a round trip between gold and fiat over an extended period of time?

If gold stock stays static won't this be unstable? This would be a historic anomaly.

What I'm saying is that new mine supply is vital for Freegold to be stable, so that gold can function only as a SoV. If there is no future gold supply then what is the psychology of the gold holder? Do I dishoard now to start a business to grow my wealth? But will I be able store my grown wealth back into gold b/c the gold holder I want to buy from is scared of letting go?
To have that healthy dynamic that keeps gold out of hiding, the market must be confident of future delivery. That's why I used the Dune reference to illustrate what happens when the production of a Giffen good is taken offline.

Anand Srivastava said...

"Mine supply is our Arrakis. It should be treated well or else..."

True. But the else part is
or else we will get freegold.

Unfortunately when we are already in freegold, the else part doesn't work.

We need the mines now to keep the paper and gold price fix working. This need is no longer there in Freegold.

There is no need for the mine supply in freegold, except for countries that are not producing anything, don't have gold, but have gold in the mines.

Can you think of such a country?

Motley Fool said...


A quick observation : a budget deficit is not the same as a trade deficit.


Quick statement of fact : mines will be producing enough gold. I suspect in most jurisdictions mines will simply be forced to sell all gold the the government again as they did pre 1970. (mining cost $1000, forced sale price $3000, freegold price $55000 - everyone's a winnah). Those laws are still on the books here in South Africa, and I know also in Australia, they just need to be re-enacted.


Anonymous said...

If gold supply stays static, then it deflates in relation to a growing market of goods/services.
Future supply is needed for the easy money winners of the fiat world to join the hard asset savers, otherwise the deflationary mindset of gold hoarders induced by a static stock will reignite the tension between the two camps. New supply will abate the deflation so easy money winners have a chance of joining us evil gold hoarders.

If Freegold arrives with a static gold stock, then it has just a few telomeres before apoptosis. A growing world economy, growing population, the crosscurrents of demographics, political cycles, war cycles, and weather cycles would crush Freegold with a static gold stock. A growing gold stock would make it more flexible and robust.

I don't think Another would advocate a static gold stock. He predicted that production would continue but under govt control. I posit that to keep Freegold viable, new supply brought on by motivated private enterprise would far exceed that of income-regulated operations.

Thank you for all your feedback. I'm not trying to be a troll, but to tweak the Freegold thesis.
I welcome the criticism.

Motley Fool said...


"A growing world economy, growing population, the crosscurrents of demographics, political cycles, war cycles, and weather cycles would crush Freegold with a static gold stock."

No, it wouldn't. Though I will grant the initial readjustment may take some time.

In this period some gold in strategic locations will help ease the transition (whether it be in ground or in official stockpiles).... say oh 8000 tonnes of official gold in the USA might help, or a decent chunk in China...hmm, perhaps a bit less in Canada since they have lots in ground and a smallish population... one wonders about some recent shifts in strategic gold holdings worldwide huh.


Motley Fool said...

Ps. Let me quote some since it is related.

"For this reason, the money used as a store of value must be something completely separate and different from the medium of exchange. It must be so, so that the store of value unit can expand in value while the medium of exchange unit expands in quantity and/or velocity. You may be starting to encounter my thrust. Expand… and expand. Unrestricted by artificial constraints." - FOFOA

milamber said...

@ Franco

I would rec reading Inflation or Hyperinflation for context in relation to FOFOA's comment.


milamber said...


Can you please explain how Dune's spice melange is the same thing as gold? I am not able to track your argument because I am seeing some large holes in it. Maybe if you wanted to argue that the spice is equal to oil, I can see that, but then that kindof blows up your point, doesn't it?


TontoD said...

China owned 3.2T at some point in time. They reduced it to just over 1T at the end of 2011. I don't know how they managed to do that. And does that mean they're now just warehousing cash right now?

"United States shows only about 10 percent of the total U.S. currency stock as being located inside the United States"

That's from the end of section 3.4 of this document (Sept 2006):
(BTW: section 3.3 is also quite informative)

That's before all the QE's. Lately, we've been printing far more $100 bills than any other denomination. Here:

tintin said...

Latest government policy in China will tax 20% on realized second property gains, and will require higher deposit and charge higher interests on second housing loans. Chinese property stocks got slaughtered today with top property developer Vanke droping 10%.

it is government policy to crash the property bubble, and the aim is to make housing affordable to the ordinary folks.

So when looking at China's property market, try not to apply US models. The Chinese government is doing things exactly the opposite to what the US government/FED has been doing to the property sector in the US.

costata said...



I'm still catching up with the comments but I had to respond to your comment above at March 3, 2013 at 10:55 AM. I visited this page you provided the address for:

You followed it with this:
I don’t see a 50/1 ratio anywhere between Silver and Gold, do you?

It was a real WTF moment for me. That page doesn't discuss the GSR. So, NO, I wouldn't expect to see a 50:1 GSR discussed in a piece where it is not part of the discussion. What a waste of time it was visiting that page and your comment above barely managed to ascend to the level where it could be considered irrelevant.

You keep spouting nonsense and the same old, tired arguments and claims about silver that have been debunked, refuted and exposed as misinformation in these pages over the years. But this extract below from your comment is the kicker. It contains the merest hint of awareness of perhaps the best reason of all why silver wont be going along for the final ride with gold - of course you interpret it bass-ackward as usual:

What do think will happen when the Silver’s stock to flow equalizes with Gold’s stock to flow ratio about 20 years from now based on current mining/consumption rates?

I'm glad you've noticed that the above-ground stock of silver is growing. No silver shortage apparently and none anticipated for the next 20 years. Increases in the stock of gold is called "Situation Normal". For an industrial commodity, even one with a history of being used as currency (like iron once was), this is called a "Supply Overhang" in other words a "Stock Overhang". It tends to depress the price of the commodity affected or cause a price collapse if the commodity is over-priced. (The silver bugs should be grateful to the market manipulators. As long as price discovery is disabled they can believe whatever they wish to believe about the glorious future of silver prices.)

We don't even need to speculate about the impact of a stock overhang on the price of silver. We have the history of the US strategic silver reserve to tell us what to expect. Depressed silver prices for decades if the overhang persists. We know precisely how gold responds to a steadily growing stock. It has no impact on the price of gold.

I rarely talk to any silver bugs these days. I tend to reserve my comments about silver to the rollers who are looking to get out before the transition exposes the folly of the silver bugs. So respond to this if you wish to but don't expect a response from me. You don't appear to have anything to say I haven't heard a hundred times before and I'm sick of rehashing this topic.

PS. I was seriously considering doing a final post on silver a few months back but since then no one has written anything about silver that pisses me off enough to energize me to complete the post. Keep at it, you might manage to do it.

Anand Srivastava said...


What I'm saying is that new mine supply is vital for Freegold to be stable, so that gold can function only as a SoV.

There is a major disconnect here.

Freegold is different from gold standard.

In freegold the price of gold is variable in currency. So for growth currency is inflated to accommodate the growing economy.

The amount of gold need not grow at all. The price of gold will inflate to accommodate the requirement of the store of value.

The expectation is that the price of gold will vary wildly depending on economy :-).

There is more than enough gold in the world. The current value of gold is 11Trillion. The world GDP is 65T. At 55K it will be valued at 330T.

Even in a 65T GDP you don't need 65T of gold for trade. You need maybe a couple of Ts.

Trade of a few thousand tons would be enough.

Some of that Gold which is sitting idle in vaults will be put to good use.

There is no need for gold mining at all. It is safer to keep the gold in mines, if the country doesn't need it immediately.

They don't need to mine gold if
1) They are a trade surplus country.
2) They have enough gold in their CB for the current deficit.

And they need to have mines to do mining.

Some country which are in surplus may still try to get more gold so that they can do more spending. If you put gold in the CB you get instant liquidity.

ein anderer said...

You have beautiful described the so called "phase transition" which is known in many areas of science. One other example: Super Conductivity. It is not built up gradually but in a sudden transition jump to its new status.
Other examples can be found also in "soft sciences" like sociology
(Hierholzer, Wittmann, 1998; Moscovici, 1976).
In this context one detail of the science of phase transitions is:
There is needed only some small amount of "units" to trigger the transition as soon as this minority of elements is acting in a kind of synchronized and coherent manner. Moscovicis book was entitled in english "Social influence and social change", but in german they titled it more correctly "Sozialer Wandel durch Minoritäten" (Social Change by Minorities), because that’s what the book is all about.
Think of the famous example of the bridge and the soldiers: In the moment some of the soldiers fall into step their influence is stronger than the influence of the unorderly non-synchronized majority, and the bridge evantually beginns to move/crash.
(Wondering what this coherent influence of the minority cold be in regard to FG. LBMA? May be not, because the FG theory says that the transition will not be man made but a kind of selfreferral reaction of the system to itself.)
Anyway, that’s one of the reasons why I’ve started to get thrilled by FOFOAs writings some months ago since I discovered here the same view: the belief in a sudden, spontaneous and if you want so "natural" reaction of the system. This is reflecting a natural law more than a human guess, and (also) therefore his writings seemed to me more relevant than many others out there in the realm of PM.
The greatness of his postings is--among many other aspects--that he seems to proof that there is only one direction the inevitable reaction can go. The last exit seems to know only one direction. ) "Seems"? Well, could read only 10 percent until now :D )

Without that threat, they will most likely wait until the dollar dies on its own.
IMHO this means: As soon they trigger FG the threat is not there anymore? If this is your opinion I don’t think so. The threat would grow again in a very few years. The threat is not the debt. Debt is only a symptom. The threat is the non homogenous way of life, type of thinking, cultural background and, yes, very different geographical and climatic conditions.

Now starting to read this post again, all it’s comments again--and for the first time The Return to Honest Money.

ein anderer said...

Portugal on the streets. "The demonstrators are demanding a complete change of course from the government …" Other sources say that 15 percent of whole Portugal’s people were on the streets. "They are at the end of their tether."

In Austria the Austrian-Canadian billionaire Frank Stronach received yesterday 10 percent in two state elections (Kärnten, Niederösterreich) off the top of his head. He calls the Euro a "monstrosity" (but wants to stay in the EU).

Beer Holiday said...

Here's a phase transition you can play with:

2D Ising model

costata said...


Re: your comment at March 3, 2013 at 5:17 PM

It's not about the total, it's about the margins. Say, $1 trillion need-to-sell versus $950 billion of must-purchase buyers then the extra $50 billion from the newbie (China) solves the problem.

Does this make sense to you?

KnallGold said...

And before anyone comes with TA, it's simply irrelevant! If you have read all the posts incl. mine (I simply left it out) you will come to the conclusion that its solely the fundamentals driving it now. Yes, it's CHECKMATE! Period.

Anonymous said...

Frank Herbert combined oil and gold to be represented by spice. He may have been giving us a clue as the true nature of oil. It's not a fossil fuel, but not abiotic either. Think of extremophile organisms and a different carbon cycle. It is sad he is gone. I wonder what he would have wrote during this time. The older I get the more I realize those books were describing how the present world really works.

" that the store of value unit can expand in value..." MF, this is the delationary pressure I'm worried about. If gold buys more and more, but new savers can't get it then politics comes into the equation. A futures market will help the SoV float. Gold needs to have an interest rate. If it always deflating, will someone take on a gold loan? How would it function as collateral?

As to those dormant mining laws in SA & Oz, they were probably a colonial tool of the Venetians/City of London. That gold was stolen from them. As to the Venetian/Roman Cult that could be Freegold's biggest impediment. The Superorganism has had a cancer.

Pat said...

This chart if accurate shows China FX reserves at 3.3T, not 1.1.

Bjorn said...


Regarding TA being irrelevant, i don´t think so. I think it´s more apt to see it as the thermometer in your nitrosynthesis example. Check out the last graph in this post:

I contend that if "gold" breaks out of the bull channel now, that means the temperature has reached 25 degrees, and it´s time to vacate the building. (Or for those of us who are standing safely on the other side of the street already, brace for the fireworks) If on the other hand "gold" should rally from here, that means that the temp is backing off again for the time being and the game continues a while longer.

Motley Fool said...


" If gold buys more and more, but new savers can't get it then politics comes into the equation. A futures market will help the SoV float. Gold needs to have an interest rate. If it always deflating, will someone take on a gold loan? How would it function as collateral?"

What? What? What? What? What?

My friend you are asking all the wrong questions. Perhaps someone else has the time to get into it. I do not. I simply echo the sentiment by matrixsentry...RTFB.

Good luck with your hike. Shout if you need a hand on the trail.


milamber said...


I guess you are losing me by saying Another's statements from 1997 are absurb when you use Dune as the bedrock for your argument. If you have some legitimate criticisms, please post them, but from my reading of your posts, you aren't proffering a sound rationale for why Freegold won't work.

Hopefully this helps you figure out where you are venturing off the trail.


Edwardo said...

What does this have to do with freegold? Possibly nothing, but I wouldn't be too sure.

Anonymous said...

To be at least a little fair to Grumps, Another did write that:

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

This could superficially be seen as support for Grumps' theory that gold will go into hiding after reaching a Freegold pricetag.

My take on this is that Another was talking about how gold tends to function before Freegold, in the 1997 or present-day market. When Freegold arrives, gold will skyrocket to a price where there is a balance between supply and demand. If no flow is forthcoming, then the price will simply continue to rise until it does. There will always be gold holders willing to part with some of their precious savings if the price is right, so they can afford to buy a new car, or a house, or new machinery for their company, of the island of Rhodes, or whatever their fancy and stack size.

Am I right?

milamber said...

@ tintin

"it is government policy to crash the property bubble, and the aim is to make housing affordable to the ordinary folks."

I guess that depends on how one defines the "ordinary folks". The Local Government Financing Vehicle (LGFV) model seems to do a decent job of expropriating land from "ordinary folks" and giving it to developers to develop. Kindof like how the US expropriated land from the Indians.

And if Beijing stops this, then they stop the engine of growth (infrastructure development) that accounts for close to 50% of their GDP.

Chart of the Day: China's spending spree and a 'messy correction'

From a review of the book I mentioned…

”The new book by Bloomberg journalists Henry Sanderson and Mike Forsythe argues that the explosion of China’s state investment last decade has been powered by the financial engineering of a single institution, China Development Bank (CDB).
The key connection in their account is a financial structure that may one day become as notorious as “collateralized debt obligations” – the local government financing vehicle (LGFV). Invented by the CDB in the late 1990s to finance infrastructure development, they have become cash cows with an insatiable hunger for land.
LGFVs play a critical role in allowing local governments to make huge investments in large projects. Some, like China's highway system, play a crucial role in China's development. Others, like a full Olympic stadium park in the sixth-largest city in Hunan, serve mainly to boost local GDP figures.
Raising money for these projects is a challenge for local governments, which have little control of tax revenue and are not allowed to issue bonds. They can, however, set up semi-commercial companies which are eligible for bank loans – the LGFVs – thus tapping into both the CDB's ability to issue bonds at sovereign rates and the enormous deposits of Chinese favors. After being given formal ownership of city assets, the LGFVs can offer collateral for enormous loans (mostly, however made up of non-revenue-producing assets like roads and public parks), and by constant land sales they can cover the interest – especially as new parks, highways, and Olympic stadiums raise land values. Completing the circle, these new assets are transferred to the LGFV, giving them collateral for further loans.”

China’s Superbank



Freegoldtube said...

Hello Everyone!

Not to take away from this post (which is phenomenal!!), I have nice surprise for you all. I have been working with some of the other "evil gold hoarders" here, making video versions of some of FOFOA's posts.

Here is the first one which I hope you all enjoy.

The Debtors and the Savers as read by our very own Lisa.

ein anderer said...

"I'm not here to challenge the Austrian forefathers, Menger, Mises and Hayek. In fact, my view is perfectly compatible with theirs. Where it differs is with some of the modern gold standard advocates and promoters. In my view they have improperly reconstructed the money concept that was deconstructed by their forebears." — FOFOA

(From The Return to Honest Money, a nice kind of the many FG intros.)

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