My Candid View – Part 3

FOFOA,

I have something I hope you can clarify for me. I think I know the answer but I don’t like the low degree of confidence I have in my understanding. It is probably within your previous writings but a simple explanation has eluded me thus far although I think it might have been in “legs” and just went over my head.

I believe that only the BIS has the power to save the paper gold market. The $IMFS cannot. I believe a "gold deal" would be needed for this. I'm not sure where I got this from. Maybe one of your posts....maybe I imagined it.

So, can you tell me why a proxy for the United States or even just the IMF directly can’t support the “price” in the paper gold market by purchasing an unlimited amount of long paper gold. My understanding is that the crumbling paper gold market is bad for the dollar regime and I’m not completely sure I know why they can’t stop it like all the other financial issues they seem to be able to can kick. I used to think in order to go long paper gold you have to go short physical gold. But recently this doesn’t make complete sense to me because if I wanted to buy paper gold this afternoon couldn’t I just wire a broker cash and be the proud new owner of a paper gold certificate? (side note I've never bought paper gold if you can't tell). Is this a case of different rules for shrimps and Giants? Perhaps the broker I wired cash to must sell physical in order for this transaction to be legit?

This world of high finance hedging, derivatives, and trading is not boring to me but it is always in a state of loose understanding for me which I find frustrating at times. As soon as I grasp a concept I feel like other concepts float away since they aren't quiet tied down. Maybe I need to write this all down =D

Anyway if you have time to help me......I would sleep much better =)

-XXX

Hello XXX,

Supporting the status quo aka the $IMFS is a lot more complicated than just supporting the POG. It may seem like the US has kicked the can all this time, but it couldn't have done that without external support. As for the declining POG, I think it's better to view it as a symptom rather than the disease. For us, it is like the fire alarm more so than the fire itself.

Supporting the paper gold market requires supporting the physical flow of gold because that is what's required. One way to do that is by keeping certain parties that are only interested in physical away from the public markets. This can be done by supplying them with off-market gold, but at paper prices that is a losing battle. So then it requires deal-making.

Simply buying up the paper price of gold won't solve the fundamental problems. You'd also need to supply physical to the LBMA and the US could certainly do that, it did similar back in '68 with the London gold pool and in '76 with the Treasury auctions. Do you know how well those worked out?

Like I said, I view the declining POG and the declining GLD inventory as that part of the gravitational effect of the black hole that we can observe. Masking those signals will not make the black hole disappear. So when I point to the declining POG, I'm pointing to a symptom, not the disease. Can you see the flaw in then wondering "well why doesn't the USG or the Fed just buy paper gold?"

Sincerely,
FOFOA

To answer your question directly I would say yes I can. Turning off the fire alarm won't stop the fire. I think for me the main point I need to always remember so that I don't fall back into my old trap is "It may seem like the US has kicked the can all this time, but it couldn't have done that without external support." I seem to digest this point over and over and then it slips away. It's probably a symptom of being a 30 something American that has only seen the United States as a seemingly unstoppable great power in the world. Then when you start to sense cracks in the wall and that something is wrong with the stories coming from the mainstream media, the mainstream alternative is to think that while the finances of the US are in trouble this country can use its great powers to shut off fire alarms left and right and maintain confidence amongst the masses. It gives the impression that this confidence is what keeps things going and it feels like it is forever sustainable with so many people disengaged and with magical un-inflating fiat always a keystroke away.

So indulge me for a second. I believe the flaw in my thinking is that from outside noise and personal bias I start believing that the black hole has been in place and growing for a while but the current dollar faction has been turning off alarms so we are none the wiser. That somehow the black hole only has power if people know about it by hearing the alarms. Alarms are sounding and I keep looking for the US to shut them off and when they don't I'm confused. What if people hear the alarms! This gives the black hole power! If I understand the situation correctly however it is more like the black hole has always been there and the rest of the world has kept us from being sucked down at great expense and effort. A brilliant move that saved the global financial system, bought time for a new one, and set such a fantastic trap that we will now see a monetary transition without war. GLD is draining and the price of paper gold are falling because it seems the world is ready for change and they are no longer holding the dollar up.

Am I getting it?

Hello XXX,

I don't think people need to wake up in order for the phase transition to occur. I never have. So what if they're shutting off fire alarms and maintaining confidence? Maybe they are! It doesn't matter because that's not what prolonged the status quo.

What prolonged the status quo was support for the system. It came in many forms. It came in the form of European CBs supporting USG debt and then China after 2001. It came in the form of private deals and CB gold being expended to keep big interests out of the commodity gold market. It came in the form of a paper gold market which has grown since the early 80s into an uncontrollable monstrosity. It came in many forms. But while you might think it was the all-powerful USG exercising its power to kick the can, reality doesn't care what you think!

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. We will have crossed the event horizon of the black hole.

It is my view that it will happen behind closed doors where no one can see it coming. Think of it like the managers at MF Global discussing pulling the plug in the moments before they came out of the conference room and told everyone in the office to stop all redemptions and freeze all accounts. At some point it must become clear to the insiders that actually trade physical at that top level that the game is over. And at that point there is great value in conserving the determination of who gets the few remaining reserves. Consider also that central bankers at the BIS are probably involved in the bullion banks at that level insofar as they have assisted in the past in keeping certain "giant" interests out of the public market.

So it's just like ANOTHER said, the BIS will probably have a significant say in the matter. After all, they are the ones who can get physical gold flowing once again at that top level with a really high bid and ask price.

Also, if you noticed, I referred to the paper gold market as an "uncontrollable monstrosity". This sets me apart from almost all other gold analysts who think the paper market makes gold more controllable by those who need to manage the flow of physical. What the paper market did for gold was to disconnect the price from the physical flow, and hand the price discovery function over to world full of paper traders. Sometimes the price trend works to the advantage of those managing the physical flow, and sometimes it works against them. But they don't have control over the price other than meeting new paper demand from paper traders by expanding the paper supply.

Today gold is chained to both commodities and foreign currencies like the AUD through the paper markets. This is why we see gold moving in lockstep with either other commodities or as the inverse of the dollar. And what this means is that it would be virtually impossible to control the price of gold in isolation. If you even attempted such a feat, you'd have a world full of paper traders working against you no matter which direction you were trying to move the POG.

The physical portion of the gold market, however, needs the POG to move in isolation. It needs gold to be priced higher in the very things to which the paper market keeps it chained. It needs gold to be revalued, and that cannot happen as long as the paper gold market is functioning because a world full of paper traders will not let it happen. So when the physical runs out at the top level in which it trades, physical gold will be revalued in isolation, without any of the other commodities or currencies coming along for the ride.

In a physical-only market, the price of gold will be established wherever real physical trades in the largest volumes, and the price elsewhere will refer back to that "top level" price. Today, the opposite is true. Today, the price of gold is established where no physical even changes hands, and the place where physical trades in the largest volumes today is at the mercy of those trading imaginary gold for imaginary everything else.

If this view seems logically consistent to you, then please reconsider the amount of control you think TPTB have over what we are watching unfold.

Sincerely,
FOFOA

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…It's my opinion we can't have a FG reval until most of the miners are dead. Ditto for most of the coin dealers. So I think we may have time. We go back to that 'least volatile' transition thing...

Hello XXXX,

I've seen you mention this before, but why do you think we can't have a reval until after the miners are dead and most of the coin dealers are out of business? Do you think they'll flood the market with physical?

First of all, miners don't sit on above-ground physical. They can only flood the market to the extent that they can pull it out of the ground, refine it and then sell it. If they are locked into hedging contracts, they can be forced to continue mining at that low price as Another said. If not, they will be blocked from the windfall profit from newly-mined gold by the hungry collective.

I personally think mining will decline quite a bit in Freegold, but at the same time, I think that smart governments will encourage some mining just to keep the equipment well-oiled and operational. There's no problem in a flow coming from the mines because that in-ground gold is essentially already a reserve asset for that zone anyway, just like its above-ground reserves. It can be converted from in-ground reserve asset to above-ground reserve asset without ever entering the physical market. It will only enter the flow (the market) if that zone is running a trade deficit excluding gold. So the process of mining, in Freegold, simply becomes a reserve management operation for the government of that zone. Not unlike moving the gold from Fort Knox to Denver or West Point, or a currency management operation if it is allowed to be sold to the public from the mines.

As for the dealers, I think the exiting dealer network will likely become a functional transmission mechanism for price in the physical-only market. There are a ton of small dealers out there. Many more than most people realize, but a lot of them are in it mainly for the numismatic trade. Bullion is just a side business for many of them. From what I've seen, a lot of small dealers tend to own their numismatic inventory outright while their bullion inventory is either borrowed (financed) or hedged.

One big difference I foresee in Freegold as far as the bullion dealers are concerned is that they will no longer have the paper gold markets in which to hedge their inventory. So, instead, I foresee that they will finance their inventory, but they will finance it in fiat currency. They will have a dollar-denominated line of credit which they will draw from as they restock their inventory. As long as they are moving inventory, they will just keep rolling it over as the spread they make covers the carrying cost of the currency loan plus their profit. This will be possible because in a physical-only market the POG will always be stable to rising just like all other traditional physical stores of value used by the wealthy, so there will be little to no price-exposure risk for holding financed gold without an ounce-denominated hedge.

So while I foresee great change for both the miners and the dealers, and while it makes perfect sense that some of the miners will die and some of the dealers will quit in the final stretch, I don't understand why you're imagining their demise would be a prerequisite to a revaluation.

Sincerely,
FOFOA

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… My question for you is do you have any input or advice on questions/wording of the email?

Based on the emails you shared with me, you've fine tuned your ability to talk about freegold without coming off as a tinfoiler to the nth degree. And while it might be difficult to believe, XXXXX is no doubt an old money giant, so I think his perspective could be immense if he is willing to share.

Regards,
XXXX

Hello XXXX,

[…]

I don't know if you get this part about old money Giants, but they will not try to profit from Freegold. It's simply too risky for them. Assuming he already has a traditional gold reserve, even if Freegold was on his radar, he might not buy any more. This is a hard point for us shrimps to digest, but the point of view of a Giant is quite different from ours.

True Giants know the value of keeping a low profile. They already have intergenerational wealth, and the goal for them is more to keep what they already have than to increase it. Keeping a low profile is the best way to do that. At some level, they even give wealth away in order to ensure that they get to keep the majority of it, kind of like the Rothschild family gives a castle away to charity every once in a while (see my post Think Like a Giant).

The Giants do feel a sense of responsibility regarding their wealth, which is why they often own multiple businesses, just like XXXXX. It's not so much that they are trying to increase their wealth, but more that they are trying to be responsible with it. In many cases it is the wife's job to give money away almost as fast as the husband is earning it. Even lavish spending and conspicuous consumption is a charity of sorts as they are seen supporting the businesses in their community.

In general I imagine the true Giants having less than 5% of their investable wealth in physical gold, and they probably think about that gold portion rarely. To try and double or triple what they already have through the Freegold transition exposes them twice. Once when they buy, because they have such a big footprint that it's difficult to hide. And then after the revaluation it will become clear to everyone how much they profited. Might as well wear a shirt with a target on it.

That's why, as ANOTHER told us, true Giants buy slowly over time, putting a small portion of their surplus income into gold on a regular basis.

So just be aware that he may not have the same perspective as you regarding the windfall potential of a gold revaluation when formulating your questions. ;D

Sincerely,
FOFOA

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…under RPG it's in their best interest to demonstrate to the world that the gold is there and it's real…

Admittedly, my view of the central banks has changed over the years, but I'm not sure I even agree with this statement in the end. "Under RPG" (meaning "in Freegold" or "after the revaluation and transition") I think that, counterintuitively, we'll know much less about who has how much gold than we do today. And I think that's the way it should be. All that matters is the flow, not the stock. This obsession with the stock is very $IMFSish and it engenders one of the greatest forces against which the Giants have to constantly defend themselves: envy. To eliminate some of that destructive force would be a great step forward for mankind, because for the truest superproducers to have an "invisible" SOV, as opposed to eg. opulent castles, would allow them to continue net-producing in perpetuity without worry. That's good for everyone!

This idea that the gold might not be real, or that it's not really there, is pretty much limited to the conspiratorial Western goldbug shrimp arena. It's not nearly as big as it might seem. Of course the (vast majority of) the gold is real. I quite feel for these central bankers having to deal with all the crap put out by the goldbug sphere of (very limited) influence.

Sincerely,
FOFOA

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Checkmate

From Checkmate, here's the view of the Rocket Man:



Think like a Giant 2

And from Think like a Giant 2, here's another Elton John classic with an important message: