My Candid View – Part 5

As a preparation exercise for the interview, Edwardo wrote out answers to some basic questions related to Freegold and these are a few discussions on specific topics that followed:

On inevitability:

It may not be inevitable, but amongst a list of possible outcomes it appears to have a high probability of coming to fruition because…

The way I view Freegold, I think that it actually is inevitable. Mainly because Freegold is simply the end of the current status quo, and that end is inevitable. The necessary conclusion that follows is that gold will no longer be undervalued because the system that undervalues it will have failed to keep physical flowing.

We can agree that exactly how it will unfold cannot be perfectly foreseen (obviously), so if someone defines Freegold as "FOFOA's specific predictions of precisely how it will play out," then I will concede that I do not have a crystal ball. Like FOA said, "If you came with a notion that I am someone who sees the future, grab the children and run far away."

In any case, we are dealing with semantics here, IMO. So if the inevitability question came up, I would probably phrase it more like this:

"Anything is possible for a period of time, but amongst a list of possible final outcomes…"

On Exorbitant Privilege:

The key point here is that Exorbitant Privilege is not assumed, or even taken, it is granted, and, therefore, any such privilege can be revoked. An irrefutable fact, to those open to facts, is that the entire dollar based system has had several near death experiences prior to the coup de grace that is about to be delivered. Both of the near death experiences centered around the inability of the system to deliver gold to those who demanded it and who could not be denied short of risking global havoc.

Good paragraph. I like this answer.

On ECB MTM policy:

It shows their position on gold as a key wealth reserve asset and, from a practical standpoint, demonstrates the ECB’s preparedness to facilitate the flow of gold. Perhaps most importantly it shows a recognition of the fact that a MOE’s viability and credibility ultimately rests on its efficacy in facilitating gold flow to key economic actors.

In my opinion it also perfectly illustrates, at the highest level, exactly what Freegold is; A separation of the monetary roles into two primary media which are not fixed in value, but are able to fluctuate in value relative to each other. Freegold is currency backed by a floating physical reserve, and that's what the ECB's balance sheet illustrates so perfectly with the very first line in each column. And the quarterly MTM revaluations reveal the floating aspect, which is different from all past monetary systems that included gold at a fixed rate to the currency on the other side of the balance sheet.

On whether the Fed/UST also MTM's its gold:

No, the gold price is essentially frozen in amber at a level that represents a snapshot from the past, specifically 1971.

The current level revaluation actually happened in 1973, and it wasn't actually a snapshot since the free market price was already higher. I think the final revaluation to $42.22 was probably done because the US stockpile had fallen below its legally required minimum level and $42.22 brought it back up to that level.

Nothing wrong with your statement above other than it's not technically precise.

So it happened two years after the default? Interesting.

They closed the gold window in August of 1971. Officially gold was still $35/oz. and no revaluation of US gold happened at that time. Then in May of 1972 they revalued it to $38, and then in February of 1973 they revalued it again to its current $42.22.

This is just speculation on the reasoning behind the two revaluations, but in terms of the legally (per Bretton Woods) required level of US gold at the time they closed the window, $35 was too low. The US stockpile had dropped below its legal limit as a percentage of outstanding currency. I'm not sure if the revaluation to $38 brought it back properly into line, because I'm not sure exactly how much gold they had at that moment. Sometime between 1971 and 1972 the US stockpile lost another 486 tonnes.

But the next revaluation to $42.22 brought the remaining 8,584 tonnes up to $11.65B which appears to be close to the magic number. So it may have been a simple accounting trick to retroactively make the US gold hoard legal as of the time of the default. And that's why I think it was more of a technicality than a snapshot.

Has anyone ever provided any credible data on the precise tonnage of gold that was being called away in the year or two before Nixon closed the gold window?

Yes, actually the WGC put out a pdf in 1999 that shows all countries' gold reserves for each year from 1950 clear through 1998. Prior to 1950, it lists the totals every five years going all the way back to 1845. So you can easily track the inflow followed by the drainage from the beginning of Bretton Woods right through the Nixon Shock. Here's the pdf. It's on page 18 and you need to rotate it 90 degrees to view it properly.

Around $11.5B was the bare minimum even as far back as 1961, and that's when the gold was draining most rapidly. They could see the dead-end approaching even then and, amazingly, we are still almost precisely at that dead-end number today. Here's a 1961 newspaper article in which they note that the US gold supply can't go below $11.5B which, at that time, left only $6.5B in $35/oz. gold to supply the rest of the world for the rest of eternity unless something changed. Here's the relevant snip of the article.

And here's the gold on the Fed's balance sheet today. $11.037B.

Sincerely,
FOFOA

Can you please give me as concise a definition of cornered as possible please? I have heard the term used before in context many times, but, for some reason, I am uncertain about it at the moment.

Cornered generally means that the cornerer gains control of enough of the stock of something that he can control the price if he wants to.

Think about that in terms of who has most of the above-ground gold stock, as well as the ability to buy up any and all that comes to market from the mines. In fact, ANOTHER said they had bought the entire mine supply 10 years out.

A cornerer doesn't necessarily have to control the price, but he can. So think about it in terms of a stranglehold on the physical market, where the cornerer could blow it up into a physical-only market any time he wanted. The cornerer in this case being the Giants, Big Trader, the oil states and the like.

I don't know the origin of this particular use of the word "corner", but my guess is that it is similar to backing someone into a corner. When you back someone into a corner, you don't leave them any way out. You can kill them at will, or let them live in that corner. But they would have to go through you to get out.

So I like to think of the physical flow being cornered by the mere existence of so many dollars out there. How many players could simply bid for the entire physical flow if they wanted to? China could easily, with $2T. That's enough dollars to buy almost 50,000 tonnes at today's price. So they could buy all of the CB gold in the world, plus all of the mining output for the next 7 ½ years. And that's just China. What about the oil states?

That's cornered IMO!!

Hi FOFOA,

In a comment to Wil, Aaron wrote:

"Shrimps switching from saving currency to saving gold is not going to make a dent in bringing about "this transition from a debt-based to an equity based system" Giants no longer willing to supply physical to the market? Now that would do it."

This reminded me of something Another wrote in '97. I can't remember the exact quote-you probably can- but it said that the great private hoards of gold had already been sold into the market. I'm trying to find it in the archives but I've yet to locate it.

Cheers,
Edwardo

Hello Edwardo,

In terms of "great private hoards" being already gone, I think there are two basic categories that fit that description. One is the aggregate of small Western physical hoards that together form a great hoard. Another did make reference to the fact that "public gold" had already "dried up" in his first post:

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

The second category would be individual "great hoards" that could be freed up to flow to parties they were trying to keep out of the public markets. He made reference to these in his fifth post:

"How DO they do it?

It's more complicated than this but here is a close explanation. In the beginning the CBs didn't sell their own gold. They ( thru third party ) found someone else who had bullion. That "party" sold to a broker who sold forward for a mine or speculator or government ) . In the end the 3rd party had the backing from the broker that he had backing from the CB to supply physical if needed to put out a fire. The CB held a very private note from the broker as insurance and was paid a small fee. This process mobilized free standing bullion outside the government stockpiles. The world currency gold price was kept down as large existing physical stockpiles were replaced by notes of future delivery from the merchant banks ( and anyone else who wanted to play ) ."

So here we see individual "great private hoards" that were sold into the market while the original owner received special CB-backed paper gold (forwards). Notice the phrase he uses, "in the beginning…" Again, this writer was someone directly involved in these deals!

Do you think the quote you're looking for was referring to "the public's gold" or to "private giant hoards"?

Sincerely,
FOFOA

Here 'tis:

Date: Sun Oct 19 1997 09:42
ANOTHER (THOUGHTS!) ID#60253:

"How much further can they take this? The world private stockpiles that could be sold have been."

I read that to mean private hoards of the very wealthy.

Yes. I'd say that comment and this one from a week earlier were talking about the same thing:

"In the beginning the CBs didn't sell their own gold. They ( thru third party ) found someone else who had bullion. That "party" sold to a broker who sold forward for a mine or speculator or government )."

This would seem to call into question the idea that Giants now included old world money with their private vaults of gold, or is there another, no pun intended, explanation? Also, what is the status of something like the Jamaica Accords in the present day? Is it relevant in any meaningful way?

Scroll down to #5 here for more on the Jamaica Accord. That was where the 2nd Amendment to the IMF Articles was established. It ushered in the floating exchange rate currency regime. Currencies could float or peg to other currencies, but not to gold anymore. Gold was formally cut free from its official shackles!

Regarding Another's statement, I highly doubt that it means all of the Western Giants gave up their gold. Those who did had a way to get it back and a guarantee that they would.

Forwards are a way to pull future gold into the present to satisfy demand. Just like when you borrow money you are pulling your future productively-earned purchasing power into the present in order to spend it now.

Let's look at Another's words: a broker who sold forward for a mine or speculator or government...

Mines and speculators (mostly hedge funds) were the biggest gold shorts in the late 90s. That means they borrowed "gold" and sold it for the cash. That was the gold carry trade. For a mine this was a hedge, locking in the current POG for gold they would mine in the future. It was essentially a bet that the POG wouldn't rise. For the hedge funds this was simply a bet that the POG wouldn't rise, since hedge funds don't mine gold.

So the broker here is selling forward or borrowed gold for the mines and the hedge funds. This would be paper gold (ounce-denominated liabilities), but it would require a certain percentage of reserves for allocation and delivery demands. Also, the broker is not the one who is extending the gold-ounce-denominated credit in these early days. He is simply the broker. He is also looking for a lender. That would be the Giant with a large hoard.

What the BBs did here was increase their reserves. The Giant "giving up" his private hoard would be similar to you giving up your claim on cash on demand from your bank in exchange for a certificate of deposit. Not exactly, but more like giving up your allocated cash in the vault for mere liabilities from the bank, so the bank could move your allocated cash over to its pile of (unallocated) reserves.

So the BBs essentially expanded their liabilities and their reserves through this process. It was a process of deallocating the gold of some of their customers in exchange for some cash flow and a guarantee that the CBs would provide physical "to put out a fire."

"In the end the 3rd party had the backing from the broker that he had backing from the CB to supply physical if needed to put out a fire."

Meanwhile, the reserves could drain as needed to keep physical gold flowing to where it needed to go. And the entities with price exposure were the mines and the hedge funds (like LTCM).

Any of these "Giants" who played along in 1996 and have yet to reallocate would probably have first dibs on that remaining 960 tonnes in GLD when the music stops, IMO. That's because the BIS will not allow CB gold to cover all of the deals when the time comes, but I'm sure that some players carry more clout than others.

One thing that surely put a strain on the flow of physical was when Barrick closed out its hedge book with cash. I think that was in 2009 and was about $5B, so even though that added stress, it was only to the tune of less than a couple hundred tonnes of physical.

Try not to think in terms of a physical market and a paper market. All sales, purchases, loans, forwards, futures, swaps and derivatives are part of the paper market. Then underneath that market is the physical flow. Anyone who has paper gold can get physical, that's the prerequisite for the paper market. So these kinds of deals would have been getting a Giant to hold paper gold instead of physical to free up that physical to flow, but there's always an inflow of new gold, as well, coming from the mines and scrap. So as long as you, being the Giant who "gave up" his physical, had some kind of a guarantee of first dibs on that inflow and, if not, that the CBs would provide the physical in a pinch, why not play along?

As I said, just because a market is cornered doesn't mean the cornerer will use his power to raise the price. In a traditional market cornering operation, you buy up enough of the stock so that you can squeeze the market, raise the price, and then sell your stock back to the market at the higher price. But those who have cornered the gold market are super producers, so they are constantly on the receiving end of the flow. They aren't interested in driving up the price to sell their gold back to the market. They are only interested in the continued flow. When that flow stops, the price will be driven up so that the flow—in the same direction as before—can resume.

Sincerely,
FOFOA

There are some phenomenon I would like to discuss further with you, two of them are "The Flow", and "a falling price strains the market."

With respect to the freegold interview on RT America, I have crystalized a narrative that I think really captures the heart of the matter, and does so in a way that I hope will grab people by the lapels and hold their attention to a degree such that it will not flag when, for example, the idea of a "physical only" market is introduced into the discussion. Without further ado, here it is.

Without over simplifying matters, whatever one believes characterizes the state of play in monetary affairs, it is imperative to understand that the planet's most important/vital economic actors, actors that folks on FOFOA's blog often refer to as "Super Producers", at all times, despite any occasional appearances to the contrary, unerringly determine the viability of monetary regimes throughout history. The tail does not wag the dog though in the world we live in it can appear that way more often than not, but the fact is that, however long a distortion may persist, monetary regimes only survive to the extent that they ensure that the most critical productive enterprises of an economy are facilitated. Monetary regimes that do not cater to what are, literally, indispensable productive enterprises are not long for this world. This is a first principle from which every other concept that is part of the freegold model springs from.

With that in mind consider that in the case of oil, the commodity that is indisputably at the top of the global economic hierarchy, the key producers of oil have always demanded what they (rightly) perceive to be the one asset that has the best chance to protect them long after their finite resource has run dry. "My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel" is something of a cautionary tale, a warning even, and the chief asset used by the producers of oil to avoid returning to an austere existence has everything to say about what really matters where the global monetary system is concerned.

To wit, the only reason the dollar system, with its fatally flawed construct such that the medium of exchange, the dollar, and the store of value, U.S. government dollar denominated debt, has lasted as long as it has is because in the absence of any other currency regime, everyone with pull cobbled something together that would allow the world's most important economic actors to get that one asset that would and could hold all of oil's value long after the last well was pumped dry.

Basically the narrative continues on with the idea that the creation of The Euro and the ECB MTM model was/is a game changer, and if the game didn't change according to, for example, Another's timeline, the delay to the new system is down to a variety of exigent circumstances that are ebbing away as mechanisms of delay.

So, however grindingly slow the pace of the evolution to a new system may appear to be, "it" is in process, even if some of the most spectacular elements that are likely to manifest- see the U.S. currency collapse/ paper gold market extinction-are still in the offing. I am hopeful that the presentation of "the first principle" narrative will allow viewers to digest key concepts like -paper gold markets are nothing more than an appendage of a system that itself on the way out and the paper gold market's dissolution will, to some degree, inform gold finally having its immense value reflected in a market price. B.) paper currency is a net benefit etc. etc.

Hello Edwardo,

I think that's a good approach you are working on! I don't want to micromanage your narrative, so I'll just point out possible weaknesses and potential enhancements that you are free to use or reject.

I think that the euro and the ECB are "hot button" issues or "buzzwords" as it were, that carry with them some baggage in most minds. That baggage being the European debt problems which are of course not a direct problem for the euro currency. That said, I do like the historical approach, and both Bob English and his audience will presumably be familiar with what Rickards said in his recent interview with Bob. So there may be some room to draft a little momentum off of the Rickards interview.

Rickards made the point that international monetary systems collapse on a regular basis. But I noticed that he focused more on the date of the collapse than the date of the birth of the new system. For example, I recall from memory that he pointed specifically to 1914, 1939 and 1971. You could say something very similar to what Rickards said while at the same time differentiating yourself by focusing on the relatively frequent establishment of a new monetary order (rather than the collapse of the old one).

Where the old system failed in 1914, a new system was established at an international monetary conference in Genoa in 1922. You know that story! And if you need to brush up on it, it's here. Then the American monetary system was changed by executive order in 1933 in order to halt the bank runs of the Great Depression. It worked! Then a new international monetary system was born once again in 1945 with the international agreement called The Articles of Agreement of the International Monetary Fund which governed the new Bretton Woods system of fixed exchange rates.

That international system collapsed in 1971 by Executive Order of the President of the United States, but the new system was formally born 4 ½ years later with the Second Amendment to the Articles of Agreement of the International Monetary Fund which formally set gold free from money and also freed foreign central banks to transact with the free gold market as well as to mark their gold reserves to market. That was in 1976, and that was basically the beginning of "free gold."

The First Amendment to the Articles of the IMF was less earth-shattering. It was in 1969 and it established the SDR as a supplemental reserve asset. In 1970 they passed out the first allocation of SDRs to everyone and a year later the whole system collapsed. SDRs didn't quite work as well as they'd hoped.

High ranking Europeans had been concerned about the inevitable collapse of the international monetary system since at least as early as 1960. See the "Exorbitant Privilege" quote by VdE, newspaper articles and the Charles de Gaulle speech. Also, the ECB pegs the beginning of the road to the euro at 1962 with the Marjolin Memorandum. There was both international concern and international effort, not to fix the problem system, but to create a new one.

I should add that the problem with the "free gold" system of 1976 was not the paper market; the problem was perhaps even the lack of a well-functioning paper market for gold. Gold needed to be "revalued", that is, it needed a higher price in isolation. This was denied to gold in 1971 by Executive Order, perhaps for selfish reasons by the US, but the ROW decided to support that decision in short order. But what it meant was that the price of everything ran away from them, including gold. Oil was indeed forced to bid directly for gold, in competition with everyone else, using the dollars it received. This threatened to collapse the whole dollar international monetary system less than 8 years after the Nixon Shock. That would have been the shortest-running system in a long time. The flow of gold came to a standstill as everyone, even in the West, waited in long lines to get some. Not a good situation.

Right or wrong, the European central bankers came up with a plan to support the status quo in order to buy the time they needed. They needed a little help from Paul Volcker, so they confronted him in Belgrade in October of 1979, and he did what was needed even as it went against the wishes of Jimmy Carter. He initiated deflation. Aaaand… you know the rest of the story. ;D

Sincerely,
FOFOA

_____________________

Focal Point: Gold

From Focal Point: Gold, here's 'We are the Champions' by Queen. Focal Point: Gold was about the game theory concept in which there can be only one winner, and I thought the lyrics fit the post in terms of the trials and tribulations gold will have endured on the long road to Freegold:

"…it's been no bed of roses
No pleasure cruise
I consider it a challenge before the whole human race
And I ain't gonna lose…"



Kicking the Hornets' Nest

From Kicking the Hornets' Nest, here's 'In the End' by Linkin Park. Hornets' Nest was a post about the "silver warriors" (hornets) that didn't like my Focal Point Gold post. Perhaps you remember them; those people who were going to crash the TBTF bank JP Morgan by buying anything and everything silver (even scrap like old silverware was recommended for those who wanted to fight for the cause but didn't have many resources) and bidding it all the way up to $36 per ounce which was reportedly the magic price that would bankrupt one of the largest global banks. I thought the lyrics were befitting these valiant toy soldiers:

"…even though I tried, it all fell apart
What it meant to me
will eventually
be a memory of a time when

I tried so hard
And got so far
But in the end
It doesn't even matter

I had to fall
To lose it all
But in the end
It doesn't even matter…"