Five!

My Candid View – Part 10

"Did you have a "simple yet profound" A-HA moment you wanted to discuss?"

Ah, yes… my aha moment.

Well, FOFOA, it may be an errant aha moment, but here it is:

I had thought that the paper gold market was tethered to the physical market, and, while it is, it is not tethered to it the way that I imagined it was. In posts I had asserted that the paper market needed physical, but not vice versa, I was right, but for the wrong reason. I was thinking that paper gold required physical to meet the occasional allocation requests that came along…from anyone asking for physical. But allocation requests from small fry, (even not so small fry) that aren't met, shall we say, in a timely way, are not of the sort that can leave the paper gold market in ruins.

When you wrote the following to XXX...

"Freegold is a top-down phase transition, IMO. The minute there is not enough physical gold flowing at the top level in which it flows, the phase transition will be complete. It will be instantaneous, and when it happens there will be no going back."

somehow the genuine picture came into view as it was intended to. The paper gold market will collapse when the top level doesn't get allocation, because, when the top level can't get the goods, a revaluation is what will be required in order to get gold in size to flow. But, by definition, the ice dam will be so thick that a massive charge will be required to break that dam up to a degree that will achieve the desired result.

The top tier not getting physical will require something like a Def Con 1 response. The bombers will have to be let loose and the world as we knew it can never be the same again.

The process of getting physical in that size to flow will require something so forceful, so monumental, that the paper market must be, as a part of the proceedings, annihilated. Paper gold will be reduced to ashes on a launch pad that will be propelling physical gold beyond the gravitational pull that holds it in lock step with all the other actual commodities. The moment the top tier cannot source physical, the paper market is a dead man walking because nothing less than paper gold's sacrifice will get gold flowing to the necessary degree. Let me know if I am on target or not.

Hello Edwardo,

Yes, I think you've nailed it! But let me try to walk you through a little more detail (i.e., add a little more resolution and color to your view)…

Have you ever noticed that sometimes your local dealer has a lot of old coins, and then at other times he has mostly (or only) the latest year Eagles and Maples? I have personally dealt with maybe a half dozen different dealers in person, and I have noticed this on a couple different occasions. Remember when I kept mentioning a flow chart while we were Skyping? It looks like a family tree, kind of like this:



In this chart, the "Me" at the top would be the top level where gold trades in the largest volume amongst Giants, CBs, SWFs, and large wholesalers. So the "Me" would be the LBMA (in combination with the assistance of the BIS) and the Mom and Dad would be the largest wholesalers as well as the CBs (because Giants and SWFs generally don't "on sell" their gold purchases. At least that's not their reason for purchasing). The Grandparents would be the lower level wholesalers. The Great Grandparents would be the dealers that you and I know, including thousands of small dealer you will only find at coin shows, and then there would be another level of Great Great Grandparents that would be us "shrimp end users".

When your dealer is mostly stocked with old coins, the gold is flowing right here within our own level. Some other shrimp has sold his gold to a dealer and now you are buying it from a dealer. But if there are more buyers than sellers at the paper price, then the dealer has to go up this flow chart to find sufficient supply. Perhaps the shortage you observed is just localized, confined to your area, but in some other areas there are more sellers than buyers. In that case, the "Grandparent" wholesaler will supply old coins acquired from another locality. If not, he'll have to go higher up the flow chart to the CB's mint, and that's when you'll see mostly new coins at your dealer. The first time I saw this was in early Oct., 2008, but I've noticed it lately as well. One dealer I called who doesn't use wholesalers was completely out of stock (more buyers than sellers), and another one I saw at a coin show last month had only brand new 2013 coins. He had bought them from his wholesaler who received them from the mint.

So that's how the physical market works. It is fractal in that different levels operate basically the same only on different scales. And the physical market uses the reference price from the paper market which means that the various states of flow around the physical market are disconnected from the price-discovery market rather than being an integral part of it.

As I just stated, I did call one dealer last month who had no inventory at all at today's low paper market price. But obviously my personal experience didn't leave the paper gold market in ruins. Another example is that, just today, Jim Rickards tweeted that his dealer (presumably on the east coast) is out of gold. Nickz immediately tweeted back that his dealer (on the west coast, who incidentally is also a wholesaler) has plenty. Then he tweeted that the "supposed tightness" in the physical market is "gold bug fiction"… tweet.

This is the same thing we hear from XXXXXX and XXXX, that if they aren't seeing it in their little corner of the physical market, then it doesn't exist. It therefore must be fiction created by gold bugs to sell their gold bug hype. The problem with that view is that there's no cohesive and coherent narrative to explain their view of plenitude. And it also leaves them with only the consensus view to explain the unusual draining of GLD. All three of them have professed, in no uncertain terms, their rejection of the coat-check room view, but I digress.

The point was that Jim Rickards' tweet didn't leave the paper gold market in ruins either. And as I said, when the flow is tight at our shrimp level, we tend to see more current-year coins directly (or indirectly through large wholesalers) from the mints. The CBs have large reserves of gold, and they regularly send small amounts to the mint which is generally enough to keep the shrimp demand supplied whenever the shrimp level of the physical market fails to supply itself with old coins. And the countries that don't have large reserves, like Canada and Australia, have sufficient flow coming out of their mines which is essentially the same thing as having a large reserve.

So, to some extent, our shrimp-level demand shocks are isolated from the top level supply chain by the CBs and their mints. As long as the paper market is still functioning, any physical shortages we are able to identify at our level will likely be localized and mostly immaterial to the timing of the inevitable collapse. These localized shortages are symptomatic of the overall tightness and the failure of the paper market to keep physical gold flowing properly, but their relevance to the timing will only be known in hindsight. As I said, I saw it happening back in 2008, so their value is not predictive in nature.

But here's the main thing… A properly functioning physical gold market is one in which each level of this flow chart pyramid more or less supplies its own demand, and any differential between supply and demand, meaning the margin of that particular level that must reach up to the next level of volume in order to satisfy demand or unload excess supply, transmits a price signal that makes its way up the pyramid. The transmitted price signal is a premium difference between localities that allows higher-volume arbitrageurs to move the gold to where it needs to go while making a profit from doing so, just like what I wrote above where the "Grandparent" wholesaler will supply old coins acquired from another locality. This is how the gold physically flows from one locale to another, and the higher up the pyramid, the larger the volumes and distances.

That's the way it should work. The more gold that flows at the bottom levels, the less that needs to flow at the top. Yet the top receives—through the dealer network—the aggregated price signals from the various "bottom" locales and so the "top level price" where gold is moving in the largest volumes becomes the reference price used at the bottom. If demand for gold is high in your locality (i.e., your area is running a trade surplus excluding gold), there will be a higher premium locally than elsewhere, and so someone higher up will bring in some physical gold from elsewhere. Simple as that!

Today, however, this natural system isn't even functioning. No gold price signals are transmitted from the lower levels to where the price is discovered because the price is discovered in the paper gold market. The CBs could potentially supply the bottom level for quite a while. So why don't they? Well, it must be much more than just the bottom level that matters, because what we learned from ANOTHER was that they were very worried about this flow as far back as 1979, so they formulated a temporary plan.

They could have run down their reserves by minting small coins forever to keep the shrimp gold bugs satisfied, but apparently there were larger interests who couldn't possibly be satisfied with mint tubes and monster boxes. So they tapped the mines. Annual mining supply in 1985 was 1,500 tonnes. If ANOTHER knew what he was talking about and the CBs were hoping for a 5-fold increase, that means the (temporarily) sustainable flow, as viewed from the top where we cannot see, must be around 7,500 tonnes per year at current ratios (notice I didn't say "prices" because, even though the POG has changed since 1985, the ratios with commodities haven't). With very little basic math, that leaves a huge shortfall pressure on the physical gold market today, in the range of some 100,000+ tonnes of physical that was expected or at least hoped-for (promised to someone?) but never delivered.

Think about that for a minute. Hmmm… How did FOFOA come up with that number? Hmmm… Is it meant to be sensationalistic hyperbole or a very conservative back-of-the-envelope calculation? Hmmm…

It's conservative.

So just think about how long the CBs could prolong the status quo ratios with their mere 30,000 tonnes if that was their goal. It's not their goal, so you can stop thinking now. ;D

The point is that the "marginal drain" from all levels combined has reached the very top of the pyramid and is now draining its reserves. This is not the way the physical gold market should work. The CBs announced in 1999 that they would no longer support this constricted flow under the current market structure. Today, as the CBs are increasing their physical gold reserves in aggregate, they are once again telegraphing the message that there is no support for the status quo from the CBs, even as they continue to mint shrimp coins due to tradition.

So once those reserves at the top are gone, what happens?

"The top tier not getting physical will require something like a Def Con 1 response. The bombers will have to be let loose and the world as we knew it can never be the same again."

Yes. But do you see how the Def Con 1 response has a lot of moving parts and detailed resolution? We can't know exactly what has transpired at the top, except for what ANOTHER alluded to. But just imagine that 100,000+ tonnes of promised or at least expected gold (that's marginal-flow-gold, not global-stock-gold, so a simple doubling of the price would never suffice) never flowed. Once the top stops supplying the top as well as all lower levels, what would it take to get physical moving again for those that apparently mattered even as far back as 1979?

Remember, at that top level you have a variety of different players, but they generally fall into two types. I would categorize the two types as "savers" and "dealers". The "savers" include the CBs, SWFs, Giants and oil producers, and the "dealers" are the bullion banks and the largest wholesalers—the "arbs" that will move gold in volume from the lower premium zones to the higher premium zones for profit. These dealers don't care about the price. They don't own the gold, they only move it for profit. The top-level "savers", on the other hand, do own the gold and do care about the price. But most importantly, they have no reason to sell any gold, and every reason to buy more.

These are the CBs who can print, the sovereign wealth funds that are tasked with spending surplus currency and the Super-Producers who, until they stop producing, have no reason to sell any gold. And there's no level above this top level for the top level dealers (the bullion banks) to reach up to for more supply. When the top-level dealer supply runs out, the only place to go for more supply is to the demand side, to those who want more and have no reason to sell what they already have.

Can you see the dilemma? The price of gold will still be the paper price, but the flow will have completely stopped at the top level. It will be a de facto failure of the paper gold market and a new price separate from the paper gold market will be required to get it moving again. It will be like gridlock in a big city. The lights keep changing from green to red to green again but nothing moves. The system has failed, and only a revaluation can get it moving again. My gridlock is your ice dam.

At a high-enough price (in real terms, meaning a revaluation), those with gold *IN SIZE* who have no reason to sell any and simply want to buy more will only have to sell a small percentage of their "savings" to unlock the gridlock (melt the ice) and get it all moving again which will, in short order, allow them to resume "saving" once again. But gridlocks don't just unlock themselves, so someone will have to act first. And here's where it gets interesting.

What is the price that will unlock the gridlock at the top level, convincing those who have no reason to sell and every reason to buy more to sell? Who can act first, and what would that action necessarily entail? Here's what I think. The first to act would have to not only understand what is happening, but also be willing and able to sell or buy any amount of gold. This eliminates the Giants, SWFs and oil states because, even though they have plenty of gold, they don't have the printing press the way the CBs do. And that's why I think the CBs will be the first to act, probably under the auspices of the BIS.

In order to break the gridlock, they will have to announce a very high spread, a bid price and an ask price, either of which can be voluntarily accepted by the other top "savers", the Giants, SWFs and oil states, or "arbed" by the top "dealers". It would look something like this: "We will buy any amount of your gold that you are willing to sell at a price of $55,000 per ounce, and we will sell you any amount of gold that you would like to buy at a price of $56,000 per ounce." How's that for a Def Con 1 response?

Here's the key. Which do you think you need to lend credibility to a really high revaluation price, a buyer or a seller? The answer is you need a buyer, and not just any buyer, an unlimited buyer. The physical gridlock requires a physical seller to unlock it, but the revaluation that will make that happen requires an unlimited buyer. So the "first to act" can't just be a willing seller at a high, revalued price, it must also be a willing buyer at that same price and in any quantity offered.

Remember this post from ANOTHER (THOUGHTS!)? This Def Con 1 response would be quite similar to the pre-euro potential oil-bid-for-gold scenario in that post. So I will rewrite a small part of it using simple word replacement to show you how it would work:

"The first few moments after the BIS's proposal to buy gold at the very steep price of $55,000/oz, there would be roars of laughter. One fast thinker after another would think "Hey. I buy some gold from APMEX at $1,300/oz, sell it to the BIS for $55K. Net profit is $55,000-$1,300=$53,700. Easy money."

Everyone at once turns to the shrimp and paper gold markets to buy, markets which promptly shut down. Now no one is laughing. Because everyone realizes that gold is now worth $55,000 per ounce and no one is prepared for that revaluation. Whoever has gold now has 42.3 times the purchasing power in that stockpile. What appeared to be a stupid offer has now become a complete revaluation of all gold stockpiles worldwide vs all currencies worldwide."

The point is that the credible bid alone is enough to shut down the paper markets and stop all shrimp transactions at the old price in their tracks. The top level price is now the reference price used worldwide. The first transactions will be sales to the BIS, but before you know it, cash4gold arbitrageurs all over the world will be buying any and all physical gold offered for, say, $54,000/ounce just to arb that $1,000/oz. spread. Before you know it, the new physical-only market will have emerged worldwide.

So there's your Def Con 1 response to gridlock at the top level in which physical gold flows.

I think the draining we see today at the top via daily GLD inventory updates is just buying enough time to divvy up the few remaining scraps. At some point you're giving away the scraps by buying more time to divvy up the scraps, so where's the point of diminishing returns? Is it now? Is it next week? Who knows? We can only guess at such "hypothetical" choices.

If I'm right about the meaning of the GLD drain, then we're already in that zone where someone is asking, "Now?" "Now?" "Now?" with a loaded pistol aimed at the suffering animal's head. The physical market is no longer functioning properly, nor is it being supported. It is instead like a body in the last stages of starvation, eating its own extremities while hoping for some kind of a merciful reprieve. Each bite out of GLD is like a crazed animal eating its own tail, or arm, or leg. ;D

Sincerely,
FOFOA

Hi FOFOA,

Thank you for that very illuminating added color and detail. The last few paragraphs of your epistle really hammered home the "state of play". The system has become cannibalistic.

The main coin and bullion dealer that I used to go through here in town, a dealer who had been in business in town for many years, closed down a little over a year ago. I never received a very satisfactory answer as to why he closed when he closed other than burnout. Now his nephew operates a shop on a substantially smaller scale, and for many months, whenever I have contacted him to find out what the cheapest premium coins are in stock, the only response I have received is the thin gruel of MLs, GEs and the occasional Kruggerand and 1 ounce bars.

Now for a mini-digression of my own. My sister and her family were visiting us this weekend and I showed her the RT interview. In the last few months, I have finally persuaded her to buy some physical, and, now, after this weekend-where we discussed matters related to the interview- she is acquiring more. Unfortunately, My father is pretty much intractable which is a shame, but C'est la vie.

Edwardo

_____________________

And finally, here's one last bonus email for you. Unlike the others, this one is not from the last 30 days. I wrote this one back in February, a month and a half before the big gold price crash in April, while the PoG was still barely above $1,600:

Hello FOFOA - I started off this week-end feeling very gloomy. But then your Checkmate Post hit the streets - and boy did that cheer me up!! What a feast! Funnily enough I was going through some older posts again, trying to make sure I understood each and every one of your Catch-22 scenarios. I think I "get" them all now, and the Checkmate Post just put the icing on the cake.

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?

Cheers - XXXXXX

Hello XXXXXX,

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 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 has ended, 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?

If the 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 Jim Sinclair's $3,500 and oil follows it up north of $200/bbl, that means some real "cost push" price inflation as Jim likes to say.

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 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 otherwise be the natural response to a jump in prices. 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 peaked.

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 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 could 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 "back up trigger" is a rising gold price which leads to impending hyperinflation. Both ultimately cause the other to happen in short order, but which comes first remains a question.

Remarkably, the bull run has stalled out for a year and a half now, along with oil, silver and just about everything else. 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's 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. So what? They have those 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 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. 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. 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 16% 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.

Sincerely,
FOFOA

_____________________

We are, today, at the very conclusion of a fiat architecture that is straining to cope with our changing world… Trained from birth, as all Western thinkers are, to read everything economic in dollar system terms; we, too, are all straining to understand the seemingly unexplainable dynamics that surround us today.

Western governments, the public and several schools of economic thought are attempting to define and explain what extent these changes will have within our financial and economic world. Most are all striving to see this as the next plateau of dollar integration, carrying us onto the next level; looking always higher for what this next level will bring in social, financial and lifestyle enhancements…

What if the last decade's efforts to prolong dollar use, both internally and worldwide, have inflated its worth to such an extent that it's now vastly overvalued? Asking more; what if the architects of a competing currency system and the major players that helped guide its internal construction, all took a hand in promoting the dollar's extended life, its overvaluation and its use; so as to buy time for this great transition in our money world?

The actual debt machine that built much of America's lifestyle is now going into reverse as it destroys its own currency; one built upon a stable debt system with locked down gold prices…

To compete in the new architecture of a Euro System currency, unrestrained trading of gold will (and has) advance its dollar and Euro price significantly…

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.
-FOA

I (we) expect none of you to consider anything said here as credible. Everything is given as I understand it. If you came with a notion that I am someone who sees the future, grab the children and run far away. For these Thoughts, and my ongoing commentary, are meant to impact exactly as the "gentleman" said they would. People hear them, and whether believed or not, the words leave a mark. A mental mark on the trail, if you will. And later, after the world turns, our little "stacks of rocks" will be easier to understand next time you are passing this way. In fact, your ability to find your own way will forever be enhanced for having seen this path in a different light.
-FOA

_____________________

Moneyness

FOA: My friend, our message and our position is that we are in one of the most exciting times of all the history of gold! We have seen that during times with the most radical transitions, the majority are usually defending the wrong asset. This unfortunate situation need not impact everyone today. If better judgment is the result of a full understanding, then some who read here will be exposed to tools that could help them avoid the mistakes of our Western hard money majority.

For Western Gold Bugs today, their culture, their system and their recent knowledge is all ensconced within the last 30 years of paper wealth. Yet they are using a hard money defense, written by masters preceding our modern era. They struggle to use that logic out of context, as it is thought to apply to this gold market today. These two precedents are leading them to reflect their gold values in some form other than physical ownership in possession. This mistaken detour from gold's true purpose will once again prove, by reality, the value of owning real gold.

Standing aside this group is the Physical Gold Advocate. For them, for us, these times will contain the greatest gain in real wealth ever seen. For those who are falling behind, gold is still within your grasp.

TrailGuide

From Moneyness, here's How It Ends:



What is Freegold?

My Candid View – Part 9

"Gold is the only money the world has ever known"
Sounds like a simple thought, but it isn't.

To understand the following you must rethink your basic
knowledge of money and investments. Get your aspirin ready.
–ANOTHER

What will change is how we view money and wealth

Everything else in Freegold flows from that!

HI FOFOA,

Your e-mail to XXXXXX on GOFAUX has, so far, left me with just one question, is the warehouseman draining his inventory (of gold) simply a matter of price? If not, what allows the warehouseman the ability to "drain"/reduce his inventory?

On a very different note,

You wrote the following in an e-mail to me:

"but if you could frame this detail (the monetary history of paper gold which extends from the 1922 Genoa Conference up to the present day) in a way that dovetails with Rickards' recounting of a few events…"

I think what would be meaningful, and what I am guessing you may have in mind, is discussing how the freegold narrative views paper gold as an approximately 91 year old phenomenon featuring a few different iterations that were designed to prolong whatever system was in place at the time. Freegold is a solution to approximately a century of paper gold machinations that were either erected to save whatever gold standard existed at the time or to cope with the problem that was incurred when the gold standard was terminated. The gold problem (and the monetary system's state of chronic crisis) is, in large part, down to nothing less than the inability for prior generations to employ gold most effectively, i.e. floating against all currencies in the absence of paper proxies.

Cheers,
Edwardo

Hello Edwardo,

"is the warehouseman draining his inventory (of gold) simply a matter of price?"

No, not at all. The warehouseman doesn't care about the price, because all he is essentially doing is arbitraging two different prices, the spot price and the future price. When that spread is wide, he's adding inventory. When it is tight (or negative), he's draining inventory. But don't get hung up on causation, because maybe the spread (contango) is tight because he is draining inventory, or because of that which is actually causing him to drain inventory. So then why is he draining inventory? Perhaps because the supply flow (at the top level, not in our field of view) is so tight that he has no other choice.

If you are interested in this perspective, Fekete's seminal paper on it was in 2004 and it is here:

http://www.professorfekete.com/articles/AEFWhatGoldAndSilverAnalystsOverlook.pdf

The paper is 16 pages long, but I only recommend the first 9 pages, up to the sub-heading "Understanding the Silver Market". Even though it is peppered with bits of HMS nonsense, it is a great description of the basis, contango and backwardation which I reread to refresh myself whenever discussing this subject. If you can understand it in the grain elevator terms like he explains, then I think you will have a deeper understanding than even someone who has mastered more complicated explanations.

Regarding this: "Freegold is a solution to approximately a century of paper gold machinations that were either erected to save whatever gold standard existed at the time or to cope with the problem that was incurred when the gold standards was terminated."

I think (and so do you) that Freegold is the solution to thousands of years of problems stemming from the use of the same medium in two contradictory roles. So I would say that the last 91 years since Genoa is more like the period of evolution of the thoughts underlying this elegant solution. Jacques Rueff's 1932 speech, which was focused on comparing the Genoa monetary conference 10 years earlier with another monetary conference that also occurred in Genoa back in 1445, is the oldest text I have read that hints at the beginning of this evolution of Freegold thought. In fact, I would probably call Rueff the father of Freegold thought. Here's how that speech in 1932 began:

"The story I am going to relate covers a long period. It is the life story of the gold standard, now afflicted with so grave an ailment that only time will tell if the victim will succumb or be left, at the very least, in a state of virtual paralysis."

This is the same person who, 40 years later in 1972, wrote:

"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."

So that's how I would portray the period consisting of the last 91 years; as the period in which Freegold as the solution emerged through trial and error, some planning, some theoretical thought, and the practical efforts of self-interested players at the highest level.

Sincerely,
FOFOA

Regarding the drain from the warehouse, I have this silly remnant of an idea in my mind that amounts to "drain=removal" as in the warehouse is literally being emptied of its physical, which is not the case. It could be that pallets of gold go out, but it is by no means de rigueur.

Regarding freegold as an evolution that solves thousands of years of years of problems stemming from fusing the MOE with the SOV, well, that is going to make a very powerful talking point, and one I look forward to introducing.

Think about the warehouse as having two sections, or two sides. On one side they simply offer the service of storing your gold for a fee. That's where all of the allocated gold sits. On the other side they store gold that they bought, mostly from the mines, while collecting the fee from the speculators playing in the futures market. They buy up any slack in the flow and sell futures at a higher price keeping the difference as the storage fee, rather than collecting a fee directly from the owner of the gold.

That way, you can think about the "draining" of the warehouse as all of the gold either a.) leaving the warehouse or b.) being slid over to the other side where it's all allocated to specific customers.

Drained gold going to allocated vaults I understand, but what about gold that is leaving the warehouse that is not going to an allocated account?

Where might that gold be going? To folks who want to store it somewhere besides the warehouse vaults? Sorry to keep banging on about this but I wants to know.

Some might be going East or Mid East, but I doubt it's as much as people think. At least probably not as much LBMA LGD bars. Remember, there's still some flow of new gold coming in, so that would go to supply "outside of the LBMA demand" before LBMA bars would be shipped. Some might be going to Switzerland to be melted and recast into kilo bars which are very popular in the East. Bron and Warren speculated that this is why it seemed like more "four nine" bars were being redeemed from GLD than the lower purity bars. Kilo bars are all "four nines" whereas London Good Delivery bar specs do not require that much purity. So if they were going to melt them to make kilo bars, the lower purity LGD bars would require additional refining i.e., additional cost.

But I'm not so sure about that explanation. Today more gold is being refined to .9999 anyway, so the "newer bars on top" might tend to be higher purity and, like I said, the "new" flow should be going to fill that "outside demand" before they move a single LGD bar. Remember also that XXXXX said HSBC was requesting gold shot from the refinery's scrap recycling. That would likely go toward the "outside the LBMA flow".

I think that there's probably enough "inside LBMA demand" to prevent too many LGD bars from exiting the system. So I think that a lot of the movement we see is probably just location swaps within the LBMA system. Think about the tight flow being asymmetrical amongst both individual bullion banks and locations. Gold coming in doesn't necessarily match the demand for gold going out in terms of which BBs are taking in versus which BBs are putting out, and the locations where the gold is being demanded.

So, netting out the entire LBMA system in aggregate, I tend to think that there's probably not as much "physically leaving the warehouse" as most people think. Basically just the entire new inflow is "leaving" while the bars already inside are being shuffled around to match allocation requests. I'm sure there are some LGD bars leaving the LBMA and heading east or being melted down, but probably not too many IMO.

-------

Are you ready for your interview? Do you have your hair, make-up, wardrobe and set design sorted?

My shirt has been picked, my hair will be in reasonable shape, so to speak. My background will likely be a bookshelf, though it may be a window (a symbolic reference that some on the blog might appreciate) or even just the wall behind my chair.

I have some questions: One is about gold for trade settlement come freegold. Will gold move a great deal or will the flow not necessarily require it to actually leave vaults. I feel silly asking, but I'm just not sure.

Also Another and FOA's predictions and analysis that have come to pass/been borne out. Care to offer a list?

"I have some questions: One is about gold for trade settlement come freegold. Will gold move a great deal or will the flow not necessarily require it to actually leave vaults. I feel silly asking, but I'm just not sure."

I think it will be a bit of both. The flow will be automatic, not unlike how the US trade deficit has automatically equaled demand for new issue Treasuries. Of course today the supply of Treasuries has overtaken demand, but that's another subject. The supply of gold will not overtake demand in the way it has with Treasuries, it will simply meet it. So gold will simply flow opposite the net flow of goods and services.

It will do this in a much more distributed way as compared to the more centralized way Treasuries flow. So distributed, in fact, that we will likely not even track it other than reporting its net movements on the BOP, which will magically balance once gold is figured in.

Those who trade inside the LBMA will likely be mostly private Giants, and in some cases London will be, by far, the safest place for them to store their gold. I'm not really sure how those capital flows (changes in ownership) will be reported on the BOP, and I don't really think it matters. It'll probably show up as some form of foreign investment or something.

But basically trade will balance without the need for massive and ever-increasing debt to keep it balanced. Gold will flow across borders in sizes ranging from grams in envelopes to pallets on planes. Geographical demand will come from zones shipping out more goods and services than they are shipping in, so the balance will be filled with gold. And if some of that demand is from Giants who want to buy gold that's already in London or Zurich and keep it there, that'll probably be recorded the same as if they bought some other immovable asset, like a building, although gold may get its own category in that regard.

"Another and FOA's predictions and analysis that have come to pass/been borne out. Care to offer a list?"

Most people would say that their predictions have not (yet) been borne out. And of course I focus more on the conceptual truth in what they exposed. But here's one courtesy of Michael H:

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

Michael H: "Who says that events since 2001 haven't played out as A/FOA expected?"

Tuesday, January 1, 2002 - Launch of euro notes and coins
Friday, February 8, 2002 - GOLD ABOVE $300
Monday, December 1, 2003 - GOLD ABOVE $400
Thursday December 1, 2005 - GOLD ABOVE $500
Monday, April 17, 2006 - GOLD ABOVE $600
Tuesday, May 9, 2006 - GOLD ABOVE $700
Friday, November 2, 2007 - GOLD ABOVE $800
Monday, January 14, 2008 - GOLD ABOVE $900
Monday, March 17, 2008 - GOLD ABOVE $1000
Monday, November 9, 2009 - GOLD ABOVE $1100
Tuesday, December 1, 2009 - GOLD ABOVE $1200
Tuesday, September 28, 2010 - GOLD ABOVE $1300
Wednesday, November 9, 2010 - GOLD ABOVE $1400
Wednesday, April 20, 2011 - GOLD ABOVE $1500
Monday, July 18, 2011 - GOLD ABOVE $1600

Another one was this comment:

Date: Wed Nov 12 1997 20:41
ANOTHER (THOUGHTS!) ID#60253:

Date: Wed Nov 12 1997 14:26
Markus ( BIS Decisions ) ID#283277:
ANOTHER: Could you please enlighten us as to the Bank of International Settlement decision you allude to in your recent post?

Markus,
A BIS meeting was held and from those doors the world did change. The Bundesbank has now made clear to all what will now be policy for CBs. A crisis is at hand! All physical gold sales will stop. All gold lending will wind down.

Less than two years later we had the WAG. And more recently, we have the release of the Bundesbank's gold actions over the years, both of which support the idea that ANOTHER must have been an insider of some kind.

I'd have to say that my fascination with them has very little to do with their predictions that have already been borne out. But it has everything to do with the perspective they shared, a perspective which I have endlessly explored from countless different angles all leading to the same inescapable conclusion that the Freegold revaluation they described is inevitable. Of course their predictive powers will amaze one and all once it happens, but until then it's all about the lens they gave us and how we can use it to view events as they unfold in a different light. Of course this is one of my favorite FOA quotes, one which you might want to print out:

FOA: "I (we) expect none of you to consider anything said here as credible. Everything is given as I understand it. If you came with a notion that I am someone who sees the future, grab the children and run far away. For these Thoughts, and my ongoing commentary, are meant to impact exactly as the "gentleman" said they would. People hear them, and whether believed or not, the words leave a mark. A mental mark on the trail, if you will. And later, after the world turns, our little "stacks of rocks" will be easier to understand next time you are passing this way. In fact, your ability to find your own way will forever be enhanced for having seen this path in a different light."

It occurs to me that there are two concrete predictions that have played out, one of which is QE and the diversification into Euro denominated debt.

-------

Hi FOFOA,

The interview is concluded. I'll be receiving a link in due course. The Q&A touched on a variety of issues related to freegold but it was not, by any means, an in depth interview. You can decide for yourself how I did.

See the e-mail below regarding what we covered. Bob wants to do another interview, perhaps two more. The more one learns about the subject the more questions arise. I didn't really get anything like as in depth into, for example, the paper gold market as I would have liked. And, though I tried to get in some important soundbites, I didn't always manage to. For example, the last question (I think it was the last question) that I was asked was "why should people buy gold?" I said they should buy gold because it is the asset that is going to recapitalize the system, which as an answer leaves out the critical information that as part of the recapping process, gold will be reevaluated-which he never asked me about. I didn't get to see him, but he saw me. I was responding, in fact, to a disembodied voice. I've had experience as an actor dealing with acting against a camera, so it was not as awkward as it might have been. He also said something about sending the interview to unspecified persons for their response.

I have to tell you, your email to XXX, somehow, the central idea in that response penetrated in a way that it had not before. I still have some questions, but I feel that I understand something that very few, except for a select number on the blog, fully comprehend. Perhaps I am kidding myself, but basically the idea is simple yet profound. I'd like to discuss it with you further at some point.

_____________________

Checkmate 2 - Slow History

"Building a coherent and cohesive narrative around events of the past is a natural part of our process of understanding. And every good story has a beginning, middle and an end. But what if the end of a particular narrative is still in the future?.."

From Checkmate 2 - Slow History, here's Levon (the Gold Trail):

"Over time, one could never compare the returns of investing in stocks and bonds to owning gold. This is simply because when gold is entangled in currency schemes, its fiat value is falsely presented while the currency system ages. Only the commodity use of gold is reflected, not its much higher wealth "reserve asset" function.

However, this present era has become one of those unique periods in paper money history when gold will take a great leap in value during the relative short term."



Glimpsing the Hereafter 2

"Think of them as relative constants when compared to the wild-ass variable of savers, the elephant in the room, or more like the bull in the china shop, as long as they don't have a good focal point to herd them out of the busy economic highway. The best thing the savers can do for the economy is to get out of the price signal transmission business and settle their accounts. Simple as that. We don't need anyone to "help" the Superorganism in identifying and enabling credibility. That's a natural process. The savers, which most of us are, should simply get out of the way, settle their accounts and let the organism work. It is only the lack of such settlement that messes it all up. And that's the main point."

From Glimpsing the Hereafter 2 and Superorganism Open Forum, here's Let It Be:

My Candid View – Part 8

Whilst discussing the demise of the Canadian penny in front of a Congressional panel, Fed Chairman Ben Bernanke demonstrates that "transactional currency is simply a notional, purely symbolic token medium of exchange, much more replaceable, resource-efficient and environmentally friendly than mining stupid metals for stupid coins."
(NotReal News)

Hi FOFOA,

I just got off the phone with Bob. He's quite keen to discuss the dynamics of hyper-inflation as it relates to freegold, and wants to know, for example, what will happen to commercial banks? Will they survive? Will they be nationalized, etc. etc.? He's very interested in as much detail as possible about the nature of the transition. I know you and I have talked about the way that the paper gold market is likely to be concluded in the manner of a corporate board meeting where things are essentially wound down in a closed meeting that happens quite quickly.

Bob has a grasp, up to a point, about the HI scenario, but he doesn't seem to have factored in the role of gold in recapping, for example, central banks. He seems to be under the impression that your view was simply that HI would just wipe out the debt and that would be that. Maybe I misunderstood him, but that was my takeaway.

I pointed out that since the balance sheet of, for example, The Fed is full of debt which will be rendered worthless, they will need something to compensate for that loss of value. Obviously The Fed doesn't have actual gold. They have paper certificates from The Treasury who possess physical gold, despite the vaults underneath The New York Fed, but if they are not to be shut down, that gold will not to be mobilized on their behalf. Bob was aware that The Fed has no gold.

He's also interested in the history of the petrodollar which seems reasonable.

And he wanted to know how average citizens would acquire gold after the transition. I said they would acquire it pretty much the same way they do now. Government monetary agencies will not be in the business of dispensing gold to those who want to exchange their currency for physical.

We'll probably speak once more on Friday, and it looks like the interview will be taped next week. I think it will be about a fifteen minute interview that will be edited down to eight to ten minutes

Cheers,
Edwardo

Hello Edwardo,

I'll just knock out a few answers quickly...

Commercial banks should be mostly fine through hyperinflation. They are essentially flat the dollar. That means that it doesn't matter where the value of the dollar goes, their liabilities move right along with their assets. Banks may or may not close their doors during the worst of it. There won't be much use for credit because interest rates would be prohibitive, so there won't be much for banks to do during the crisis.

There's no reason for banks to be nationalized. They will automatically become more like utilities because they will lose the pool of savers' saving which they are used to churning and skimming. Give up on the notion that justice means banks, as businesses, will be destroyed or nationalized. Banks are a necessary part of the system and they are basically immune to hyperinflation because their balance sheets only require nominal performance from the currency.

It is impossible to know exactly how the transition will look. Things could unfold in a variety of orders that all lead to the same set of inevitable events. The gold market will fail to deliver at the highest level causing physical gold to go into hiding until a new order emerges that gets it flowing once again. That new order will be a different kind of market consisting of only allocated or physical sales. There will be no unallocated, swaps, options, futures, forwards or leases because the price will be set at the highest level where the largest volume physical transactions take place.

The commodity-like structural framework necessary for paper proxies will no longer exist. The price gold is trading at the highest level will be many times the actual cost of mining, therefore mining will be tightly controlled and the flow of traded gold will, for the most part, not be new gold like it is today. Gold in the ground will essentially become a supplemental extension of official above-ground monetary reserves.

Meanwhile, the dollar's overvaluation will come to an end. Understand that the dollar is overvalued today because people outside of the US accumulate dollars. This is what causes the overvaluation. They don't even have to sell the dollars they already have, they simply have to stop accumulating more dollars and the overvaluation will end in a heartbeat.

Having oil priced in dollars obviously helps maintain the overvaluation of the dollar, but it does not in and of itself cause it. Oil states may take dollars for their oil, but then they spend those dollars. The oil states do accumulate some dollar reserves, but to the extent that they accumulate dollars rather than spending them is really the only extent to which the oil states directly support the dollar's overvaluation. It also gives other states more reason to accumulate dollars because they can be spent on oil. The point being, it is the accumulation or hoarding of dollars that causes the overvaluation.

So when that ends, a devaluation of the dollar will ensue. Where we will see it first I can only guess (i.e., on the USDX, in currency pairs, at the grocery store, in the bond market, etc...). Where we will ultimately see it in very short order will be in the cost of US foreign imports, especially those most needed by the USG. This will cause an internal budget crisis in certain agencies of the USG and the National Defense Resources Preparedness Executive Order will quickly kick in allowing each department of the government to independently issue guarantees and payments in any amount necessary to keep the shit flowing in, with the Fed assisting each agency in serving as its fiscal agent (yes, that's in the EO).

Hyperinflation begins with a devaluation and then the feedback loop that keeps it going occurs at the market bottleneck where printer himself spends without limit. No one other than the printer can afford the higher prices because, for everyone else, there is an immediate "shortage of money". Hyperinflations are ironically characterized by a shortage of money for everyone but the printer. This is why, for everyone but the printer, transactions usually turn to barter or credit indexed to a stable foreign currency during the worst of it.

This event will destroy the dollar. And by that I don't mean that the dollar will disappear, but simply that all dollar-denominated debt will be destroyed, and remember that one person's debt is another person's savings or reserves. So dollar-denominated savings and reserves will be wiped out all over the world as the USG tries to maintain its own status quo in real terms.

Now imagine if this were simply a hyperinflationary event with no Freegold revaluation. Imagine that Rickards and all the others are correct in that gold will simply rise along with everything else that is real. Let's look at a simple CB balance sheet with 85% of its reserves in dollars and 15% in gold.

Right now this CB has:

$85B in dollars and $15B in gold at today's price. That equates to about 360 tonnes of gold.

So let's look at the real purchasing power held in reserve by this CB. Let's use barrels of oil as a proxy for "real purchasing power" since everyone needs oil.

$85B in dollars = 810 million barrels of oil
360 tonnes of gold = 142 million barrels of oil
Total PP = 952M bbls

The GOR (gold:oil ratio) is about 12.3 right now. If it's simply a hyperinflationary event without the Freegold revaluation, then that GOR will remain roughly the same, just as it has for the last 70 years.

So as the dollar hyperinflates into oblivion, that portion of the purchasing power will go poof. Meanwhile, no matter how high the price of gold goes in dollars, if everything else (oil, silver, milk, eggs) is rising at a similar rate, the real purchasing power of the gold reserves will remain the same. Here's what it would look like:

$85B in dollars = Zero barrels of oil
360 tonnes of gold = 142 million barrels of oil
Total PP = 142M bbls

The monetary reserves will have lost 85% in real purchasing power. Think about that in terms of the entire planet's-worth of physical reserves. When the lights go out on the dollar matrix, the reality underneath will be revealed. And unless something else is revalued in isolation from everything else, then the aggregate amount of reserves will simply decrease by the amount of dollars in existence today. Does that make any sense?

No, of course it doesn't. There are always winners and losers. It's not that the dollar will lose and "everything else" wins. Something else will win, and I think it's not only obvious what that thing is, but also, thanks to the Freegold lens, it is also obvious how and why it will occur.

The Fed is really just a proxy for the USG. The USG can take the monetary power away from the Fed on a moment's notice. The UST can issue its own money. Therefore the USG has control over the Fed in extremis. If we are to believe FOA (which I do), the UST will ultimately deploy at least some of its gold to slow the dollar's decline. In my view, it is pretty obvious how this will come into play. I think that during hyperinflation, as the real inflow of free stuff is contracting regardless of how many zeros they add, the USG will make some payments in gold for the most vital (in its own opinion) imports. But these payments won't necessarily be in the open. They will be behind closed doors while in the open the payments will be made in dollars in order to give the impression to others that these vital imports are not rising in price as fast as everything else.

I'm not sure exactly what you mean by "the history of the petrodollar." But the connection between dollars and oil traces back to 1932 when a US oil company first struck oil in Bahrain leading to a relationship between Saudi Arabia and the US that exists to this day.

http://en.wikipedia.org/wiki/Saudi_Aramco#History

Sincerely,
FOFOA

What minimum price do you imagine is required to put the paper gold market out of business?

What kind of question is that? ;D It's the "gap up" and not the specific price that will end the paper gold market.

"What kind of a question is that?"

A fair one I'd say since your expressed view was that gold had to go above some of the more modest targets that have been tossed out, which for the sake of discussion might be $5,000 an ounce, to put the paper gold market out of commission. It's not a view that's ever made much sense to me.

I think the specific revaluation price and the inability of the paper markets to cope with any sudden revaluation are separate issues. Ignoring for the moment the reasons why $55K makes more sense than a $5K revaluation (and the reasons have nothing to do with breaking the paper market), I think that an overnight reval to $5K would certainly kill the paper markets.

First of all, think about how much of the paper market must be hedged in correlated assets. All those "correlated" hedges fail upon a revaluation (price change in isolation). So the shorts are no longer flat, they are exposed.

Next, think about COMEX just as an easy example. Sometimes during the night the POG changes wildly. So from a floor trader's perspective this is like an instantaneous gap up or down. Now think about the fact that COMEX is really a cash-settled market. So imagine a COMEX short holding a $1M position. Upon revaluation he would suddenly owe $3,875,000 rather than $1M. That's across the board. So even in paper settlement terms, a reval to $5K would break the banks and no one would get paid, even in currency terms.

Imagine the massive de facto short position held by the bullion banks that is only offset with derivatives in correlated assets. Upon revaluation, even to $5K, those theoretical short positions become real short positions, and the largest banks in the world are suddenly facing a brand new liability, even if it is only dollar-denominated.

Say the BBs conservatively have a $100B theoretical short position in terms of their outstanding gold-ounce-denominated liabilities that is offset by $100B in derivatives. As gold revalues 3.875X (which would be to $5K from today's price), they would now have $387.5B in liabilities offset by only $100B in assets (excluding reserves), leaving them owing $287B (in dollars) overnight. That's like sudden-death bankruptcy. So basically any significant revaluation would crush the paper gold markets. I think the reason for higher numbers lies elsewhere.

Bear in mind that a reval to $5K is quite different from a rally, a bull run, or an inflationary spike to $5K which would take all of the correlated commodities and currencies along for the nominal ride as well. Hell, even an overnight reval to $2K from here would probably kill the shorts and leave the paper longs with no counterparty to make good on their sudden "windfall".

But that's not going to happen, because when it happens, the reval will go high enough to get gold flowing in any size that anyone, including the Giants and oil states, want and can afford. And I assume that those at the top whom Another knew have a price in mind that will kick start this monster once it seizes up.

I wonder what that price is, but, equally, I have in mind that the revaluation has to compensate for all the lost wealth that has accrued in debt instruments over decades and will be destroyed as a result of what we see transpiring. Being made whole is going to necessitate a very high price, and, as we know, gold can go to pretty much any price theoretically because its reval is walled off from economic activity.

"That's like sudden-death bankruptcy."

This brings us back to the state of commercial banks post reval. Am I missing something here or are we not talking about some real decimation in some of the biggest names in banking?

My point was to show how the paper market is destroyed. The paper market is destroyed because if it's not, then the banks are destroyed. The banks won't be destroyed because they'll settle those claims at the paper price, which could be quite low at settlement time. This process argues for at least a short period of "gold in hiding" rather than the immediate emergence of the new physical-only market which would make it more difficult for the banks to get out of that short position. It also argues for a transition following a collapse in the POG rather than a rally or a spike. The higher the POG at the time of reval, the less the reval in real terms or else the higher it must go, plus the shorts will benefit less if it happens during a spike in the POG.

They have an easy and well-established way of dealing with this. They simply halt trading and declare forced liquidation of all positions at the last price. If you refuse to take the cash during the forced liquidation, good luck trying to get your physical in court later. Hope you read all the small print they ever put out. ;D

Okay. It's the old, cashed out at the last quoted price before the screens go black condition. I wonder what the minimum amount of time is required to achieve what you describe. Not very long I'd say. And I am wondering how long HI will go on for given that the effects of HI in America will be felt planet wide. I just don't see it going on for very long. If Volcker got an earful of "do something" back in '79 I can't imagine that the feedback from the four corners of the globe isn't going to be deafening, not that he or she will need to hear it in order to pull the plug on the dollar.

Volcker got an earful because they didn't want the collapse to continue. Today they are more prepared, so I don't think that Bernanke or whomever will get an earful from Europe. If they do, Congress and the President will give them the finger and keep printing. It will go on as long as the USG refuses to give in to the inevitable (unavoidable) austerity diet that's heading its way.

During hyperinflation, the trade deficit collapses to zero in real terms even as it reaches near-infinity in nominal terms. It is the collapse in real terms that they will fight. I'm sure there will be some tipping point at which the diminishing returns of printing become indisputably obvious. But even then, the USG is a big, hungry monster. I can imagine it going past the point of reason and, besides, there will be hidden benefits that will become equally obvious, like the cleansing of all of the debt. Perhaps reason enough to keep printing a little while longer even after there's no other return in real terms.

So, in summary, my mid-range guess is 6 months, but it could be as short as 3 months or as long as a year IMO. Then again, I suppose it could roll out more slowly than I expect, more like Zimbabwe, where the USG finds that printing the shit out of the dollar brings real returns longer than I expect. In that case, maybe two years, but I think that's less likely.

"I wonder what the minimum amount of time is required to achieve what you describe. Not very long I'd say."

Not long at all. Technically it happens the moment they declare it. And then the accounts can get credited within 48 hours. It's not unlike issuing a brand new currency and giving everyone 48 hours to get to the bank and exchange their old currency for the new one. The old currency is already worthless as soon as they announce it except for the limited window of time they allow you to exchange it for the new one. If you hang on to that old currency, it'll just die on the vine once the window closes.

I don't expect Europe to be the leader in making unpleasant noise because they have their system in place to mitigate the ill effects of dollar HI. I agree that extinguishing the debt or at least vastly reducing it will amount to a goal of sorts, but the political class is going to be hearing from the locals the way Volcker was hearing it from the Europeans. How long will they hold out in the face of the kind of ugly displays they are apt to experience. If there's ever a betting pool for this I'll take the under on a year.

Under on a year is a good bet. 3 months may even be more likely than 6 months. I don't know. The complaints will come from the disruptions to the just-in-time supply lines, and people may turn to their government for help, demanding even more printing (free stuff please). Perhaps the savers and conservatives are screaming to stop the insanity while the majority points to the conservatives as heartless rich and demands that the USG print the shit out of the currency to get as much free stuff as possible. It's hard to predict who will be rational and who won't. Well, I guess it's not that hard. ;D

Regarding HI, we know The Euro is set up to weather the storm; do you have any thoughts on some of the other more important nation states and how they will be affected?

As I said, HI begins with a devaluation which translates into a jump in prices, especially foreign imports. What follows is the government's reaction to the devaluation and the jump in prices.

I think that, as Another explained, all currencies are more or less tied together today, not just because they hold dollars as foreign exchange reserves backing the currency, but also because they trade more or less freely and float against each other from minute to minute. So when the dollar devalues, it may initially be against all other currencies, but I think that they too will follow in (extremely?) short order. In other words, all currencies should see a general devaluation around the same time. Of course they can't all devalue against each other at the same time, so that mutual devaluation should play out as a jump in commodity prices, a devaluation against the physical plane.

So as you see, even though other currencies may quickly follow the dollar down a short waterfall, that won't relieve the ball-of-twine budget crisis the USG will be facing with a jump in prices.

The point being that in each currency's case, where it goes from there depends on the local government's response to the sudden crisis. Some will just devalue like Iceland, others will go hyper as the government panics and prints. What sets the Eurosystem apart is that no single government has control over the ECB, so, even if they panic, they can't print. So look at currencies where the government can say "print" and then try to judge if the government will. That should give you a good idea of which ones have a higher probability of going hyper along with the USD. The usual suspects like Japan and the UK are kind of obvious. Less obvious are commodity-based dollar system supporters like Australia, NZ and Canada, the ones that FOREX Trader calls the "comdolls" (ie. commodity dolls). I don't know about Russia and China. They should be interesting to watch. They are both big countries with lots of local resources and pseudo-communist governments, so their governments' survival impulse may be more heavy-handed locally than joining the international print fest.

Today I did a Skype check with Bob's producer. It looks like early next week for the interview.

Was she hot?

Listen to you. She said she couldn't display a vid from her end, which sounded like utter rubbish, but there you go.

_____________________

Inflation or Hyperinflation?

"…The dollar is so vastly overvalued today because the rest of the world has kept it on life support for 30 years past its expiration date. It is the stability of dollar prices at that small marginal flow that sustains the illusion of wealth in the entire, massive monetary plane. And yet the modern "hard money thinkers" think that we can somehow retain this level in real terms by simply devaluing the dollar against gold and then managing that new "gold value". I wish all the modern hard money thinkers – you know who they are so I don't need to mention any names – would just take a few minutes and listen to FOA and maybe, just maybe, see how wrong they are…"



FOA on Currency Styling, Currency Management, Dollar Hyperinflation and End Game Scenarios

From FOA on Currency Styling, Currency Management, Dollar Hyperinflation and End Game Scenarios, here's 'Boulevard of Broken Dreams' by Green Day. The reason I chose this song was partly for the chorus line "I walk alone" as it relates to FOA's parting words. But I also liked it because I could relate to the lyrics myself as the Freegold concepts explored here are not very popular in the precious metals community for various reasons:

"I walk a lonely road
The only one that I have ever known
Don't know where it goes
But it's home to me and I walk alone…"

My Candid View – Part 7

Actual GLD Vault

Hi FOFOA,

Another question that I think has a decent chance of getting asked is something related to the repatriation of German gold.

We are, of course, standing in a different place from the tidal wave whose narrative is "They don't have the gold and so they crashed da Market" to get their hands on cheap physical to replace that which they didn't have.

My line in response to the conspiracy perspective would be that while a seven year delay for a return of one's gold does seem rather strange, there was no diplomatic furor from The Germans as a result. And if it was the intent of "the manipulators to sidestep some sort of catastrophic market event, driving the price of gold down below the cost of production amounted to swimming through croc infested waters in order to get out of the heat. Could "they" be that stupid? Possibly, but to paraphrase Victor, I don't like any theory that rests on such a premise.

Cheers,
Edwardo

Hello Edwardo,

What a mess these kinds of stories are to deal with. First of all, the price decline has nothing whatsoever to do with German gold repatriation, obviously.

As you know, I don't think anyone is actively trying to suppress paper gold. Short term price manipulation can happen in anything, and in any direction, but that's done for short term profits and not for ideology. And as you point out, the current price decline is probably not producing any extra physical because it is stifling the mines and probably increasing the flow to the East in weight terms. The suppression of gold was systemic and due to the expansion of the supply of paper gold backed by central bank guarantees from ~1983-1999. The suppression was for the purpose of buying time, and not for some CB anti-gold ideology. (For more on this, please see 'The View of the Rocket Man' video at the bottom of Part 3.)

In terms of "active suppression," I do think the BBs have control of how quickly paper gold rises given overwhelming demand. In other words, they have no problem handling high demand for paper gold. They can simply create more of it. They can expand the supply. So the rate of rise can be easily managed as long as there's strong market demand for their product, paper gold. It gets quite a bit more difficult to control the price, however, when there is low market demand for their product, especially with so much of it already out there. Kind of like dollars. ;D

I think this may be partly why "the top" in 2011 looked the way it did. The LBMA survey was coincidentally released right before the top! The survey was released in August of 2011 and gold topped at $1,896 on Sept. 5, 2011, just days later. I wonder if they would have even released the survey if they had known that demand for their product was about to reverse trend.

The survey was conducted in Q1 of 2011 and it appears to show an expansion in paper gold during that quarter. This would be newly-issued paper gold amounting to more than 7,600 tonnes during a quarter in which the price of gold barely rose $35. Since this was near the top of the decade-long bull run, I can imagine demand being high and that some of it was met with new supply rather than old supply. Perhaps in Q3 demand was instead met entirely with old supply which is why we saw the price spike from $1,492 to $1,896 in one quarter. Then demand dropped out from under the massive supply and the BBs lost control.

It's kind of like the printer who has control of the rope as long as demand is pulling. Remember the tug-of-war analogy in 'Big Gap'?

"The printer controls supply and the marketplace controls demand. A tug-of-war is actually an apt analogy. When demand for a currency spikes its price, the printer just eases his grip on the rope, releases more rope and the whole demand side just falls on its butt. […] But in the same way that the marketplace has no control over the supply side, the printer is powerless on the demand side."

Anyway, the point is that any kind of "active manipulation" talk is a non-starter for me unless the talker can demonstrate an understanding of what's actually possible and not simply parrot the conspiracy theories. When you understand what went down and what went up over the last year and a half, that was not manipulation. It was some kind of a massive shift in trader sentiment that has nothing to do with physical gold.

Sorry, enough about manipulation/suppression. Let's talk about German repatriation.

Only simple minds imagine that CBs share the same transitions concerns as we shrimps. I, on the other hand, understand that while "gold in your physical possession" is the best transition policy for shrimps, that is not the case even for private Giants, let alone CBs. At the Giant level, properly allocated physical is the best way to store the bulk of your hoard. I have a hard time imagining anyone with 20+ tonnes stored in a home safe.

For CBs, there are many reasons why their gold is where it is. During WWII Germany stole a lot of gold. A good deal of the European gold that wasn't stolen by Germany was moved to New York for safekeeping, so that it wouldn't be stolen by Germany. Then, after losing WWII, most of that stolen gold was taken away from Germany.

Since WWII, Germany has been a net-producer accumulating a lot of gold. And most of that accumulated gold was accumulated in New York City through Bretton Woods. That's why it's there. Nations generally keep at least some of their gold in the financial centers because that's where it is most useful. And under the auspices of the BIS, that's normally the safest place for it, especially for small countries.

If the gold is all kept at home, then it can disappear whenever there is a violent transfer of power. The gold obviously doesn't belong to the ruling party, it belongs to the people of the country, but that doesn't mean it cannot be physically stolen. However, if it is kept in London or NYC, it is much more difficult for the deposed party to make off with the loot.

There are, however, good reasons for Germany to want to repatriate some of its gold. First of all, it has a lot of it. And it certainly has more than necessary stored externally. But transporting gold is risky and dangerous. So it is always done in secret. Germany is probably doing more business with countries other than the US these days, more business in Europe and the East, so it doesn't make sense to keep so much of its gold on the North American continent. It is potentially more useful if it is physically in Europe.

But more than any of these reasons, the repatriation talk was simply a response to the gold bugs demanding to know where Germany's gold was being kept. So BUBA released a complete list of where it is, and since an inordinate amount was shown on that list to be in NYC, they accompanied the release with the repatriation talk.

We don't know if they really want their gold moved. And if they do, we don't really know if the US refused immediate delivery or if they asked for the 7-year plan. And even if they wanted and were to receive the gold within one year, it would make sense to say it was happening over 7 years. It's safer to transport a pre-announced shipment if you distract potential pirates with a bogus timeline. In any case, we really don't know all of the facts. We only know the theories of conspiracist gold bugs for whom this release was made in the first place. So, whatever.

I care about this story about as much as I imagine the Bundesbank does. It's more of an annoyance to be quelled than anything else.

Sorry if that doesn't help you much for the interview, but I had to get it off my chest since you asked. ;D

Sincerely,
FOFOA

This article approximates quite well the "other" view:

What If? by Grant Williams

Edwardo,

FWIW, I wrote that last reply before I even saw this email, let alone read the 'What If' article in it.

So the GLD drain is to get back the gold for German repatriation, and the price suppression is so the Fed doesn't have to pay too much for that gold? Something like that? ;D

How about this? Something else happened right around the middle point between those two lines. And that is the marginal paper gold bug, as represented by my bellwether, turned his back on the gold market and declared the end of the bull run and the beginning of a secular bull market for the dollar (aka deflation).

As each marginal gold bug throws in the towel, a new marginal gold bug is created, and then it's only a matter of time before he throws in the towel creating another new marginal gold bug. And so on and so forth. And the marginal gold bugs that don't throw in the towel simply get squashed because there are just too many commodities heading lower and dragging paper gold down with them.

These guys really must think that gold moves in isolation. Well, at least he admits he's inclusive when he adds the gratuitous "and silver" while quoting analysis by Maguire and Silver Doctors. ;D

There are a few redeeming ideas and charts in that article, so let's play with his scenario a bit and see if it makes any sense in the big picture without enlisting any conspiracy theories.

The main premise that he relies on is this CB leasing of physical gold that the CBs now want back. In order to have leased gold, you must also have a borrower of that gold. That is, someone who carries the short-side price exposure. In the 90s that borrower was the mines and the hedge funds. And they both took it in the keister when gold started rising in 2001. So from 2001-2011 there was not really a market for leased gold other than the small bit for fabrication, unless the CBs were acting as the lender of last resort for the BBs in providing actual physical reserves needed for the subterranean flow. This would imply a tight flow during that whole period. This would also have left the BBs with the short-side price exposure which they would have hedged going long futures or other correlated asset derivatives. This BB long hedging could have possibly been partial support for the decade-long commodity bull.

If this situation is in the process of unwinding right now, as the article proposes, then as the BBs return the physical to the CBs (taken out of GLD, Comex or wherever), they are relieving themselves of that price exposure and must consequently sell the off-setting long-side hedges, which would have been Comex futures and other correlated commodities/currencies, adding downward pressure to any otherwise organically-emergent bear market.

Let me just pause here to say that, even if this was the case, I would still say categorically that it has absolutely nothing to do with BUBA's repatriation request. At least it's not a response to BUBA. BUBA's announcement may, however, have been BUBA's way of telegraphing the ongoing unwind to anyone who might be paying attention.

One problem with this view is that somehow there was a surplus in the subterranean flow that amounted to at least 1,300 tonnes—the gold that went into GLD. Did the BBs borrow that gold from the CBs in order to corral some of the demand coming from the West? Perhaps, but it seems to me that that particular Western paper gold demand could have been met with fractional paper rather than fully-reserved paper. So this logic tells me that, somehow, the 1,300 tonnes that was accumulated between 2004 and 2010 (when GLD inventory plateaued) actually was surplus to the required physical flow. And if so, then it doesn't make sense to me that the BBs would be borrowing physical from the CBs between those years.

I can't explain the existence of that surplus during those years, except to say that it existed and therefore there must be an explanation. So I am left with imagining plausible explanations to show that it was possible. One such plausible explanation is that the BIS successfully kept the biggest interests out of the flow through some sort of deal-making like Another wrote about. But that kind of deal-making must have had a finite timeline which I wrote about in Think like a Giant 2. This coincides with Ari's 2010 "target" which then got pushed to 2013 after the GFC in 2008. This correlates with GLD inventory plateauing in 2010 and then declining in 2013.

Again, it's merely a plausible explanation to show that the surplus reserves required to build up GLD were possible even though the physical gold flow was technically "cornered" as far back as 1997. The alternative is the view in the 'What If' article that the CBs were leasing out more than just their good name all that time. I suppose it is also possible that, rather than leasing the physical to the BBs, the CBs could have actually ponied up the 1,300 tonnes for GLD directly. That way no one is carrying the short-side price exposure implicit in a lease during an obvious bull market. The CBs could have done that to "corral" the Western demand, but I think it is too much of a stretch to believe the source of that gold being the CBs could have been kept quiet. So I think it is more likely that it was BB gold that was checked into the coat-check room rather than CB gold. And if the BBs had that much gold to spare (that much slack in the flow rope), then why would they have been borrowing physical from the CBs?

The consensus view is that the gold in GLD was "purchased at market" to meet the demand from investors. Well, the BBs are the market in LGD bars so even if they "bought" the gold to put in GLD, they bought it from themselves. Ergo, coat-check room. No matter what, GLD represents a place to put gold that would otherwise be part of the BBs' physical reserves if it were not in GLD. And that's why the coat-check room view is the correct view.

The main difference in the conclusions drawn from the consensus view is that there is no shortage of physical and never was. There's plenty of it to always meet demand. But even in that view of plenitude, it would still be correct to view it as a coat-check room. Just that the checked coats (in that view) would represent only a small fraction of the total coats (physical reserves). And in order to maintain that view of plenitude even in light of the present drain on GLD, redemptions must be a necessary or obligatory part of the arbitrage that keeps GLD in line with "gold", which, of course, makes no sense.

Sorry to meander here, but I thought it would be worthwhile to think through a few ideas out loud, and, yep, turns out I'm still happy with my view. ;D

Sincerely,
FOFOA

How is it the case that in order to have that view (of plenitude) redemptions must be obligatory?

Because in my view the massive redemptions reveal the opposite of plenitude. Redemptions are a choice made by someone, not a necessary part of the arbitrage "mechanism" as it were. "Obligatory" might be the wrong word as it implies that the APs must actively manage GLD so that it tracks "gold". The consensus view would argue that they are simply "arbing" to make a profit off of the stupid GLD investors who don't watch the NAV (the price of GLD relative to "gold"). So (they would say) it's not so much obligatory as it's simply a way to make money.

My answer would be that I used the term "obligatory" (or compulsory) to cover both "the AP actively managing scenario" as well as "the arb requires redemption scenario" which is the crux of the consensus view. That's really what the difference boils down to. Would GLD track "gold" if it weren't for the arbs creating and redeeming shares to skim a profit off of the stupid GLD investors? The answer is of course it would. I does!!! Kind of like silver tracks gold. GLD is not an actively managed fund. Instead, it is an exchange traded fund. That means participants in the exchange arb the correlation between GLD and everything else.

Arbitrage is natural. It mostly happens automatically. A dedicated arbitrageur probably wouldn't even mess with GLD because it tracks everything else so well. He's looking for ratios that are technically exploding past fundamental differences so that he can make a profit. If hundreds of thousands of people are trading GLD and "gold", then the ratio between the two should be self-correcting over a reasonable amount of time… AND IT IS!!! This graph of the intraday premiums and discounts shows it self-correcting repeatedly during the day, every day!

We have evidence in the data that creations and redemptions of shares are not necessarily a part of this mechanism. Logically they are not, because GLD could theoretically trade at $500/oz. gold or $5,000/oz. gold with the same amount of inventory. It has an objective or indicated value, and to the BBs the shares are literally "as good as gold." Think about that.

So if there's plenty of gold reserves in the LBMA, then why are the BBs draining GLD? The consensus view says "because they need to redeem the shares to book the profit on the arb that maintains the correlation between GLD and "gold"." Nonsense!

Sincerely,
FOFOA

"So from 2001-2011 there was not really a market for leased gold other than the small bit for fabrication, unless the CBs were acting as the lender of last resort for the BBs in providing actual physical reserves needed for the subterranean flow. This would imply a tight flow during that whole period."

Well, we have a pretty good idea that there was a tight flow then. I remember discussing this with JR on the forum and him saying the constantly rising price was evidence of gold not flowing well, ergo the ever rising price being required to keep the flow going.

Well, the prices of silver and other commodities went up too. But we know that physical gold is in a league of its own, so I think it might have been a mistake to think that the "gold bull market" was a symptom of the shortage of physical gold (or silver or anything else). It probably helped the physical gold shortage, but it might not have been because of it.

I'm not saying there wasn't a shortage of physical. I think that, because the flow of physical has been "cornered" for at least 16 years, obviously there is a shortage until there is a revaluation. But I'm also saying that something other than the price rise must have delayed the inevitable because obviously there was a "surplus" in the flow of at least 1,300 tonnes from 2004-2010—enough to populate GLD with physical gold.

That's not a huge "surplus" in the big scheme of things. If we think about a roughly 4,000 tonne-per-year flow from mining and scrap during those six years, 1,300 tonnes total amounts to only about 5% of that "new" flow. That's a marginal percentage, so whatever took care of the threatening physical demand could have easily overshot enough to fill GLD with or without intention.

BTW, I hope you realize that I am discussing speculative issues at the "cutting edge" of Freegold that are not fundamental nor foundational to Freegold. I am simply using my "view" or "lens" to tease out the best explanation, or at least a non-contradictory one. That's why I use the term "plausible" instead of the occasional "certainty" I show toward Freegold. Certainty doesn't extend beyond the gold revaluation or dollar hyperinflation. Beyond those two topics I'm venturing into analytically speculative topics trying to apply that in which I have high degree of confidence to those things which are obviously unknown, in the attempt to discover a plausible and non-contradictory explanation.

Some people mistakenly apply my "certainty" toward Freegold to anything I comment on. And then they think that if they can disprove me on any small detail then my macro view must be wrong as well. This reveals poor understanding of what I'm discussing, but it is rampant in my arena, which is why I don't spend much time speculating publicly about things other than what is covered in the A/FOA archives.

Yes, I understand. The naysayers are always on the lookout to catch anyone else who has the temerity to do what you are doing.

Funny, I read this article that someone called "straight out of Freegold" and, to me at least, his choice of words and phrases revealed just how far away from Freegold he really is!

http://dailyreckoning.com/your-personal-gold-standard/

He's clearly not expecting a gold revaluation:

"And gold at the levels I’m talking about would mean that you’ve now verged into hyperinflation, or something close to it, because nothing happens in isolation."

He's clearly talking about an inflationary spike that will occur in all commodities and not exclude paper gold:

"It will have a kind of a slow grind upward… and then a spike… and then another spike… and then a super-spike. The whole thing could happen in a matter of 90 days — six months at the most."

I find it a little funny that people want so badly for someone like him to be a secret Freegolder that they are blind to how different his analysis actually is.

It reminds me of XXXXXX. He, like Rickards, expects the dollar to devalue and gold to fill the hole. But neither one seems to have thought it through far enough to realize that nothing fills the hole without at least one thing being revalued in isolation.

Rickards: nothing happens in isolation.

I'll have to remember that one! ;D

I completely agree. Good catch with the isolation language. He was wrong before the words ever escaped his mouth since we've already had a revaluation (isolated move higher) (1933) albeit a vastly less spectacular and meaningful one than what lies ahead.

_____________________

Open (Window?) Forum

From Open (Window?) Forum, which has more discussion about "GLD – The Coat-Check Room View", here's Phil Collins with a familiar sentiment:



The Debtors and the Savers 2012

"…Thinking for yourself pays. Seeking reassurance feels good, but it doesn't pay. Waiting for official confirmation is also rewarding, but the reward isn't money."

"Change isn't easy. More often, it's wrenching and difficult. But maybe that's a good thing. Because it's change that makes us strong, keeps us resilient, and teaches us to evolve..."