Friday, October 18, 2013

Gold as a FOREX Currency

Another gold writer emailed me the other day with a few questions about my take on the apparent disconnect between the gold price action this year and "physical gold's obvious fundamentals." I explained to him how the POG (price of gold) is thoroughly and utterly disconnected from the physical segment of the gold market today. I said that any increase in physical demand (due to physical gold's obvious fundamentals) does not, cannot, drive the price higher today. It does one thing and one thing only, it stresses the current gold market structure.

The reason, I said, is that physical gold's fundamentals have nothing to do with "today's gold market." Today's gold market is "majority-owned" by gold trading as an electronic FOREX currency, which has almost nothing to do with the physical side of the market. That exchange by itself would probably make a good post, but this one is all about his primary follow-up question, which was:

"The area where I’m still hazy is the gold as a FOREX currency."

The following was my reply to his question, which I wrote in great detail with the intention of turning it into a post because it's something I haven't seen any other gold writers even acknowledge, let alone factor into their POG analysis:

As you well know, the POG rose in the 70s, but then in the 80s and 90s it fell from about $500 down to $250. During the 80s and 90s is when the CBs started leasing gold, or at least lending in gold-ounce-denominated units (lending their good name as Another put it: "Understand, they only lend their good name on paper, not the gold itself"), so that the bullion banks could help the mines hedge against the declining POG and not only keep producing, but actually increase production. From 1985 to 2000, global gold mine production increased from 50 million ounces to 82 million ounces per year, even as the POG was halved.

Checkmate is a good post for this wide view, or just watch this video by Freegoldtube, from the bottom of Checkmate, which has some relevant quotes from FOA:


This gold leasing/forward hedging started around the same time as Barrick switched focus from oil and gas to gold, around 1983, but by the mid- to late-90s it was more than mines taking these gold-ounce-denominated loans. Hedge funds wanted in on the gold carry trade too.

Meanwhile, following the closing of the gold window in 1971, gold received its official ISO 4217 currency code: XAU. This happened in either 1973 or 1981 (I'll explain the uncertainty in a moment, but I assume it was 1973 although I don't have the 1973 list). Silver received its own currency code, XAG, in 1983, platinum (XPT) in 1989 and palladium (XPD) in 1993. I mention these dates to show you how new all of this is. Mine forward hedging, CB gold lending, gold carry trade and metals trading alongside currencies on the FOREX. All very new.

Last year I emailed the currency ISO office in Switzerland to obtain this information. Here was my email and the reply I received:

Dear Sir,

I have a question about XAU (and the other commodity codes XAG, XPD, XPT). I understand that ISO 4217 was developed in 1973 and adopted a few years later. I also understand that SIX periodically publishes updates to the list, the latest being in 2008.

My question is: Was XAU on the list from the beginning in the 1970s, or was it added in one of the later published updates? And if so, what year was XAU added as a currency code for gold (as well as the other commodity codes)?

Lastly, if you could direct me to a copy of that historic publication in which XAU was added, that would be much appreciated!

Sincerely,
FOFOA

Dear Mr. FOFOA,

Thank you for your mail. Unfortunately we do not have a copy of the 1st edition of ISO 4217:1973. XAU was added either from the beginning in 1973 or later to the 2nd version in 1981. I attach the 2nd version for your information. [Click here to download the 2nd edition of ISO 4217:1981]

For the other commodities please see the following amendments:

XPD (Palladium): Amendment number 65: http://www.currency-iso.org/dl_currency_iso_amendment_65.pdf issued: October 1993
XPT (Platinum): Amendment number 25 and 36: http://www.currency-iso.org/dl_currency_iso_amendment_25.pdf issued: 8 March 1989 and http://www.currency-iso.org/dl_currency_iso_amendment_36.pdf issued: 29 January 1991
XAG (Silver): Amendment number 8: http://www.currency-iso.org/dl_currency_iso_amendment_8.pdf issued: 21 October 1983

I try to get the first edition of ISO 4217:1973 from ISO and if successful I will forward it to you.

Yours faithfully,

Marianne Nikles
Secretariat of the Maintenance Agency
for ISO 4217
c/o SIX Interbank Clearing Ltd
P.O. Box
Hardturmstrasse 201
CH-8021 Zurich
Switzerland

office@currency-iso.org
www.currency-iso.org

Everyone knows about the mine and hedge fund involvement in the gold carry trade in the 90s, but much less attention has been paid to gold's use as a currency in the foreign exchange market (the FOREX), which continues to this day. I'm sure you are aware of the massive size of the FOREX market compared to other markets, but here's what Wikipedia says about its size:

According to the Bank for International Settlements,[4] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.

"Daily volume" and "daily turnover" are confusing terms, because there are different ways they are estimated in different markets. Double counting, for example, is one potentially confusing factor. But I think that the sheer size of this market is what is most amazing, whether it is $2T, $4T or $8T per day changing hands, it still dwarfs other markets.

In January of 1997, the LBMA released its "daily clearing volume" for the gold market which was an astounding 30 million ounces or 930 tonnes per day. At the price of that time, that was about $10B per day. Today, thanks to the 2011 LBMA survey, we know that "total daily turnover" is about ten times "daily clearing volume", and that "spot" (as opposed to forwards, swaps, options and other derivatives) makes up 90% of that volume. That's the "gold spot market" today! About $100B daily turnover in January 1997, and $240B per day in 2011, the equivalent of 5,400 tonnes total, or 2,700 tonnes changing hands every day! And that's from 64% of the LBMA members reporting, so it's likely higher, especially once you add in non-LBMA (retail) FOREX trading.


For comparison, the annual flow from mining and scrap recycling is about 4,000 tonnes. That's annual. So the physical flow from mines and recycling compares to the LBMA spot market like this. About 16 tonnes per day in physical versus 2,700 tonnes per day in the "spot market". Now what could possibly constitute such an enormous "spot market"? FOREX trading.

The FOREX market is a $4T per day market including all currencies, and it looks like the "gold trading as a FOREX currency" portion of that market could be $240B at a minimum, possibly higher. That would make "paper gold" a full 6% of all currency trading in the world, including dollars, pounds, yen, euro and the rest of the 178 "currencies" with their own ISO 4217 codes. Think about that.

Amazingly, this was clear to some even in 1997. That's what spawned the Red Baron series, and I think the LBMA revelation was at least partly responsible for A/FOA showing up on the scene. Who knows, maybe Another was the one who leaked it to the London Financial Times! Here's a bit from My Candid View – Part 4:

Back during the London Gold Pool years (late 60s), physical demand did drive the price of gold up. And, perhaps in the late 70s and 80s and even into the mid-90s, Comex futures were more than just a side show in driving the price. But today I think it is clear that there's much more money chasing gold in the FOREX market than anywhere else. How else can we explain the volume in the LBMA survey? And I didn't come up with that explanation. It first appeared in 1997 right after the LBMA first revealed its tremendous clearing volume. Note that clearing volume was still shocking then, but it's also much smaller than total volume. From the Red Baron series circa Sept. 1997:

"The formidable volume of daily trading strongly resembles that of currency trading."

"This suggests (at least to me) the trades are non-Central Bank transactions - and more probably commercial operations related to CURRENCY TRADING."

Now, currencies trade in pairs, like USDJPY or XAUEUR. The first in the pair is the "commodity" you are trading, and the second one is the "money" it is priced in—the denominator. So if you are long USDJPY, you are essentially long dollars and short yen. Earlier, you mentioned how it's easier to play the market from the short side when the price is falling, and I mentioned a conversation I had with FOREX Trader back in early June, which you hadn't seen.

Here is that conversation. It was about the implicit carry (interest rate differential) built into currency pairs and cleared overnight, possibly giving institutional money (like pension funds) a built-in "yield" as an additional incentive to short FOREX "gold" around May of this year. It was unusual enough that it caught his attention and he sent me an email:
FT: Hey FOFOA,

Nothing new on the wire to report from my end. But I did have an interesting note for you which I've been meaning to email about, unfortunately been very busy.

The note is that carry is kind of screwed up in the FX market. As a simple example, EURUSD shorts are paying carry. Also, XAUUSD and XAUEUR shorts are as well, at least for the last couple of weeks since we noticed here in the office. Relative to the other G10 carries available, especially if you don't include the comdolls (NZD/AUD/CAD), the rate available is pretty good ($16/$1,000,000/night) on a relative basis. About a quarter of what you get for an AUDUSD long and about 4 times what you'd get on a USDCHF long.

I am very certain that this carry (combined with the technical position of the charts) is incentive for a lot of traders to short the FX pairs on leverage, carry can be a major consideration when trading a levered position. For example, we pretty much never hold overnight positions in AUDUSD or AUDJPY.


FOFOA: Can you explain this a little more? Are you saying you earn a small "interest rate" when you short the euro or gold?

FT: Surely you have heard of the "carry trade" before? Let me explain it. Basically, the original investment thesis was essentially: given two "risk free" instruments, yielding differing interest rates, a trader purchases the instrument with the higher rate on leverage, and funds that position by shorting the instrument with the lower rate, at the same amount of leverage. This allows the trader to collect the "carry" or "swap", which is the overnight interest rate differential between the two instruments.

This concept is the cornerstone of almost all financial activity which occurs, as long as there is margin to borrow. Obviously a simple example would be the "bank spread", i.e. short 1-3Y Treasuries and long 10-30Y Treasuries.

Same applies, implicitly, in spot FX. If I am long $1,000,000 AUD and short $1,000,000 USD (i.e. long 1 AUDUSD contract) then each night as the banks roll over their intraday positions (squaring the books), I earn the interest rate differential (e.g. AUD LIBOR minus USD LIBOR divided by the number of trading days in that year) from whoever is on the short side of my long (through the broker). If I am short 1 AUDUSD contract then I must pay the differential to whoever is on the long side of my short.

Currently, both XAUUSD and XAUEUR shorts are paying carry. During a technical uptrend in an instrument like AUDUSD, this is a strong disincentive to short the instrument, as the trader must pay the differential to hold the position. A technical downtrend which pays carry on the other hand, gives incentive to the trader to short, the more leverage applied the higher the multiple applied to differential earned.


FOFOA: Thanks. Yes, I understand the basic carry trade (borrow one currency and sell it short to invest in a different, higher-yielding currency). Like the yen carry trade – borrow yen, sell them for dollars, use the dollars to buy Treasuries. Or the gold carry trade. Borrow in gold units, sell them for dollars, invest the dollars. You not only earn the interest differential but you also profit even more if the borrowed unit falls in value relative to the invested unit. And if enough people are doing this, the very act of doing it pushes down the borrowed unit. It's all great until it's not and everyone rushes to unwind the trade first. Sound right?

I just need to wrap my head around it in FOREX terms since I've never traded currency pairs.


FT: Yep that is exactly right, the only difference is that in spot FX, all of it is implicit, i.e. you don't need to go out and borrow to short, or invest the dollars in Treasuries, your short is part of the pair and you can earn the overnight rate directly.

FOFOA: One thing that was confusing me was your trader lingo: "the shorts are paying carry." To a non-trader who doesn't know the lingo, that could be taken both ways. As in "the short traders are having to pay the interest rate differential," or "short positions are now being paid the interest rate differential."

FT: Sorry about that! Never even occurred to me :P

I'm not sure I remember the last time trading XAUUSD paid carry in either direction, so I thought it was quite interesting. Obviously interest rates have had a jump over the last month, but I doubt if that's enough to account for this. It seems possible that the "interbank/overnight rate" for XAU has gone down significantly, driving up the rate differential?

The way I like to think of it is, if the US 10Y yield goes from 5% to 2.5%, then this indicates there has been strong demand from the market to lend 10Y money to the US Government.

So if the XAU "interbank/overnight rate" goes down, this indicates there is strong demand from the market to lend overnight money to ...???


FOFOA: Just to be clear on this "the shorts are paying carry", if I hold a $1M short position in XAUUSD overnight (I'm shorting gold because I think the $POG is going down), do I get paid $16? Or do I have to pay $16?

FT: Haha sorry, yes, to be clear, if you short XAUUSD then you get paid $16.

FOFOA: Thanks! And now who is paying me? Is it someone who holds a $1M long position in XAUUSD overnight? Does it now cost $16/night to bet on gold in the FOREX market?

FT: The person paying you is nominally your broker, but what's happening is everyone that has a long on XAUUSD is paying the broker and the broker is disbursing that accordingly to the shorts.

The differential is not nominally symmetrical because FX contracts are denominated in the "right hand" currency in the pair (in this case USD). So it actually costs $21 to bet on XAUUSD longs. Although I believe the differential expressed in percent should be symmetrical.


FOFOA: So it sounds like this is a big incentive to be short gold on the FOREX. How do you read this?

FT: I think it could potentially be a big incentive in the same way as I've been using AUDUSD as an example. Following a trend is nice because of the potential for capital gains. Following a trend which pays cashflow is obviously nicer. Leveraging a trend which pays cashflow, nicest of all, back up the truck.

MY SUMMARY: There is an unusual incentive right now to short gold on the FOREX. You get paid to do so, and it's the longs that are paying the shorts. This is separate from the capital gains made when gold actually goes down. So if/when gold goes down, the longs are not only taking capital losses, but they are paying the shorts an interest rate differential for the "privilege" of being long paper gold (overnight).
[Note: The above exchange was back in June, and it related roughly to the April-June timeframe. FOREX Trader brought this to my attention because he thought it was an unusual situation. He couldn't recall seeing the XAU shorts getting paid the carry before, although it's not something he normally pays attention to. Another FOREX trader also brought it to my attention that this would not necessarily be available to retail traders because fees, spreads and rates are often less-friendly to the traders at retail brokerages. That's why I specified institutional money at the top.]

Also in my last email, I mentioned that with "only" 3X leverage institutional money could turn that carry into a reasonable yield in a no-yield environment, to which you raised an eyebrow. Apparently, leverage is quite common in FOREX trading. Here is my comment about leverage back in June under my "Black Gold" post:

Hello MdV,

I mentioned your comment to FOREX Trader because he doesn't really follow the comments.

Regarding 50:1 leverage, he said that retail brokers usually offer up to as high as 400:1 leverage to would-be currency traders. But he said that you'll rarely see professional FX traders using more than 20:1 leverage, and even then it's usually only the day-traders using that much leverage. He said at his office it's generally more like 3:1 or 2:1.

When you increase the leverage, there is a massive increase in the "cash flow" of the invested capital, but it also increases the potential for a margin call, which he says is obviously why retail brokers offer such high margin. For example, at 50:1, you'd only have to deposit $20,000 to hold that $1M XAUUSD short overnight and earn the $16. That equates to an annual interest rate of 21% which is HUGE. But the downside is that a 2% adverse move in the underlying is going to mean a margin call, which means you could lose the whole $20K if gold goes up 28 bucks and you don't have more cash to wire to your broker.

At 400:1 leverage (just for fun), you'd be earning a "carry" (interest rate differential) of 170% annualized. But the bad news is that gold would only have to move up $3.47 before you would either lose your whole wad or have to deposit more. Imagine having to deposit another $20K each time gold moved up $3.50 and you've only got $100K. If gold goes up $18 you'll lose the whole $100K, even if it then goes into free fall right after you went broke.

My point is, the high leverage offered by retail FOREX brokers is probably a cash cow for them (not you). But the real pros (like FT) are only using 2:1 or 3:1 leverage.

With lower leverage, he says: "This is where the technical trend comes in, allowing you to run your carry position with a tight "stoploss" that should stick unless the trend reverses. If you're a large investor with cashflow requirements (think pension funds and whatnot) then positions like this can be a moderately attractive way of earning a 5% "yield" in an otherwise yieldless market."

Sincerely,
FOFOA

How many other gold writers have you seen that have even mentioned this $240B+ per day segment of the gold market, let alone analyzed its impact on the price of gold? In my last email, I told you how I answered someone who asked, "Can you point me somewhere (or perhaps you have written about it - and it has escaped me) what determines the daily (paper) Spot price. Does anyone know the factors involved?" Think about the relative weight of this $240B+ paper gold market as you read the bolded part at the end:

Have you ever noticed that the spot price is often slightly different depending on where you look? I just opened Kitco and APMEX simultaneously and the ask is $1,295.70 on Kitco and $1,296.20 on APMEX. The answer is that there is no official spot price. Everywhere you look for it the price you see quoted will either be from a live trading platform and, therefore, the opinion of thousands of traders who are looking elsewhere for reference, or else, as with Kitco and APMEX, it will simply be reporting the going price on some active trading platform. So there is no official spot price. There is only the opinion of thousands of traders who are all cross-referencing thousands of different correlated items, charts and other active trading platforms in search of an opportunity at any given point in time.

Which segment of the gold market do you think carries the most weight when it comes to determining the spot price of gold at any moment in time? GLD daily volume is around $2B. What is COMEX daily volume? Isn't it somewhere around $20B? And the LBMA reports a daily volume of $240B, 90% of which is "spot gold" or about $216B per day. So COMEX is about 10 times the volume of GLD, and LBMA "spot" is around 10 times COMEX and 100 times GLD. Does that sound about right, or am I getting something wrong here? I realize that I'm comparing "daily volume" to "daily volume" and there may be a margin of error due to differing methods of reporting "daily volume", but with an order of magnitude difference between LBMA "spot" and anything else, it's pretty safe to say that LBMA "spot" carries the most weight when it comes to determining the POG.

Here's a screen shot of a FOREX trading platform that "a big physical dealer out of the mid-east" provided to another gold writer. He said he uses this platform to purchase gold, and that he also takes delivery from the platform provider (FOREX Trader said that would be called a "physical ECN" if true). As this particular story went, he was able to buy and sell as much as he wanted, but was, on occasion, limited as to how much he could take immediate delivery on. Here's a quote from the story as it was told: "…physical orders were getting partially filled. If they ordered say 10 Kilo's they would get 5 or 4 as confirmation, and would have to wait for delivery of the balance."


I asked FOREX Trader if this screenshot looked like a physical ECN to him and here's what he said:

"There is no way I can verify based on the screenshot whether or not his access is to any physical ECN. But from my personal experience, it doesn't look like it. To me it looks more like any regular bucketshop CFD brokerage account. First of all, the spread (60c) is 10c higher than most CFD brokers offer, and definitely way higher than what you get on the interbank at 3:30PM London, 30 mins after the fix! Secondly, all you can see is the spread, you can't see the market depth even 1 level down. For example, I link a screenshot of MB Trading (which is an ECN -not interbank- broker that I do have an account with) http://www.onestepremoved.com/wp-content/uploads/2012/02/sampleMarketDepth.png, thirdly it only seems to show the ability to buy/sell at market (as opposed to limit orders), which is another very big red flag that it's a CFD account.

However, while all three of these points trigger my skeptical side, like I said I have no real way to confirm or deny whether he is trading a physical ECN, there are a million software packages out there, each broker often provided support for at least two and there is no standard on how they should look."

I mention this FOREX Trader email for a couple of reasons. First, notice the term "interbank". Here's what Wikipedia says about the interbank:

The interbank market is the top-level foreign exchange market where banks exchange different currencies.[1] The banks can either deal with one another directly, or through electronic brokering platforms. The Electronic Broking Services (EBS) and Thomson Reuters Dealing are the two competitors in the electronic brokering platform business and together connect over 1000 banks.

The point I want to make here is that there seems to be a kind of pyramid structure to the FOREX market, with the interbank at the top tier of the pyramid. Down at the bottom of the pyramid you have the retail FOREX trading platforms available to you and me. You have to be a bank or a pretty big player, a wholesaler or a middleman to deal directly with the LBMA bullion banks as evidenced by the number of trades reported in the LBMA survey. The daily average reported was 6,125 trades totaling $240B. That breaks down to about $39M per trade, or 9/10ths of a tonne.


And that's why I think that this segment of the "gold" market could be larger than $240B per day. So what's the dog, and what's the tail? Remember that Another said, way back in 1997, "And Comex is nothing, if "only a silly game". Worldwide trading in gold could be cut in half and still equal all the metal in existence!" He also said, "Comex is a side show!"

It would be interesting to see how the LBMA would explain those 6,125 trades averaging $39M per trade, which over 36 reporting members averages out to 170 trades per LBMA member per day, each at almost 1 tonne. It's a stretch to imagine even a top tier FOREX ECN (electronic communications network) in which the average trade is $39M. So I imagine the LBMA would simply say they were OTC spot unallocated transfers between clients. But then who are those clients? I imagine they could include FOREX trading brokerages, some of which are owned by the bullion banks themselves, and each of which would carry a gold-ounce-denominated balance, directly or indirectly, with a real bullion bank that also deals in physical. A kind of FOREX brokers' gold-ounce-denominated liability clearing system for the various ECNs.

I suppose you could say that gold trading as a currency is, to an extent, "backed" by the much smaller physical segment of the market. In other words, "gold trading as a currency" requires, needs, depends upon a functioning physical market which trades at parity to paper gold. But the physical portion of the market does not require, need or depend upon the paper side. It's not a symbiotic or mutually beneficial relationship. It's more like a parasitic relationship, where the parasite cannot survive without the host, but the host will be just fine, even better, without the parasite.

How does this tie back into everything else I write about? Well, I think it should help you understand how the price of gold is not driven by the physical segment of the market, and therefore parity between the two is not as solid as it seems.

Of course there is no ironclad proof that the majority of LBMA volume in that survey is FOREX trading, but I have yet to see a better explanation, or any other explanation for that matter. As far as I'm concerned, that is the explanation until I see another contender. Can you think of any other activity the bullion banks are involved in that could account for $240B daily volume in gold trading?

I'm sure that some of that volume is straight-up unallocated gold savings (as opposed to trading) accounts, and some is probably physical changing hands, but the vast majority must be gold trading as a FOREX currency. And tell me, what would be the difference between a plain-vanilla unallocated gold account at a BB and an XAUUSD trading account balance at that same bank? The answer is absolutely nothing! Those gold-ounce-denominated credits are essentially the same thing. You can even ask for physical delivery from a FOREX trading account if it is with a bullion bank that deals in physical, which is why I mentioned that screen shot and the story from the large Mid-East gold dealer.

This astounding volume has been known since 1997, but have you seen anyone talk about it relative to COMEX or GLD? Today the LBMA "daily clearing volume" is $29.9B, and from that survey we know that total volume is roughly ten times clearing volume, so that means total volume could be up to $300B per day now. Here is the average daily clearing volume from Oct. 1996 through present, in ounces, $ value and number of transfers. The 2011 survey is the only thing concrete that we have to show how "total volume" relates to "clearing volume", but even with a margin of error, how else can you possibly explain these volumes?

We know the FOREX market is huge. We know that gold (XAU---) is part of that market. And we know the LBMA released its astounding volume data for the purpose of demonstrating that gold is a deep and liquid market. 2+2=4. I think it's really that simple, even if no other gold writer mentions it. But if anyone has a better explanation for that volume, I'm all ears! ;D

Today, any paper gold is just as good as real physical gold for the purpose for which people buy gold, which is to buy it today and sell it later, or as a hedge. Any paper is just as good as physical as long as they trade at parity!

You brought up the argument that "the people playing this game don't want gold, they just want to trade its volatility." True, and also some want it as a hedge or insurance for other investments. But what they all want is provided by paper gold as long as paper and physical trade at parity. They don't want physical because, today, there's no functional difference between paper and physical except that physical costs more to store. But when paper gold fails to perform that function for which everyone buys "gold", they'll want what the physical holders got. So it doesn't matter that they don't want delivery today. They still do want the same thing from "gold" that everybody else does, which is exposure to the price action in physical gold. But today they are only getting exposure to the price action in their massive paper gold market, which has a tenuous parity relationship with the much smaller physical market.

Here is FOA talking about how the paper gold holders think they are betting on what's happening in the physical segment of the market when, in reality, the physical segment is struggling to trade at prices determined in the oversized paper segment of the market:

FOA (7/4/99; 11:01:14MDT - Msg ID:8384)
Gold: Saving Real Money In A Time Of Transition

Clearly, the intent of this paper market, is to bet on the price of gold as it is determined by the buying and selling of other physical traders. The western public should take these trades for the concept they truly represent. ""I (the long side) bet on the "price" of gold not because we need or want the physical metal. Rather, my wager is that others will need real gold to protect themselves from bad monetary systems. In fulfilling that "need to own", these others will drive up the dollar price and I will make money while working within the confines of our good monetary system.""" The shorts make the opposite bet, in that they think the world monetary system will work itself out and induce "the others" to sell all their gold. That is, gold they bought in the first place, because they did not know that our money managers could repair the world financial system.

Yes, today Western longs and shorts are playing out these two views of the gold market. Yet, both sides are using paper gold bets to represent their beliefs. Truly, the major majority of this market does not buy or sell physical gold to represent their investment concepts. There are a few that buy coins and bullion, but, even in their large amounts, it is only a drop in the paper gold bucket.

This, my friends, is the very nature of western trading of gold. The mindset is to treat it as a concept for making currency, not protecting existing wealth. […]

There are many mental angles and philosophical side steps one can take when understanding the above. But, in this concept lies the very basis of the flaw in the current gold market. A paper market, built upon world misconceptions of currency values and the historical reasons for owning gold. The present deployment of world assets into a paper system of valuations is likened to traveling a trail of no return. History has shown that the assets accumulated in this way will never be transformed into "the things of life"! The paper wealth you currently own is nowhere near the real value your currency says it is. With the above introduction, we have begun close to the end of this journey. In the upcoming chapter one, we return several miles to walk ground already well traveled. We will observe concepts on the right and the left, not discussed by other guides. The very sights that make such a trip, "worth wile".

"You will see this trail thru the eyes of history and feel old ways as new Thoughts!" Another

I dug out a few more quotes from FOA for you, to hopefully encourage you (and others) to dig into the archives yourself. Here FOA mentions how the paper price of gold can fall even in the face of high physical demand:

FOA (8/10/99; 19:56:56MDT - Msg ID:10858)
Comment

"Another" counseled later that the gold market, as we know it was in danger of failing. In this case, failing means less and less major players are offering bids for future paper in the top tier markets because the gold can't be supplied. This loss of bids allows the paper price to fall further as present paper holders also attempt to sell. This is the "EXACT" reason that gold does not respond to the major financial events of today! Believe it! Local downstream physical dealers, because they use the Comex and LBMA paper market as a price creator, continue to sell gold at lower prices even as buyers come in droves.

FOA (8/23/99; 21:10:00MDT - Msg ID:11896)
Comment

The large funds don't want the trouble of real gold so they continue to play this game of "let's bet on the gold price and see who is right"! Today, they are learning a painful lesson that the stated price for gold is established by the same derivatives that they don't want to exercise. In their world, they are convinced that massive physical gold is but a phone call away for shipment into certified warehouses, so the derivatives price must truly reflect the real market.

FOA (9/1/99; 21:12:43MDT - Msg ID:12639)
Reply

The end work of this process has found the 3,000 or 5,000 ton per year real bullion market, is little more that a sea shell on a fifty mile beach. Everyone on the "gold net" already knows how much LBMA trades and that is small stuff compared to the other unseen world markets. The debth and liquidity of the paper market moved the bullion trade into the "pink sheets". Needless to say, today, the famed "closing bullion price" is set by the cash commitments that bid for derivatives, not the cash that bids for bullion. In the old days, really big traders would arbitrage any such paper overhang against bullion by calling for delivery. Today, with the paper market so large, any such power play would find most traders taking delivery of gold as the market is sold out from under him. Besides, this new market perspective works against any long traders because none of the present "derivative gold demand" wants delivery! They only want to settle in cash, because taking delivery would require selling their other "better performing" investments. The mindset today is that gold is only an insurance hedge, as such "an increase in its price will settle up in a cash delivery to me, to offset my other risk of cash impairment to my portfolio"! To further develop: "I don't need physical gold, I only need to participate in its price movements"!

In complete satisfaction of the current trend, derivatives fill the bill for this current gold market. Clearly, we can see that this new market is not "fraudulent". There is nothing wrong with players pouring margin money into the short side to create a demanded product! It's has evolved into a cash game. This is where GATA is fighting a war they cannot win. Gold bugs (of the last few years) were viewing the present market using 70s eyes. Indeed, they were investing in an industry that was losing primary demand for its product, even as "the need" for that product was exploding. This new gold market found a way to channel the "modern need" for gold's attributes away from physical demand and into paper supply. You simply can't create a short covering run if none of the current (insurance) longs want to take delivery. Even worse, as this trend was further developed, more and more old private physical holders were selling their gold and holding paper instead. Add to that Western dollar supporters wanting their currency to look good, and we have paper gold supply that's also used as a form of positive currency intervention. Anyone investing in the gold industry, expecting bullion to explode from all the new demand was truly disappointed. For every new Western gold bug that wanted gold for insurance, there were five paper sellers to supply him with all the gold insurance he needed, at a fraction of the cash commitment. Peter, (if you are still with me) this is only the end of this act, not the end of the play. We have been standing on the trail and looking at where we have just travelled. Now, let's turn around and look forward.

[…]

Once again, the needs of investors will redirect the method of using gold. As the wealth effect of the Dollar/IMF system goes into reverse, the process of receiving your gold hedge insurance in dollars will be perceived as a risk. At this stage, all of the past demand for gold that was channeled into cash settled paper derivatives will suddenly reverse its trend. Slowly, more and more of a percentage of settlement will be asked for in real gold. As delivery fails from increased demand, existing derivatives will be dumped upon the market place in an attempt to cash out. This very process will: First dry up all gold supply and lock down any existing private stocks. Second, cash biding on the dealer market will become convoluted and reflect only gold's currency value. It's economic / industrial use will be priced totally out of the market. Third, what was once the world price making market for gold, will become useless for delivery as its contracts are defaulted on and discounted in price. What price could the world gold price be set at, using these defaulted, bond like securities? How low does russian debt trade?

I pulled these quotes by searching the term "paper market" and, yes, there were lots of hits. Here's one quote I'm including because it could almost explain what we saw over the next 14 years up until today in the gold market:

FOA (09/06/99; 20:56:39MDT - Msg ID:12946)

Remember, the present financial system has a need for new mined gold to flow into derivatives at a low price to support the paper market. The same paper market that keeps oil behind the dollar also holds the dollar together. As of today; To further pull existing "old gold" from portfolios by forcing the street price down now invites a run from the dollar. A high physical "street price" will at least keep the dollar in play when price inflation begins. If the paper gold price rises from its present level, will gold stocks follow? Probably! But what if that rise ends quickly as the gold market begins its next "official" failure run?

Is that where we are in 2013, in the gold market's next official failure run?

Here's a little bit of the "wide view" I mentioned above:

FOA (10/31/99; 18:56:22MDT - Msg ID:17990)
Comment

Slowly, everyone is coming around to understanding how our gold markets got so far off track. The official determination of what constitutes "buying and selling gold" never started this way. In the beginning gold was wealth and people traded it as money. Jump ahead to the US timeline and we see currency a gold loan that didn't pay interest as it was the US dollar. You loaned your gold to the treasury and they gave you a contract stating that your metal was held until asked for. Your contract stated that 1/35 ounce of gold was owed you, on demand. Because no one asked for their loan to be repaid, the treasury just kept creating more loan contracts even though there was not enough gold to repay with.

After this "gold loan scam" went bust around 1971, they went back to using real gold again. The government allowed trading in physical in the US just as it was done in the rest of the world prior to this event. Then someone used the gold fabrication industry as evidence of a "need" to create a US futures market so suppliers could paper hedge risk. No need to make the point that this paper market was of little need as the gold industry had worked well for thousands of years without it. Indeed, another form of gold derivatives was just born. The gold market was destine to evolve again as the distinction between trading real bullion and betting against someone on the direction of the metal's price movements became one and the same. People accepted that a gold derivative was just as good as gold as the pre-1971 dollar was. We came full circle.

Pulling these quotes is actually fun for me, so I could keep doing this all day, but then this email/post would be 40 pages long. So I'll leave it at this for now. But there's much more in the archives. I only scanned less than 25% of FOA's posts to pull these quotes.

The point is that the paper gold portion of the gold market is where the price of gold is discovered, and it appears that gold trading as a FOREX currency is the largest portion of the paper gold market, by an order of magnitude even. The daily physical flow from mining and recycling is around 16 tonnes while the LBMA tells us that their spot unallocated flow is in excess of 2,400 tonnes per day. Here's one last quote from FOA:

5/3/98 Friend of ANOTHER

Gold is valued by the number of outstanding claims against it. Kind of like a house for sale with ten bidders. Each bidder thinks the house is in the bag because they have a valid bid ticket. Each one thinks he can have the house at any time, even though nine others want it too, because all I have to do is bid a little higher and take it! Insane, but that's what is going on! Somehow, the BIS and the major private gold holders know the total claims, as does Another.

Total loco London gold turnover in the first quarter of 2011, as reported by 36 LBMA members, was $15 TRILLION. Total turnover as reported in ounces was 10.9 BILLION ounces, or 340,402 tonnes over 63 trading days. That's a lot of trading! I wonder which market that includes "gold" has the depth and liquidity to entertain such volume, since it's obviously not the physical market, GLD or even the futures markets.

"The area where I’m still hazy is the gold as a FOREX currency."

Is it still hazy? ;D

Sincerely,
FOFOA

And the light bulb goes on!

Awesome, thanks for this. I’ll re-read again and get back to you in a few days… got a bit going on right now.

Thanks again FOFOA.
______________________


580 comments:

1 – 200 of 580   Newer›   Newest»
Bjorn said...

Those are some great Foa quotes! Thank you! And also... First! ;-)

steerpike said...

The daily physical flow from mining and recycling is around 16 tonnes while the LBMA tells us that their spot unallocated flow is in excess of 2,400 tonnes per day.

maybe de same tonne is being bought and sold 150 times
a day.

How is that for a stupid remark?

michael3c2000 said...

Another landmark post FOFOA! And timely.
Derivatives never had it so gold.
http://financial-dictionary.thefreedictionary.com/Currency+Carry+Trade
- Mikal

michael3c2000 said...

Bad money drives out good and computer-driven money drives a hard bargain.
http://www.zerohedge.com/news/2013-10-18/hft-scourge-ending

S P said...
This comment has been removed by the author.
Dante_Eu said...

Great article FOFOA! Although I don't understand much of it. :-)

And...WOW, Awesome Parrot! :D

Woland said...

Great FOA quotes. I had never seen FOA 7/4/99 ID8384
before. It clarified the logical contradiction of paper gold:
IF;
1. Gold is an insurance hedge, which will be settled in the
dollar price of gold, and
2. Insurance is a product which a) needs a seller, and b)
must be periodically renewed, then
3. From WHOM will you buy/roll over your gold $ price
"insurance", if and when the event you are insuring against,
a "collapse of the dollar's value", comes to pass.

It's kinda like an insurance company which only underwrites
hurricane insurance having all its reserve assets invested
in mortgages on homes within the hurricane zone.


Aquilus said...

People still call it "Gold". Its real name really is XAUUSD. If you don't see your favorite gold pundit realize that, that is not the pundit you were looking for (waves hand)

Excellent article! Should be required reading for anyone before they say they understand anything about the 'gold'(XAUUSD) market.

Aquilus

Beer Holiday said...

This is great!

The analysis of how the gold market works is one of the many things that sets freegold apart from the mainstream gold sprukers IMHO

For example when someone ( I think it was M !) asked Peter Schiff about freegold and he responded along the lines of "that's what we have today"

It's really amazing how little attention most gold bugs, especially of the libertarian persuasion, pay to how the gold market actually works.

Gary (not the evil one!) said...

Thanks FoFoA - this is so important to understand where we are going and why almost all the pundits don't 'get it' with their constant predictions of a higher paper price using data of the accumulation/hoarding in the physical market. The 2 are, essentially, mutually exclusive.

Roacheforque said...

I remember the June article and it was most interesting. I got tangled into a ridculous argument over it at another blog where someone posited that the magnitude of the forex market overwhelmed the "need to buy oil in dollars" (an unrelated topic? Not really).

But in the end, the moral of this story is that while the little people can follow in the footsteps of Giants by holding physical, the blood is far too rich where the real money is made, and it is THAT system of wealth accumulation that keeps the present IMF$ in perpetual play.

I hate to quote myself but ... "The 1% produce nothing but slips of paper, through their banks, claiming wealth in payment for wagers of outcomes that they have expertly manipulated against financial "systems" which have more wealth than street smarts."

This is FOREX. Where it truly "takes money to make money" and where the "real money" is made, for what it's worth ... which is of course the essential question is it not?

For what it is worth?

Great follow-up post. I believe Ender should have something to add? He did have some interesting comments around that June time frame, or a bit earlier.

Roacheforque said...

Oh, and going back further than FOA, who could forget this memorable gem?

"This convertible gold market is old from the mid 70s but is new from the early 90s. It is old by the 70s because it is "freely convertible", but it is new by the 90s as it "is not" "freely tradable"! The US$ price of physical gold is no longer "fixed" from supply and demand, rather it is "created" through the market action of "paper gold". Truly, it is the US$ has become the "item traded" in the "paper gold" market, not physical gold. Participants have yet to realize that the gold futures, gold options and gold forward markets, worldwide, have become little more than currency trading arenas. The percentage of gold delivered against these markets has grown so small as to be nonexistence when compared to actual metal settled at closing. Physical gold does still move, and in size, but this is little or nothing compared to the "paper gold" traded."

Clearly, in the context of your Forex Trader, Another was "spot on" here.

Happy!

Lisa said...

FOFOA

WOW- EXCELLENT - etc - I echo the comments above. The currency/FOREX stuff is all starting to make sense to me.

Quoting you & FOA from above - this summarizes it all for me:


(YOU) "The point is that the paper gold portion of the gold market is where the price of gold is discovered, and it appears that gold trading as a FOREX currency is the largest portion of the paper gold market, by an order of magnitude even."
=>>>>>
(FOA) "As the wealth effect of the Dollar/IMF system goes into reverse, the process of receiving your gold hedge insurance in dollars will be perceived as a risk. At this stage, all of the past demand for gold that was channeled into cash settled paper derivatives will suddenly reverse its trend. Slowly, more and more of a percentage of settlement will be asked for in real gold. As delivery fails from increased demand, existing derivatives will be dumped upon the market place in an attempt to cash out. This very process will: First dry up all gold supply and lock down any existing private stocks. Second, cash biding on the dealer market will become convoluted and reflect only gold's currency value. It's economic / industrial use will be priced totally out of the market. Third, what was once the world price making market for gold, will become useless for delivery as its contracts are defaulted on and discounted in price. What price could the world gold price be set at, using these defaulted, bond like securities?"
=>>>>>
(YOU) "I suppose you could say that gold trading as a currency is, to an extent, "backed" by the much smaller physical segment of the market. In other words, "gold trading as a currency" requires, needs, depends upon a functioning physical market which trades at parity to paper gold. But the physical portion of the market does not require, need or depend upon the paper side. It's not a symbiotic or mutually beneficial relationship. It's more like a parasitic relationship, where the parasite cannot survive without the host, but the host will be just fine, even better, without the parasite."


THANK YOU THANK YOU THANK YOU


Phat Expat said...

Yes, great article; quite illuminating.

The coming week will be the tell. :-) Tracking.

50sQuiff said...

Thanks for another great piece and some choice FOA quotes. My question now is, who are the major players trading XAUUSD and for what purpose.

Isn't the existence of the FOREX market ultimately predicated on international trade? Currencies leave their native zones and need to be cycled back if their value is to be realised. They therefore acquire a value outside their native zone, become engaged in trading and speculation and, sometimes, get held in reserve as savings.

So what is the purpose of XAUUSD in trade? No goods or services are traded (publicly) in XAU units. Is there a relationship between oil trading and XAU trading? Does anyone remember the video where Evelyn de Rothschild was explaining his exit from oil and gold trading. He basically said once you left one, you basically had to leave the other. I can't remember which way round it was.

But assuming oil trading has nothing to do with XAU volume, I can only imagine this instrument is trading in high volume as part of a continuous hedging process. In other words, it's the basis for gold derivatives.

My question then is, are there any public records relating to this kind of XAU demand? What drives XAU hedge demand and from whom? Where are the stories about pension funds and local governments in Europe pitching their toxic XAU hedges?

Beer Holiday said...

I wonder what to make of the gold crash in term of Forex markets, some commentators blamed the unwinding of the yen carry trade. This leads me to wonder if it will be a large move in another currency which eventually crashes gold.

I remember someone pointing out that the state currencies and the euro ultimately directly impact peoples lives and will be defended with "whatever it takes". In that light gold is the weakest currency as it doesn't "belong" to any group of people or a government. Who will defend gold next time, the BIS?

It reminds me of Another's quote about hundred dollar swings in the dollar PoG.

罗臻 said...

Why is there so much paper gold? Because there is so much paper. Gold isn't the only market where the simulacra have replaced the original.

Sam said...

May this post cause a few ah ha moments for gold experts. If you aren't getting your readers into physical gold you are getting them into something worse than the system they inherently want to insure themselves against.

Michael dV said...

BeerH
I'm not sure how to relate this to your comment but the Euro is also a currency without a (specific) country. The Euro's balance sheet is 'backed' by a lot of gold. I am not sure how a collapse in POG would affect the Euro as it hold physical gold.
In the end currencies are abandoned in favor of saving 'the system'.

Indenture said...

Someone should force Harvey Organ to read this. He has been talking about the COMEX crashing for years (I read Harvey before I found FOFOA),

Roacheforque said...

Asian Characters,
No, gold most certainly is not the only paper-socialized simulacra in the market place, in fact.
The point? ALL pricing of ALL THINGS in our modern world are a product of our rehypothecated realities, especially "commodities".

Daniel Yu said...

Roacheforque,

The poster you refer to as Asian Characters is MengTzu or Mencius. It is chinese characters.

Marco Polo said...

In summary, the exponential increases in sovereign debt of almost every country in the world feeds and sustains the FOREX market. The debts create the volume the market needs to create a seemingly constant, stable flow. Always growing, not contracting. Back and forth one currency to another, millions or billions of transactions daily. The tiny margins or shifts are associated with stupendous volume, so an awful lot of mouths are (very well) fed on the margins and the equally tiny commissions. I see it so clearly now, why the totally meaningless, staggering numbers are so necessary.

As long as the debts exist merely on paper in an ultra-low interest environment, who cares? Numbers on the computer screens driven by baffling algorithms traded at the speed of light in real time. Nothing more than a video game for traders.

The rub comes for savers and taxpayers. They fund the whole merry go round. The high level at which the game is played has not yet caused the expected inflation at street level that printing money would normally do, because the expansion is in abstract numbers, not notes in circulation.
But we are witness to the glut and excess (hyperinflation) at the top: inexplicable, step change increases of spending on super yachts, mansions, precious stones, rare artwork. While the ordinary working man suffocates.

How will it end? When enough working men and women do the numbers and decide to stop striving. The tax "take" falls dramatically and that causes politicians to panic. Anarchy.....

Robert said...

Great post, FOFOA. I think the first edition came out in 1978 (according to the Russian version of the wikipedia page for ISO 4217: https://ru.wikipedia.org/wiki/ISO_4217) and was republished by the British Standards Institution in 1979 as a booklet titled Specification for Codes for the Representation of Currencies and Funds: http://tinyurl.com/qjlyyt3

Unfortunately I cannot find the text online. But the window between the first and second editions was pretty narrow.

S P said...

If I understand the post and some of the comments correctly, then what applies to gold should also apply to all fiat currencies, commodities, stocks, etc. What is traded is not items themselves, but the perception of value of the items. Because traders have leverage and can make instantaneous moves on digital exchanges, all of the gains go to the players who can "buy low and sell high" faster or based on inside information.

But if this true, why are there bull markets at all? In theory we should see extreme volatility in the prices of all things, but no clear down or up trend. However if you look closely there is a general uptrend in commodities. Isn't this possible only if the supply and demand equation in the physical market was contributing to the price? How was the gold bull sustained all these years?

This suggests to me that longs still have pricing power compared to leveraged shorts.

To be honest I'm sort of proud that I don't understand all of this. One almost has to be twisted to try to figure it out. We certainly aren't dealing with science here.

Victory said...

XAU/USN - 55,005 Bid 55,055 Ask

Victory said...

XAU/EUR - ?

Aquilus said...

Victory,

Freegold right? XAU: what's that?

XAU/Anything = Does not compute

Dante_Eu said...

Like trying to divide with zero, ie. XAU/0 = Computer says "No Pasaran, try again." :-)

Victory said...

Auilus, my bad...

USD/USN - .0235 Bid .0238 Ask

Phat Expat said...

It is interesting to note the behavior of the 'other' PMs; Pt and Pd, having held rather well. Signs of HI tremors or counter-cyclic trend? Paper continues to influence, for now...

Michael dV said...

The 'other white metals' seem to have found a range, likely supported by industrial use in auto catalytic converters.

Grumps LaBastard said...

Satyajit Das: With regards to gold, Das says that investors need to look at it as a tactical asset instead of a strategic asset. "I don't think it is necessarily a good long-term store of wealth," Das added.

http://www.youtube.com/watch?feature=player_detailpage&v=DhWkyddPzu4

Phat Expat said...

MdV
That's one possibility. It's amazing how, after watching a market for many years, an intuitive feel is developed; a market memory if you will. For me it's purely mechanical; sans emotions. I wonder just how sudden this HI will be?

Phat Expat said...

Das video take away:
How fortunate to be the only child of gold-loving parents. Ah, how even the sun shines on a dawgs arse. ;-)

Gary (not the evil one!) said...

Das sees Gold as a 'strategic' trade only, eh?.... useless video GreaseLaxativeBactericide.

Grumps LaBastard said...

What the overall driving force is behind these carry trades? Why will things be any different in the hereafter?

Aaron said...

The overall driving force La Bastard is currency printing without consequence. When currencies can be printed without consequence, severe misallocation happens. In a Freegold monetary system, currency printing is recognized for what it is and valued accordingly.

But for our newer readers I will take a moment to post a previous comment of yours so the newbies can evaluate your thoughts within context. What was that quote again?

"Then there is an alternative site the FOFOA blog. I don't recommend it anymore. The thesis there is that gold will stay external to the system at a price of 55,000/oz. There will be no mining of gold, no gold lending, easy credit creation in a currency will be punished by a higher gold price in that currency. It is bizarre. I post there under GrumpsLabastard telling the cultists there they're full of crap. My name is mud over there."

Grumps LaBastard said...

Interest rates.

Aaron said...

Oops. My bad, Bastard. I should have used your updated quote:

"Then there is an alternative site the FOFOA blog. I don't recommend it anymore. The thesis there is that gold will stay external to the system at a price of 55,000/oz. There will be no mining of gold, no gold lending, easy credit creation in a currency will be punished by a higher gold price in that currency. It is bizarre. I post there under GrumpsLabastard telling the cultists there they're full of crap. My name is mud over there."

"Interest rates."

Gary (not the evil one!) said...

FG's not a discipline he's mastered
and often sounds as if he is plastered
It's great fun to berate
his obsession on interest rate
He goes by the name of Grand Bastard

Publius said...

Why is there no longer a freegold entry on wikipedia? Did they delete it?

Michael Haller said...

Under Freegold gold is demonetized, and has one function only: a store of value. The function of legal tender changes only slightly: it is a medium of exchange and unit of account, but stripped of the store of value function. How will we recognize the arrival of freegold? Does China currently have freegold? Unlike most governments the Chinese government encourages its citizens to own gold presumably as a store of value otherwise they would encourage them to hold Yuan instead. Can freegold arrive in one country slowly over a period of time and then arrive suddenly all over the world only when the debt based fiat system collapses?

mcmagicfly said...

Phyz puke (to calm waters) imminent?

VATICAN CITY | Sat Oct 19, 2013 3:15pm EDT
Oct 19 (Reuters) - European Central Bank President Mario Draghi held talks with Pope Francis in a private audience on Saturday, the Vatican said.

http://www.reuters.com/article/2013/10/19/ecb-draghi-pope-idUSL5N0I90JH20131019

michael3c2000 said...

China takes delivery of deep storage tower:
Chinese Buy Chase Manhattan Plaza Gold Vault

http://www.bloomberg.com/news/2013-10-18/jpmorgan-tower-sale-sets-record-for-chinese-in-new-york.html
http://www.zerohedge.com/news/2013-10-18/chinas-largest-conglomerate-buys-building-houses-jpmorgans-gold-vault
http://www.silverdoctors.com/jp-morgan-is-selingl-its-gold-vault-at-1-cmp/

SLK said...

K

Grumps LaBastard said...

Do you know that there are periods in which gold holders lost nearly half of their PP while CPI raged? What protected them? The currency as long as deposit rates exceeded CPI.

The hard money crowd exclaims how fiat has lost PP as a unit of account, but they forget about the compensating yield of a currency. Remember my study of how the dollar outperformed gold when continually rolled over as a 10 year Treasury? I didn't even allow for the coupons to accrue interest in a savings account while the bond was in effect. Even with a compounding term of ten years, the dollar beat gold.

I've come across other instances in other currencies in which gold underperforms CPI enough so to make Jupiter himself doubt his Freegold cock.

https://www.youtube.com/watch?v=F5MS7MCHRjM&feature=player_detailpage

Motley Fool said...

Grumps

Please do buy currency, or bonds as per your preference.

TF

Archer said...

The Gimp posts yet another dim comment:

"I don't think it is necessarily a good long-term store of wealth," Das added.

Das "thinks" wrong, and you are thicker than two short planks. It's not how gold may or may not have functioned in the period leading up to freegold (though, unquestionably, it is an excellent wealth preserver over generations and epochs) it's how it will function in freegold that is at issue. And freegold is a subject that you, despite your incessant and unwelcome role as this blog's anal polyp, simply haven't grokked.

Motley Fool said...

S P

http://fofoa.blogspot.com/2012/07/fallacies-1-paper-gold-is-just-like.html

Motley Fool said...

Michael Haller

"Under Freegold gold is demonetized, and has one function only: a store of value. The function of legal tender changes only slightly: it is a medium of exchange and unit of account, but stripped of the store of value function."

Not really no. These functions are a continuum on the time axis. Neither would truly be stripped of any of the roles, they would just be closer to one of the two endpoints (0 or infinity), and will even shift position as circumstances change.

http://fofoa.blogspot.com/2009/10/gold-is-money.html
http://fofoa.blogspot.com/2009/10/gold-is-money-part-2.html
http://fofoa.blogspot.com/2009/10/gold-is-money-part-3.html

The above may be of use to you.

TF

Archer said...

The blog seems queasy
A mcfly puke's imminent
And/or some Grump dump



Grumps LaBastard said...

Over a multigenerational span gold will transport wealth over time, but it will not grow it, unless it is dishoarded at a deflationary endpoint.

The problem is that we are mortal. Lifespans of 80 years. Income earning span 45 years. Peak earning period perhaps 20 years. Window to accrue disproportionate savings maybe 10-15 years. When you fine tune the time axis to smaller units, then gold's store of value morphs from a straight line to a sine wave. The above periods of a shrimp's financial life can easily fit within the peaks and troughs of this sine wave.

Michael dV said...

M Haller
yes and the Euro, a currency with gold marked to marked on its balance sheet exists too. Freegold won't be here until it is priced only as a physical wealth asset. Currently, as this article shows, it's pricing is complex and almost unrelated to physical gold.

Roacheforque said...

Michael,
How will we recognize the arrival of freegold? (it will be evident, depending upon your definition of it) Does China currently have freegold? (No) Unlike most governments the Chinese government encourages its citizens to own gold presumably as a store of value otherwise they would encourage them to hold Yuan instead (a bid topic which deserves much discussion). Can freegold arrive in one country slowly over a period of time and then arrive suddenly all over the world only when the debt based fiat system collapses? (Possibly).

These are my humble (answers).
On the Chinese encouraging possession, can we not see the definition, or at least the pereception, of what a morally superior form of society, let's call in capitalistic communism, is being reached for?
How should we compare this to the USG?
At least we are free to discuss this for now.

http://roacheforque.blogspot.com/2013/09/who-and-or-what-are-united-states.html

However, as the old adage goes, that Gold's chief virtue is the FREEDOM which it imparts to the holder, isn't really true that China is accumulating freedom, from under the foot of an exhorbitantly privileged tyrant?

Or so they might think. There does seem to be a transfer of freedom, along with the gold, from West to East.

Roacheforque said...

That should read "(a BIG topic which deserves much discussion)" above.

mcmagicfly said...

Archer> thanks for your pubescent brainiac moment.

However, going back to the real world of adults, Draghi was clearly there to coordinate something, either to make pope soften his public socio-economic appearances with the excuse, these proclamations of his are not good for "tze stability" and sheeple well being in the longrun, so ECB-EMU has its plans to unveil shortly. Or Draghi was there to coordinate availability of some idle oz. bricks, sending them to a mission to calm the market, buy time, FG delays. Other options for that meeting with low probability bordering on insignificance are also possible.

Victory said...

"Gold, unlike all other commodities, is a currency...and the major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating."

-– Alan Greenspan, August 23, 2011

Grumps LaBastard said...

http://fofoa.blogspot.com/2009/10/gold-is-money.html


Inherent in this post is the common goldbug misconception that gold as money is a stable store of value. It is not. The value of money is not constant. Once you accept this then you are free to truly understand that everything floats.

Motley Fool said...

Grumps

"When you fine tune the time axis to smaller units, then gold's store of value morphs from a straight line to a sine wave."

It takes a special kind of idiot to blindly look at the past as project what happened there into the indefinite future, while ignoring the context or checking to make sure that would remain unchanged in the future too.

"http://fofoa.blogspot.com/2009/10/gold-is-money.html


Inherent in this post is the common goldbug misconception that gold as money is a stable store of value. It is not. The value of money is not constant. Once you accept this then you are free to truly understand that everything floats. "

"You see, as a truly demonetized wealth asset, gold has a much much higher value to mankind than it does as a transactional money." - FOFOA

Quoting from that specific post it is clear that the value of gold is not constant, even though the details are not expanded on there.

I do wish you could stop being such a condescending fuckwit, but perhaps that is simply your nature and you do not have the will to change it.

TF

Gary (not the evil one!) said...

Once again GrandBastard - you amaze with your lack of understanding (after all this time)...

What you may have wanted to say was :
Once you accept this then you are free to truly understand that everything, else, floats.
or, everything else, moves around Gold.

Adding a comparison to your lifespan isn't enough. You are then putting value on your life over gold, in a true selfish, modern, impatient, manner. Try looking at your legacy, instead. Then you will be thinking like a Giant. The gamblers, over a few days might win but over time, years, decades, generations, they always lose. Perhaps the light bulb will finally shine for you.

Grumps LaBastard said...

Rather than regurgitate, I chose to do some research for myself.

The following should be a lesson for all:
Drinking From the Poison Well of (News, Opinion, Entertainment-- W E Pollack

http://www.youtube.com/watch?v=OpjxJDmY5_I&feature=player_detailpage

How much of your current belief in gold is derived from the opinions of others? This is what sucks about the internet. Everybody just wants to hang out with like-minded comrades and circle-jerk each other until a Bose-Einstein condensate of an alternate reality emerges in that group's collective consciousness. Don't dare let the real world impose itself. If the temperature were to rise a mere Kelvin then the BEC dissipates.

Motley Fool said...

Grumps

Yes of course. We are all unthinking,regurgitating, circle jerking savages, and have not spent one iota of thought on critical examination of any ideas here or elsewhere.

You are on the other hand enlightened and original and are merely trying to help us with your wisdom from your enlightened perspective, due to the kindness of your heart.

...

Speaking as one who has been here a while, your commentary has taken on a certain flavour to me. I would paraphrase thus :

I R teh smartz. Why you no listen to me? You be sorry.

...

It is ironic that if you had actually bothered to read the fucking blog, you would have noted your ideas are neither original, nor interesting.

Instead it seems you do superficial skimming, at times, with the sole purpose of finding something you can disagree with so as to seem superior.

I have some sad news for you. If your goal is to get respect from those here, this will not work.

Anyhow. Meh.

TF

Jeff said...

For those who can distinguish the present from the future.

FOFOA: The next step in discovering how Freegold (or Reference Point Gold "RPG") is different from what we have now is the concept of "captive money." Today gold is traded like a volatile commodity by gamblers who like to call themselves traders. Or else it is held as a small percentage of one's wealth for the expressed purpose of "insurance." Gold is actually a pretty poor inflation hedge as long as it is under external influences such as the inflatable supply of paper gold BB liabilities. So the only way it can even hope to perform as prescribed is as insurance in physical form only. Yet so many investors still hold "paper gold" as the insurance portion of their portfolio. This alone really highlights the confusion in Western "professional" investment Thought.

Most people are savers, not investors or traders. Yet today we are all forced to be investors chasing a yield because there is no such thing as a perfect inflation hedge. If there were such a thing, a large portion of the "investing public" would not be anywhere near stocks and bonds. Even the most "risk free" bonds, US Treasuries, have the greatest risk of all, currency risk. And in the case of the dollar, this is exposure to a risk that, today, is well out of the hands of the currency manager thanks to seven decades of functioning as the global reserve standard.

Gary (not the evil one!) said...

GrandBastard ,
Why is it so importantly to you to change our minds?
It is obsessive on your part.

When you say things like:
I chose to do some research for myself
you smell like a tunnel-vision egotist sounding as if your research is better than ours.
Your interpretation more intelligent.
It's kind of like a Twilight Zone episode.

Why can't you let it go?
It can't be worth it for you.
Do you have some form of OCD?
How many of us have to tell you to f*%ck-off - before you do?
Since you rarely respond to anything anyone says to you...
How are those mining shares doing?
It's rehtorical - you've done nothing but lose money and trying to convince us that physical Gold is a trade isn't going to bring back your mal-investment.
I'll save in the manner I want to - and you do whatever the f$ck you want.
Deal?

Grumps LaBastard said...

Me mining shares are down but my cost basis is low as well. I've been adding to my 3 mutual funds on pullbacks, but I'm waiting to see if 206 holds on the HUI. If that fails then 150 is the next magnet. Then I can really lower my cost basis. When jumbo shrimps discover there are not enough phyzzical lifeboats for their wealth what do you think they'll turn to next? The gold shares. It's been obvious that the shares have been manipulated down like the bullion. Take Agnico for example. The float is only 180 million and on a good day it trades 2 million. For big money to take a position w/o gunning the stock it's going to take months to build a position at low prices.

I noticed on the UNWPX composition by nationality that a percentage is allotted to Jersey. I can't find any miners whose HQ is domiciled in Jersey, so it must be a Goldmoney account. I called but nothing can be disclosed until it's public. Finally Holmes is dumping that GLD holding.

Interesting how Willie indicated who the major shareholders of Newcrest were in his latest public article. Vatican Knights, anyone?

I'm not trying to change the minds of the converted, but new readers should be exposed to concepts this blog ignores.

DP said...

"new readers should be exposed to concepts this blog ignores."

Like the reason mining share owners have been getting killed, and will continue to do so.

Good luck to all dear new readers.

Motley Fool said...

"Like the reason mining share owners have been getting killed, and will continue to do so."

Certainly you mean why they should buy these despite this being so. It's not something ignored here.

I second your wish of luck to all new readers, who must suffer through these imbeciles.

Motley Fool said...

Well, why they should buy these according to the supreme wisdom (sic) of Grumps.

t au said...

Gosh Grumps, is there any possible way you could just post a link here to your blog for our “new” readers’ benefit and you could then go forth and enlighten them there?

It would save some of us “converted” the hassle of having to continually scroll past your unrelated posted nonsense here. Heck, I would even consider supporting your blog with some low cost basis mining stock – I assume there is plenty available for such a purpose.

DP said...

The worst part is the not being able to scroll past, since any truly toxic waste should really be addressed by somebody in reasonably proximate order.

Can YOU spare just two thoughts per month for the poor, innocent children… I mean dear new readers?

Send just two thoughts now, and save a lifesavings today. [image of malnourished new reader, caption: 'I like money']

Motley Fool said...

t au

Hear, hear.

Sam said...

Excellent quote from FOFOA Jeff. Those that follow the comments will note that Grumps claimed to discover via his own research that gold was a bad inflation hedge and posted his thoughts here as a revelation for us confused FOFOA cultists. This is another reason why I believe he has not read the blog or at least not comprehended enough of the information to give any advice or counter arguments against the freegold thesis.

Sam said...

Though gold is currently the ultimate speculative buy today, the fundamentals for the bet is its role as the future savings tomorrow.

Franco said...

So, when somebody compulsively shits all over every blog entry, multiple times per day, there is no solution for that? The comments section of this blog used to have so many meaningful posts that you could make a PDF for future reference.

Grumps LaBastard said...

I've given advice aplenty. It's not Freegold we face, it's the Kondratieff cycle. We are in Winter now. Credit needs to fail, but the Fed won't let it deflate. BTW, TSP has another post mentioning that gold is not money, not wealth.

Motley Fool said...

It is a common human trait to search for order in the chaos that surrounds us. Signs that point to a way of making predictions about what is to come.

In some respects we, as humans, have been very successful in this endeavor. We have crafted the art of observation and rational deduction into many fine branches of science, which eases our subsistence, and also our minds as to the predictability of things to come.

We have come so far, yet we always strive for more, and have difficulty in acknowledging that there are limits to knowledge. It is the ultimate human conceit, that nothing is beyond us.

For your benefit, Grumps, and others who care to heed my words, I will say that economics is one 'science' in which our predictions and rationalizations are of little use in predicting the future, unless we can shape such around an understanding of all history and the fluidity inherent in it.

In plain words, the Kondratieff cycle is simulacra, an illusion. It satisfies our need to rationalize and predict, but in doing so also exposes our weakness, our need for such.

It is of course a much larger observation, and for that it should be lauded, yet it falls short of the mark. It has become a theology, and has left the origin of purpose in its wake, being deeper understanding.

In this 'science' it is all or none. There can be no half measures.

Of course I expect you, Grumps, to dismiss my words, but perhaps others can learn from them.

Archer said...

Mcfly whines,

thanks for your pubescent brainiac moment.

You are very welcome.

However, going back to the real world of adults

Setting aside the dual conceits (though I'd be willing to wager that you wallow in more than two) that you A.) live in the "real world" and B.) that the world of adults is more real than that of those who have not reached puberty, what on earth makes you think that you inhabit "the world of adults"?

That was a rhetorical question in case you were thinking of boring the blog with some semi-literate fly speak response.

And speaking of conceits, AP (anal polyp) with the spew below you are right up there with fly squat.

Rather than regurgitate, I chose to do some research for myself.

AP, you don't have near enough sense to properly order whatever bullshit data you may have collected. I say may, because, bastard that you are, you've never shared the raw material that informs your alleged revelatory findings. Best not to, because there won't be much left of you afterwards AP.

In the meantime, by all means lower your cost basis aka dig a bigger hole with those mining shares.

Woland said...

something of interest to a few of you, perhaps?? at;
Testosteronepit.com Oct 14, 2013
"Next step in dismantling the dollar & U.S. credit hegemony"

No doubt many of you have heard of the formation of the
new global credit rating agency being backed by China,
Russia, etc. to offer an alternative to the 3 U.S. dominated
agencies. It is to be called "Universal Credit Rating Group"
and will be based in Asia. The news that interested me is
that they have selected as their chairman Dominique du
Villepin, who is a former Prime Minister (under Jacques
Chirac) of France. The article is brief and well worth the
few minutes spent, IMHO. greetz {;<)>>

Michael Haller said...

Motley Fool

Thanks for the links. Now I understand freegold will arrive one person (entity) at a time until eventually gold will only be available for barter between a very few people (entities) with a great deal of real (physical) wealth. The average Joe will probably have very little experience with gold after freegold arrives. Thanks FOFOA, now I understand!

byiamBYoung said...

Archer,

Hahahahahaha!

Cheers

Indenture said...

Michael Haller: " The average Joe will probably have very little experience with gold after freegold arrives."

Actually, when every person on the planet with paper savings denominated in Dollars wakes up one day penniless because the Dollar has collapsed the average joe will experience gold. Big Time. Whether they have gold or not almost people will be familiar with the basic concept of Freegold.

You save in gold. Invest to your heart's content.
But you save in gold.

Phat Expat said...

Wow, I feel for you Grumps. The shares have been non-performing for quite some time and you're not recognizing an apparent paradigm-shift. I hope it works out and you are able to recoup some of your losses. But, I'm sure you've heard the falling knife analogy. Though I trade paper for fun and profit, I also recognize that the system as it is today won't be tomorrow. Good luck.

Phat Expat said...

Woland
"...new global credit rating agency being backed by China,
Russia, etc. to offer an alternative to the 3 U.S. dominated
agencies. It is to be called "Universal Credit Rating Group"
and will be based in Asia."

Great, trade one set of crooks for another set of crooks. I'm sure that will work out just fine. But, kinda like the US got their "change", so too will the ROW. ;-)

Attitude_Check said...

Remember Another said that if you hate this system you will hate the next one. But at least we shrimps will have a small piece of the pie, and hopefully be able to grow it after..

Phat Expat said...

AC
No doubt; though I hope others can get past this notion of "change for the sake of change". It usually doesn't work out too well (and there won't be a safety net this time around).

Motley Fool said...

Michael Haller

If your comment was meant seriously, I fear you suffer from a affliction common today, instant gratification/revelation mentality.

Again your conclusions are very far off the mark.

Gold achieves its highest value when it is distributed as far as possible. While most shrimps pre-transition will not own gold, after it will be available to anyone at a free-floating rate, and the masses will have understanding through experience, once the path is shown.

All savers will own some gold in time, whilst they have a net surplus.

TF

SLK said...

Thanks for material on FOREX ! I had been looking but there has been hardly anything around on this.

The Demand side has been consistent story, i think is good. Physical buyers in the FX market is only bidding whatever they can take delivery - hence the demand is small. If we could get some more on SUPPLY - the clutch between paper and physical, that'd be good.

Physical has to be supplied in the market, as there are big physical-only buyers and their orders are filled. ETFs are the obvious source, but physical holders don't generally like to part with their property. May be it is more talked-about elsewhere that FOFOA doesn't like to even acknowledge this much.

The Supply side lies the key to read the intentions of the powerful how the transition will go from now to paper getting wiped. That physical has been supplied, is 'official support' in the lingo here. This is a very big cost.

That they afforded this cost to keep the gold market whole, does that mean 'official support' will continue, when they don't want to supply physical any more, in the form of Forex price going up in step with physical? I believe they can make a lot of $ doing this, before eventually loading the innocent with paper when they get wiped? (the gist of the story on this blog has been that the informed are switching from paper already, leading to low support for paper).

I think Freegold is a given. Only the transition, and the transmission between paper and phys is interesting to me.

If FOREX Trader has anything, would greatly appreciate! (was interesting he mentioned that in Apr, XAU sellers was suddenly and mysteriously getting paid to encourage the act)

many thanks,

Eric said...

Timely article in light of the fact that someone http://news.goldseek.com/GoldSeek/1381417452.php
already stated as much in this piece.

Michael Haller said...

Motley Fool

I'm afraid you don't understand my comment. Let me illuminate. There are approximately 171,000 tons of gold available for ownership in the world. Most of that gold is already spoken for and I believe FOFOA is right, when freegold arrives, the governments of the world will take control of, and tightly control supply from, gold mines. Therefore, there will be very little gold supply available for the average Joe. If gold is worth $50,000 per ounce in todays dollars (probably more) after freegold, savings, if any for the average Joe (somebody who earns $50,000 a year before taxes in the U.S.), will be counted in fractions of grams not ounces. If you do not have gold before freegold arrives, it will be very difficult, or impossible, for you to acquire gold after freegold arrives.

Motley Fool said...

Michael

A misunderstanding, sure.

There is some use to being precise with wording. For example, your last sentence is incorrect again. Being able to afford smaller weights of gold is not the same as not being able to afford gold, there is a qualitative difference. Similarly as regards availability.

I am uncertain how one could take your previous comment to mean the same as the above one, but I am glad I misunderstood you.

Thanks for clarifying.

TF

byiamBYoung said...

@Michael Haller,

Bear in mind, as well, that as savers begin dishoarding their gold to support themselves in retirement, physical gold will flow into the market for purchase by new savers.

@FOFOA,

It took three readings, but I now comprehend the massive scale of the Forex market in comparison to the physical market. It's now very clear to me that demand for physical gold has almost no impact on the market price. Thanks!

Cheers

Dante_Eu said...

I usually just glance at Grupms posts and I have to give him credit for one thing. He is damn right in one thing, our lifes (80 +- couple of years) are to short to truly appreciate value of gold. That's why Another said:

"Gold transcends human valuations."

That's why I like FOFOAs point regarding that gold is the inverse of paper money. Due to economic conditions, future profits, political risk, etc. paper money is "limited on the upside" and "unlimited on the downside". Gold on the other hand is "unlimited on the upside" and "limited on the downside". Through its long history of 3,000 years or so gold has never gone down to 0. Paper money, on the other hand, has always gone down to 0. That is what makes gold inverse of paper money.

This is the time that "limitnes" may come to play. Time to save and preserve not time to speculate and multiply. If I not live long enough to see it play out or if I never feel the need to dishoard it, that's fine too. It will be passed on to next generation. And I would consider my self actually lucky for having that fortune!

No paper instrument comes close to that. No interest rate high enough. No slick snake oil salesman.

Simple is as simple does. Besides, you never know what you gonna get from that yellow box of chocolates. ;-)

PS FOFOA, the search function on your blog sucks BIG TIME! :-)

gull_mann said...

After reading previous posts on FG and theories on what gold will be reset to in terms of USD, my question is what will the 'purchasing' power of the gold be at that point? I might have missed that in previous entries?

Will one oz of gold buy you a round trip airfare in economy to Australia? Or will one oz of gold buy you a new BMW? Gold can go to $100,000 in an inflationary situation, but if all $100,000 buys you is a tank of gas I'm not sure that really matters.

Motley Fool said...

gull_mann

You can take the ballpark figure of $55,000 to mean purchasing power of dollars today. So yeah, a bmw works.

As to the nominal amount it will reach during the monetary collapse, who knows, trillions per ounce.

TF

Grumps LaBastard said...

We really don't know what the tax liability landscape will be after the revaluation. Perhaps the collectible tax gain is still in place. Maybe raised from 28%.

Take AEM with a float of 180 million shares. With Au @7000, all-in cost@2000, that means 5000 per oz.
At 1.2 Moz/year that's 6B/year.
33 dollars/share
Now start slapping a multiple for a stock price. Just a conservative multiple.
And 30% of earnings for a dividend.

Having miners as part of your gold portfolio will buy you time after the revaluation to move to other asset classes as physical gold loses PP. The big move in miners could come after the revaluation as new projects are greenlighted. This happened after the 1980 peak.

BTW the TIC report will be released Tues 9am. Finally.

Motley Fool said...

Grumps

Yes, the 1980 peak will be exactly like a transition of economic system. Perfect analogy. -.-'

And sure, nothing is certain, so I guess that means we should discard all rational or reasonable speculation and simply assume everything will remain the same as ever.

/sarc


Of course uncertainty does not stop you from making predictions such as : "Having miners as part of your gold portfolio will buy you time after the revaluation to move to other asset classes as physical gold loses PP.", whilst having demonstrated remarkably little insight as to the discussions here.

I tire of you.

Grumps LaBastard said...

Do you know what it would mean if gold were to never lose PP? To gain PP perpetually? What kind of world it would be?

A Deflationary hellhole.

At some point trust will reenter the system. Gold will then take a back seat. Even if it used to settle BoP in trade, it's PP will decline and rise as a function of trust in the financial system.

Gary (not the evil one!) said...

What kind of world it would be?

Would it be a world without your infestations in my InBox?

Jeff said...

Dante, I don't use the blog search feature. Just use google, it works better. For example, FOFOA human valuations

Some gold came out of GLD today, eh?

Finally, FOFOA's latest made the sidebar at Jesse's.

byiamBYoung said...

GLD drops another 10.5 tonnes, to 871.72.

It's like a car crash. I don't want to look, but I can't help it.

Cheers

Archer said...

We really don't know what the tax liability landscape will be after the revaluation. Perhaps the collectible tax gain is still in place. Maybe raised from 28%.

No, Anal Polyp, you don't know because you are bound and determined to park your wee little noggin up your silly arse. The gold has to flow, the present tax scheme, or anything even remotely like it, is a non starter, like one of your posts only less so.

Do you know what it would mean if gold were to never lose PP? To gain PP perpetually? What kind of world it would be?

You think you know, AP, but you don't. Again, you are guilty of extrapolating key features of the present into a future that will not resemble the past. Now, kindly piss off and write another semi-coherent post on that dip stick blog of yours that you keep pimping to no avail.

Grumps LaBastard said...

So are you guys suggesting that FG will be the end of the Kondratieff wave, the end of the business cycle, the end of the credit cycle? Is this the pair-of-diggums shift you all's fussin' bout?

Archer said...

Do you think we have a business cycle now, AP? Do you really? I suggest you pull your puny (what passes for a) cranium out of your over sized arse- just don't do it here- and experience the light of day.

Reality Show said...

Thanks again Fofoa, every time I read you the picture improves. Love FOA's typo: The debth and liquidity of the paper market...

Uncle GLD was sick again today, another 1.2%
The best fit line in my chart shows that the average diversion between the PM Fix and GLD's inventory has grown by 34.5% this year, fwiw. Chart

Attitude_Check said...

If you bothered to actually understand FG you would know your statement is non sequitur. It is a structural change in money, credit, medium of exchange, and store of value. This completely changes how the financial system responds to various economic cycles, not that those economic cycles suddenly stop.

Attitude_Check said...

If gold gained PP it would certainly be deflationary, for the store of value function only, not medium of exchange, nor unit of account. If it was deflationary in all three with the present banking system it would be a horrible mess. But that is not what FG proposes. Your straw men bear no resemblance to FG.

sean said...

Please stop replying to GLB - he obviously doesn't pause to read replies.

Roacheforque said...

Politics and "money". The Euro project tried to separate them, but time bears down upon that resolve ...

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100025855/frexit-fever-reaches-heart-of-french-establishment/

Perhaps there will be another Another, to speak of a Eurasion Union.

Or .. is it ALL just facade?

Pity the little people, they may never come to know.

jojo said...

Dante-

Just to add to what Jeff says, I too use Google but my search would look like this:
site:fofoa.blogspot.com human valuations

Having site: in front has Google search that domain only so in the above search, you get the zerohedge and other results weeded out.
Just fyi.

Woland said...

"Saudi Awabia vewy angwy, partie numero deux", via ZH
"This lack of Syrian Agression will not stand, man: Saudi's
Bandar Bin Sultan Furious with U.S."

Is this a part of a shift toward France and the Euro, or am
I just breathing second hand smoke from the flower? {;<)>>

Roacheforque said...

Sir Woland,
The quintessential observation, from within the attempts to draw an unclear conclusion:

It is no secret, that as the primary hub of the petrodollar system which is instrumental to keeping the dollar's reserve status, Saudi has no choice but to cooperate with the US, or else risk even further deterioration of the USD reserve status. A development which would certainly please China... and Russia, both of which are actively engaging in Plan B preparations for the day when the USD is merely the latest dethroned reserve currency on the scrap heap of all such formerly world-dominant currencies.

A shift toward France lately, may not exaclty be a shift toward the euro, though that link I posted by Ambrose may have pitched it a bit hard.

As the Flower of Understanding requires the radiant light of TRUTH in which to blossum, we find it struggling in the darkness of propaganda, and "versions of reality" hanging like apples from a tree.

Pick the version whcih suits you, they are ALL no more than perceptions, but of perception IS reality, in a world where value is dependent upon faith.

This we learn, from the wilting flower of understanding ...

Edwardo said...

With respect to the AEP piece, my view is that you can consider any attempt to turn back the tide of history, as in, scuppering The Euro, as effectively speeding up the timeline of freegold. They will break the glass and hit the red button before they let a gaggle of French government elites pour Cabernet in the gas tank.

Attitude_Check said...

Shift away from the US and dollar certainly. I don't think it is yet clear what it is a shift to yet. If the Euro it wont look like the present version IMO.

Roacheforque said...

We know what Dimitry and Slutsky would have, a Eurasion MONETARY Union, after all ...all good ideas are copied, and improved upon:
http://www.themoscowtimes.com/business/article/what-euro-crisis-russia-seeks-single-currency/460456.html

Roacheforque said...

In any event, someone just made a boatload of dollars with paper gold in the last hour ...

;0)

KnallGold said...

Can one make from this an euro-crisis??

How does one detect oil bidding for Gold? Or would just the BIS know it?

KnallGold said...

...a boatload $'s yes, but not much sFr.'s so its just a currency thing. Yeah I'm watching the $ right now, and the euro which is close to 1.38. Something is brewing, maybe we're through the eye of the storm?

Edwardo said...

Woland,

You may be correct that this contretemps, which may be more faux than real, is about providing The Kingdom cover to run to the Euro. Of course you didn't put it quite that way, but I am, well, wondering just what this is all about too.

Of course it appeared, appeared, mind you, that the Syrian blow up that came to something of a head recently was over nat gas and who controlled the flow in the region. On one side we had/have SA and Quatar and the U.S. (who, if we are to believe the MSM is now said to have failed SA) and on the other side Syria who were/are fronting for big brother Russia.

But if SA and The Russians have an adversarial relationship over "energy" which they seem to do, and The Russians are Europe's supplier of Nat Gas...well, let's just say that if this falling out between the U.S. and SA is as advertised, might this present something of an opportunity for The Europeans to build a "new sort' of relationship with the Saudis? A relationship whose purpose would be, among other things, to markedly improve Europe's rather disadvantageous position where Russia and their energy supplies are concerned.

This is all just conjecture for fun of course.

Woland said...

Hi Edwardo;

Sitting where we do, it can never be more than speculation,
and what better reason than for the sake of fun.

On one minor topic, I think you may have the alliances
mixed up, but maybe I am misinterpreting your thoughts.

Saudi has the world's largest oil reserves, and Quatar the
largest gas reserves. Quatar is already the largest exporter
of LNG, and the Al Thani dynasty is seeking to challenge
Saudi for influence in the Arab world. They have been
backing the muslim brotherhood in Egypt, with Saudi on the
opposite side, funding the Al Sisi coup. The Syria issue, as
far as the 2 rivals were concerned, was about Quatar
wanting to run a pipeline through Syria and Turkey, on the
way to Europe, and both Saudi AND Russia opposed, but
for different reasons. Russia wants to keep its hold over
Europe via their substantial gas exports (and profits) and
does not need a new competitor. No doubt you read parts
of the (alleged) discussion between Putin and Prince
Bandar a few months ago on this and other subjects. Who
knows if it is accurate? Not me, but it has been put out
in the media for some purpose, accurate or no. Cheers.

{;<)>> (that's Bandar)

Michael dV said...

Speaking of Syria...I was just told that the 82nd Airborne is going to Japan (30,000 strong) to 'train for Syria'. This from the grandmother of a soldier. This may flare up again. They supposedly go to Syria in 30 days (about November 20.

Edwardo said...

Woland,

Yes, I had Quatar on the wrong team. Poor house of Saud, not bullying The Royal's rivals sufficiently when commanded to.

victorthecleaner said...

Woland,

with the recently reported fuss that Bandar Bin Sultan allegedly made in Russia and now his comments about Syria, he looks rather unprofessional. I am sure he isn't just a clown. So my gut feeling is that he is acting.

Victor

Woland said...

Hi Victor;

I agree Bandar is no clown. I's sure he represents Abdullah
on these issues. Saudis have 3 objectives above all else;

1. Security
2. Security
3. Security

4 things (in their minds) threaten security;

1. Shia majority Iran
2. Shia majority Iraq (hence the incitements to civil war)
3. Shia minority rule in Syria (allied with Iran and Iraq) to
perhaps oversimplify.
4. Arab democracy (and yes, Iran and Iraq are, relatively
speaking, compromised democracies) and the threat
of it spreading to other arab states.

Abdullah has been quite clear, with respect to Iran, about
what he wants the U.S. to do. "Cut off the head of the
snake." Just read the wikileaks tape quotes (via Manning)
in the footnotes to the Wikipedia article on Abdullah. Since
I have no life, this is what I do for fun. greetz. {;<)>>

Grumps LaBastard said...

If Au falls back to 1300 while the $ falls to a 78 handle, then it will be hard for the MSM to ignore the blatant manipulation.

Alex in Montana said...

Woland,

Israel will do Obama's dirty work in so far as Iran just as they did in Iraq and Syria. The Saudis will publicly complain and privately cheer. Everyone in the Middle East knows this. The Saudis realize that Obama has it in for them. I would cozy up to the Russians and Chinese and totally ignore Obama. Obama is gone in a little over there years.

Daniel Yu said...

Just came across a link in TFM's public posts. Very well written.
http://www.goldensextant.com/ChineseGPS.html#anchor29599

Substitute BIS with BOC (Bank of China) and Freegold it is !!! No need for US$ to drop further.

Hey, Grumps LaBastard, aren't you tired of posting here where most people don't like you?

Grumps LaBastard said...

Gibson's Paradox Revisited: Professor Summers Analyzes Gold Prices

"The economic mechanism is clear. Increases in real interest rates raise the carrying cost of nonmonetary gold, reducing the demand for it. They also reduce the demand for monetary gold as long as money demand is interest elastic. The resulting reduction in the real price of gold is equivalent to an increase in the general price level...
In other words, the bottom line of their analysis is that gold prices in a free market should move inversely to real interest rates. Under the gold standard, higher prices meant that an ounce of gold purchased fewer goods, i.e., the relative price of gold fell. Since under the Gibson paradox long-term interest rates moved with the general price level, the relative price of gold moved inversely to long-term rates. Assuming, as Barsky and Summers assert, that the Gibson paradox operates in a truly free gold market as it did under the gold standard, gold prices will move inversely to real long-term rates, falling when rates rise and rising when they fall."

This is what my research revealed. If you look in places where the ESF doesn't play. Still after what six-eight months, nobody has been able to explain why a saver would eschew a positive real yield in favor of a asset that will be hard pressed to keep up with CPI. This is the place a goldbug cannot look.

Grumps LaBastard said...

"Hey, Grumps LaBastard, aren't you tired of posting here where most people don't like you? "

It's not about being liked, it's about the pursuit of truth...and being called funny names.

Archer said...

The pursuit of truth, AP? You can't handle the truth which is that the Barsky Summer's isn't a holy grail.

It's flawed because one can't make the assumption that the Gibson paradox will operate in a truly free gold market as it did under the gold standard.

When you were out doing your "independent research" did you happen to answer the cause of the consumer price inflation in the last 15 years of the "key Gibson Paradox period" (the years of strongest correlation are 1879-1913 in the US and 1821-1913 in the UK)? I wonder, did it even occur to you to consider the relevance of this data as it relates to that which you have glommed onto as your holy grail?

Attitude_Check said...

If its about truth then you should address my questions and comments I have made recently. If I am wrong show me. If you are unable to yet continue to post the same ol same ol, then it isnt really about truth is it.......

Roacheforque said...

The pace is quickening - debt is really exponentiating now.

It kills me when ZH (and their ilk) state that "we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined. Well, it has nothing to do with Obama, only TIME.

If we make it through the next U.S. President's 1st year "in office" (if there still is one) she will rack up more debt in that year than all prior Presidents combined, including Obama's 2 terms.

The timing on freegold has more to do with Chris Martenson's stadium filling with water than with some external event.

TIME proves all.

;0)

One Bad Adder said...

$IRX has retraced somewhat (ish??) here and given the recent (anticipated) shellacking of DX it's not THAT surprising.
The Long end has even perked up a tad improving The Short - Long Ratio into the bargain.
So ...it all appears as if our "Flight-to-the-Present" (which is a precursor to FreeGold IMHO) is decidedly on the back-burner for now ...however -
Looking at these charts now ...and throughout October, gives an impression of one almighty systemic "last-hurrah".

Let's Watch!

One Bad Adder said...

For those with a mind to, it's quite enlightening to toggle those (above) links to "weekly" - it'll show (a) far more volatility and (b) how "conveniently" current values are hovering around the 1 and 4 Yr moving-averages!

What could possibly go wrong!

Dante_Eu said...

Jeff & jojo:

Thanks for the tip.

Blogger platform is a part of Google though, so it's strange the search function isn't any better.

John said...

The longer Freegold is delayed the greater risk that the masses flock into bitcoins instead. People are starting to understand that something is very wrong with the current system. They are searching for ways out and they aren't finding much hope. Bitcoin so far serves as one of those straws of hope. Governments better start rolling out Freegold before bitcoin crushes their system even more.

/John2

Pat said...

John Freegold has nothing to do with the masses, and everything to do with Giants. The most basic of all premises here.
RTFB

John said...

True but what if all the shrimp combined went into bitcoins. Surely 7billion shrimp will weigh more than a handful of giants?

Gary (not the evil one!) said...
This comment has been removed by the author.
Gary (not the evil one!) said...

Surely 7billion shrimp will weigh more than a handful of giants?

One of the many problems with Bitcoin is that only one Billion people have access to the Internet. I suppose the rest should just...? So already it would not be a functioning MoE for the 85% of the world...

Indenture said...

John: "Governments better start rolling out Freegold before bitcoin crushes their system even more."

Can you elaborate on this sentence?

Indenture said...

http://www.wired.com/wiredenterprise/2013/10/btc-china/

Roacheforque said...

NO paper will survive the inferno, nor any digital representation of same. People can flock into paper, rocks, scissors or bits and bytes, but none of those will not store value when the debt based (confidence based, socialized agreed upon wealth) system transforms into the equity based.

Will bitcoin as a means of exchange or unit of account survive? Probably, but bitcoin will be subject to the same SoV transition as all digital currencies.

John said...

Gary your reference is old. More like 2.5b internet usersa and increasing fast.

Roacheforque bitcoin isn't a fiat currency. That's my whole point so far people are flocking into it since it's the only option they see to this mess we are in. Gold is of course a better option but most people just don't understand that at the moment and that's my second point. It would be for everyones (shrimp) best if freegold comes sooner than later so they get there money into the correct asset.

John said...

Actually what I want to say is that the longer this goes on the more wind bitcoin will get and if it gets big enough I fear it may be a competitor to freegold. If the shrimp have a perfectly functioning form of wealth storage and form of exchange it may be difficult to convince them that freegold is better.

Gary (not the evil one!) said...

More like 2.5b internet users and increasing fast

Okay, so half the people in the world can't use it.

If the shrimp have a perfectly functioning form of wealth storage and form of exchange it may be difficult to convince them that freegold is better.

Convince who? I thought you were already informed that FG has nothing to do with shrimps. You seem to infer that FG is a 'decision' - it is an organically occurring market reaction. John, shrimps will use paper currency, or bitcoins or some other form of digital... so what? - it won't effect FG. You are bringing your misconceptions to the Forum...

RTFB

John said...

Again, if Ll the shrimp come together they will out weigh the giants. That's all I'm suggesting. Gary, I'm sorry if my uneducated brain is insulting you and this forum. i'm just using the forum for what I thought it was meant for, exchanging view points.

Michael dV said...

John
Bitcoin is just another medium of exchange. It is not a store of value any more that any fiat currency is. Folks like it because they see that unlike fiat, bitcoin cannot be 'printed to infinity'.
The store of value function of money is the one needed by producers, especially super producers. Most people on the planet would suffer little if the value of currency went to zero because most (in the USA the figure is 80%) have essentially no savings.
China and the Saudis on the other hand must have a solid store of value or risk the loss of real wealth. Gold serves that purpose already even priced at a small percentage of its freegold value. Unless the Chinese plan to spend more than 1.2 trillion dollars soon (the value of their treasuries) they simply do not need freegold prices today.
They will decide when they decide. They are getting more gold every year and maybe want to stall things until the have 'enough'.
No rush for them although I'm sure they are ready to act if there is a panic out of dollars.
The shrimps of the world will ultimately use gold too but for most of us, if we save in gold now, it seems like it needs to happen yesterday (it does for me).
This whole thing is in the hands of the big guys now. We assume no one wants the blame for killing the dollar so there might be more Kabuki, intrigue and soap opera before it happens.

John said...

Michael thank you for that excellent answer. i'm going to re-read it several times. I still don't understand why bitcoins doesn't act as a store of value. It is as I understand much like a commodity in that it requires energy to come to existence and that there is a finite amount. Gold is of course a true store of value because of it's history but what makes bitcoins different from say silver or diamonds?

Motley Fool said...

John

Bitcoin may serve some purpose to individuals in future. I doubt it, but who can say.

However it will not serve as systemic store of value at the international level at large scale. This is what is of import.

It will not be used by sovereign funds, central banks or big wealth as store.

In the movement of gold, via currency, a spur and brake function is established and international imbalances settled, due to its (future) systemic placement. Bitcoin does not do this.

It is ideally suited for transaction, and the cost of such is negligible. However it is not used for such, and it has problems in that it is deflationary. This means it will be hoarded rather than used.

It will not experience systemic revaluation, and if we consider marginal benefit analysis of bitcoin versus gold as store of value, then gold wins out, due to tradition, and network effect.

In terms of costs for transaction, today they are low for BTC due to the processing power devoted to mining. In future the costs will need to be increased to entice such processing power, needed to verify transactions, when mining BTC is no longer profitable.

I am fairly certain, but won't say absolutely, that these costs will exceed that of gold in future in terms of store of value function.

In terms of transactional function, I think the cost benefit easily exceeds that of fiat at present, especially for third world countries, so it may find use there. The nature of BTC, being deflationary, is problematic for this though.

Place your bets as you will.

TF

jojo said...

John-

Your ideas have been discussed here many times in the past and given all the idiot trolls (especially lately), it's sometimes hard to discern if one is serious or if one is trying a different tack in their trolling repertoire.

You are aka JohnW, no?

If so, it looks like you've been around a while but may need to do some RRTFB.

The thing that struck me funny the most about your comment is the idea of "rolling out FG" or however you said it.
FG is a paradigm change.
The idea of someone "rolling out" a paradigm change strikes me as funny.
With more RRTFB, I think you'd agree.

Keep up the questions and comments though...very refreshing. Scrolling past Mcidiot and Grumplander gets old.

Tony said...

John,

Let me first state that I believe bitcoins is irrelevant to the onset of Freegold. However, for the sake of furthering this discussion, let's just presume that your argument is correct and bitcoins may in fact affect the eventuality of freegold if enough shrimp pile in. Let's also get this out of the way and assume that 50%+ of the world's population has access to the Internet. My questions to you are:

-As a hypothetical, if you were to go to your local Wal-Mart and take a poll, what percentage of shrimp own bitcoins vs. gold? My guess, probably similar (both miniscule).

-What percentage of shrimp have even heard of bitcoins vs. gold? I'm guessing, all would have heard of gold, but still less than 50% would have even heard of bitcoins.

I just don't think most people put their fiat into things they don't understand. Hence the small gold ownership. Much less likely to put fiat into things they've never heard of.

Of course bitcoins exposure may increase and familiarity with them will too. Evenso, let's assume 3.5 billion people are familiar with bitcoins...my next question would then be:

-How is the market cap of 21 billion bitcoins going to realistically service the spending/saving needs of 3.5 billion people, much less 7 billion people?

My point is, even if bitcoins' growth could affect the FG onset, bitcoins' widespread global adoption seems to me a rather unlikely outcome. Just my 2c

Motley Fool said...

Grumps

Did a google search for you. First time Barsky-Summers research was mentioned here was July 2009.

http://fofoa.blogspot.com/2009/07/how-dollar-made-it-this-far_05.html

There is a nice discussion about it here too :
http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html

Now I know, reading the blog is beneath you, but just wanted to remark that at your current pace you might catch up to conversation in a few years time.

Until then expect more eye rolling and sighing.

TF

Motley Fool said...

Tony

Wanted to answer one for you. ;)

"-How is the market cap of 21 billion bitcoins going to realistically service the spending/saving needs of 3.5 billion people, much less 7 billion people?"

They have the digits, and could make more digits available with a small coding change.

That question is similar to how could gold service the saving needs of the planet. The answer is price. :)

TF

Motley Fool said...

Ps. I am not attempting the others, as I am just as dubious of feasibility. :D

Tony said...

Thanks TF! I've just showcased my bitcoins ignorance. Perhaps that's why I don't own any :)

Motley Fool said...

Haha, no worries. I have this habit of researching anything of interest; bitcoins came up some time ago. :)

I answered for two reasons. The one, to tease a bit, and the other because I think we need to look at valid questions.

In that vein...

Can one eat bitcoins? xD

Boner Parte said...

it may be difficult to convince them that freegold is better

Gary (not the evil one!) said...

Gary, I'm sorry if my uneducated brain...

Apology accepted. Now you have the opportunity to educate 'your brain'. It will be a journey filled with many revelations. I kinda envy you.

penguino said...

Bitcoin's ROI over the past three years is about %1400 annually :) That might get some shrimps' attention as far as a store of value goes, and if it continues to get bigger it'll become interesting to bigger and bigger shrimps and even small giants as well.

I agree that cryptocurrencies are not going to replace gold at the institutional level anytime soon as they do not have the history to give confidence as to the long term viability of their ability to store value. That said, shrimps are much less history-conscious and more likely to ride the wave of bubble-mania. And when you add up all the shrimps in the world, I'd think they do make up a creature that's relevant at the giant scale. They normally don't use the influence in any cohesive way due to a lack of unified action, but popular mania and herd behavior could temporarily change that.

Only a portion of the world may currently have internet access, but I'm pretty sure that portion holds the vast majority of the world's wealth.

Bitcoins are a lot more similar to gold than they are to modern fiat currencies (there's a reason they're often referred to as gold 2.0). Limited supply (bitcoins will ultimately have even lower monetary inflation than gold) and no central authority who can print more. The main advantages of bitcoin over gold are instantaneous transfer to anywhere in the globe with internet access along with the ability to store them simply by memorizing a passphrase in your head - i.e. a brainwallet. Try to confiscate that or prevent it from crossing borders :) The feds still can't seem to access the Dread Pirate Robert's (the recently busted Silk Road kingpin) private stash, and realistically the only way they ever will is if they can get him to cough up the info.

The advantages of gold over bitcoin are its history (this is particularly valuable to giants and institutions) and its tangibility. People (particularly you older geezers :P) are generally more comfortable with something they can hold in their hand. Make no mistake though; bitcoins are just as real and scarce, but it carries those properties ultimately in the world of mathematics. I'd also point out that the most critical tech behind bitcoin, public key cryptography, is not new, and has been the basis of the electronic banking industry since the late 70's/early 80's, so at least that portion of the tech has been tested at a major scale for a decent while now.

Personally, I think there's plenty of room in the wise saver's vault for both gold and bitcoins.

One Bad Adder said...

...on Bitcoin: - What seems to be overlooked in the discussion is that we're currently in a Global Fiat Systemic Environment where everything is Paperised - FOFOA has clearly identified just that in the post above.

In same, Bitcoin is most assuredly a viable alternative to (name your poison) Fiat.
What "fiat-centric" GoldBug doesn't envy the exponential "uptick" in it's price-performance over the last few years and I'd wager most would have expected Gold ($PoG) to have "done-a-Bitcoin" over that period - Alas, didn't happen!
So, in the current Fiat System of which Gold (aka $PoG, XAU is firmly entrenched) - Bitcoin has proven to be "outstanding". due to it's admirable "alternative-to-Fiat" qualities.
...however! whereas it has outperformed Fiat (and probably will keep doing so into the future) - to expect it to challenge GOLD in a FreeGold / Fiat System the likes of which is anticipated here, (for patently obvious reasons) is grossly overestimating the power of Faith IMHO.

Roacheforque said...

Good commentary Penquino. Yes, tangibility will probably become important. Bitcoin is still virtual wealth, and perhaps today well worth using.

As for holding. Again, all virtual wealth is subject to instantaneous "lights out" of a dimension quite different than what is taken fro granted in the here and now.

In the future the freedom of holding gold for the little people could even be challenged at gunpoint if the lust for power and control burdens holders enough.

There may yet come a time when the little people themselves civically "bail out" over the many indirect forms of "bail in".

t au said...

@ John

Here also is an earlier discussion by FOFOA on Bitcoin at http://fofoa.blogspot.com/2011/05/open-forum.html
that may be of some benefit to you.

FOFOA said...
Hi Neverfox,

On bitcoin, I recommend reading this post by Mencius Moldbug. Not that it goes into great detail about bitcoin, but that I agree with his target price for bitcoins, which is "epsilon." Roughly translated, his target price is empty space. And I also agree with his arguments for his target price, which would apply to your theoretical question as well. My one caveat is that I'm not rushing out to buy the 5 to 10 bitcoins that he recommends "just in case." I'd rather buy another case of Mountain House. ;)

Sincerely,
FOFOA

byiamBYoung said...

John and Bitcoin enthusiasts,

Bitcoins are interesting. I even mined a while myself, before giving up. I still have 0.11 BTC.

I suggest you read Focal Point Gold

That will go a long way toward making the case for gold vs bitcoin.

Cheers

Tony said...

Well, I must say the bitcoin percentage gains have been impressive....I never thought it'd get this far. All I know is the first post in the bitcoin open forum was enough to turn me away from entertaining the idea any further. There were actually three posts:

http://fofoa.blogspot.com/2011/06/bitcoin-open-forum.html
http://fofoa.blogspot.com/2011/06/bitcoin-open-forum-part-2.html
http://fofoa.blogspot.com/2011/06/bitcoin-open-forum-part-3.html

I probably ought to re-read, as it's been a while.

Grumps LaBastard said...

http://fofoa.blogspot.com/2009/07/how-dollar-made-it-this-far_05.html?showComment=1246998958055#c2794995702446065923

Zebedee said...

Money does grow on trees.

Geoscientists in Perth have discovered gold particles in the leaves, twigs and bark of eucalyptus trees, claiming a "eureka" moment which could revolutionise gold mining.

http://www.abc.net.au/news/2013-10-23/an-gold-found-in-gum-tree-leaves/5039226

Those naughty wildcat trees...

One Bad Adder said...

Zebedee: - Met a bloke in the 80's who knew of a very successful prospector who targeted areas where the (gum) trees had a golden hue.
Tried it ...to no avail ...inevitably left barking up the wrong tree ;-)

Grumps LaBastard said...

Here's a blast from the past:

victorthecleaner said...
On a somewhat different subject. Most of you have probably heard of the paper

Gibson's Paradox and the Gold Standard by Robert B Barsky and Lawrence H Summers.

I encourage everyone to read the original paper rather than what various secondary sources say about it. The paper is very well written and quite readable.

Brief summary: The price of gold in real terms (i.e. the purchase power of gold) has a strong inverse correlation with the real return on long dated bonds. This is an empirical finding backed by a few centuries of data and holds both during the time of the classic gold standard and during times in which the price of gold floated.

This discovery of Barsky and Summers contradicts one of the common claims of you free gold people, namely that the purchase power of gold will rise sharply when the US$ financial system fails and that it will stay elevated.

Barsky and Summers would agree that the price of gold will rise extremely high when the failure of the US financial system is imminent. For their results to apply it does not even matter whether the dollar loses its value through strong inflation or whether large parts of the banking system default in a deflation similar to the 1930s. In both cases, the (risk-adjusted) real yield of long dated bonds is strongly negative.

But according to Barsky and Summers, once a new financial order has been established with higher real long term interest rates, the price of gold would decrease again and not remain elevated.

The findings of Barsky and Summers are backed by a few centuries of data, whether or not the price of gold was pegged to the official currency. You can even use their idea in order to detect whether the price of gold was pegged or not. When it is pegged, the real price of gold increases by a decrease in consumer prices relative to the gold standard currency. When it is not pegged, the real price of gold rises by increasing nominally even faster than consumer prices. Reginald Howe shows a graph that uses the idea of Barsky and Summers to support the claim that the price of gold was basically pegged to the dollar during the 1990s.

So, how do you sustain your claim that the price of gold in real terms will stay high and how do you refute Barsky and Summers?

Victor

April 30, 2011 at 9:21 PM

Grumps LaBastard said...

I would fine tune what victor said. The nominal POG doesn't have to decline with positive real rates, but it will trail CPI. So the POG could still rise and lose PP concurrently.

Zebedee said...

@ OBA... LOL!

Aaron said...

Grumps LaBastard said...

"Then there is an alternative site the FOFOA blog. I don't recommend it anymore. The thesis there is that gold will stay external to the system at a price of 55,000/oz. There will be no mining of gold, no gold lending, easy credit creation in a currency will be punished by a higher gold price in that currency. It is bizarre. I post there under GrumpsLabastard telling the cultists there they're full of crap. My name is mud over there."

Roacheforque said...

Here again, it was the finding of Gibson's Paradox that opened the doorway to (not found as a result of) the current control fraud situation, and very instructive on how to manipulate said "paradox".

The massive use of interest rate derivatives where the counterparties are artificial (impossible claims between ESF and JPM to create stealth bond demand) refutes Barsky and Summer's by design. We do not need to.

Summer's is quite well off as a result, and Yellen has the chair.

Indenture said...

It appears the only group intelligent enough to comprehend Grumps Theory is located here at FOFOA.
The group here at FOFOA has rejected Grumps Theory.

Conclusion: Either Grumps needs to find another location farther down the intellectual list or Grumps needs to find another theory.

We have patiently listened.
Please show respect and do the same.

Grumps LaBastard said...

AEM up on massive volume

Grumps LaBastard said...

What is the group's stance on Gibson? Do you guys refute it or believe in it? I sense some cognitive dissonance.

Sam said...

The LaBastard paradox

Though answered time and again, those with a poor ability to comprehend will continue to ask the same question. Though refuted time and again, those with a poor ability to comprehend will continue to state the same argument.

Dr. Boer said...

Imagine Bastard's mission is to distract, to confuse and to derail the discussion. Skipping his comments works the best for me. Like static on your car radio. Ignore the static and enjoy the music. Happy driving!

Sam said...

http://www.kitco.com/news/2013-10-24/KitcoNews20131024DA-CPM-Group-Alleges-Whistleblower-Maguire-Has-No-Metals-History-Silver-Summit.html

Knotty Pine said...

@Sam,

Andrew Maguire is in fact a Federal Reserve plant!

Grumps LaBastard said...

What's the answer? FOFOA validated Barsky-Summers in that comment referenced above.

Indenture said...

...

Roacheforque said...

Christ Grumps, the answer is, "it doesn't matter".
The only thing conclusive about Barsky Summers is that gold behaves a certain way in an inverse relationship to interest rates under certain admittedly manipulated circumstances through the years. And beyond that there really was no conclusion ...
The importance of the findings however were that they laid the foundation, as a blue print for the ESF / Treasury / FED and Primary dealers to extend the demand for US debt by manipulating interest rates. Whether or not the price of gold is impacted by this manipulation is secondary, it's interest rates that protect the debt at this point, the manipulations of LIBOR, etc...

Your problem, if I may be so impertinent, is that you want economics to comply with strict physical laws and formulaic mathematics, instead of manipulation, propaganda, collusion, deception, CONfidence and human emotions, all of which affect the price of paper gold, stocks, home prices, interest rates, all of which are manipulated, all through the sentiment of emotional states and thoughts which do not comply with your charts and graphs and formula's.

What does matter is that
1) gold is, always has been, and always will be TRUE WEALTH.

2) DEBT is not a sustainable long term store of value, and

3) FREE Markets of the type in which such mathematical equations derive their logical conclusions DO NOT EXIST today, other than as forms of misdirection from the manipulations

NOW ... when these first first TWO things that matter inevitably regain the stature of REALITY the THIRD has a chance to be resolved.

This is called FREEGOLD.

Grumps LaBastard said...

FOFOA said...
Martijn,

This manipulation scheme began with a seed, a tiny acorn, and grew into a mighty Oak.

It probably began with Larry Summers' paper, "Gibson's Paradox and the Gold Standard" written in 1988.

Gibson's Paradox was a term first used by Keynes in 1930 to describe his theory that interest rates correlate with the rate of change in the general level of prices.

Summers' 1988 paper spelled out a scheme by which a government could use Gibson's Paradox to its advantage and keep interest rates down and government bond priced up by rigging the gold market. At the time, Larry Summers was a professor at Harvard and his paper was published in the Journal of Policy Economics.

It is also interesting to note that the PPT was birthed around the same time.

Then, in 1994, Larry Summers followed his buddy Robert Rubin into the Clinton White House. In 1995 Summers became Rubin's deputy Treasury Secretary and later his successor.

Follow these two and their network of friends around Washington and Wall Street and you can see the giant footprints of this scheme as it grew from an acorn to an Oak!

This evolution gradually encapsulated Fed monetary policy, the ESF and now the PPT and the NYSE.

This is POLICY. Which is why it is CRITICAL to keep men like Summers close to the ACTION.

Gold, in its limited supply and its wealth reserve function, is David to Goliath. And public perception, as Ender says, is the Achilles' heel of this behemoth in the room.

This is why the MANAGEMENT OF PUBLIC PERCEPTION is so important to them right now. As JS calls it, MOPE! JS says "122 days to go". I wonder why...

Sincerely,
FOFOA


July 7, 2009 at 1:35 PM

They had to rig the gold market and CPI numbers to blunt the Barsky-Summers effect. As real rates trended toward negative this would have been fuel for a higher gold price.

The manipulation was necessary b/c Barsky-Summers was real. It had to be hidden. The manipulation was not the cause of the inverse relationship to rates, it was the response. This is where you guys are getting confused.

Grumps LaBastard said...

When I look in other currencies where the ESF doesn't care what the POG is the Barsky-Summers effect can be readily seen in all its glory. Gold does have an inverse relationship to interest rates and the direction of change of these rates. It's an amazing thing to behold.

Phat Expat said...

MdV
Okay, finally got hold of the Remy Martin VSOP (498 RMB, ~82 USD) in Shanghai. Very nice; perhaps a bit sharper than the Hennessy, but definitely a close competitor; and for the price, it is quite good indeed. Thanks for the rec. Now I have two bottles here I must deplete prior to my departure for Europe; such sweet sorrows. ;-)

fnord88 said...

Very interesting article for many many different reasons:

http://www.zerohedge.com/contributed/2013-10-24/switzerland%E2%80%99s-gold-exports-go-through-roof

lots of gold leaving, lots of gold staying, and lots being exported to China but not through the usual channels

Michael dV said...

Phat
RM is $36 at Sams Club.
I Have tasted better but none at a price I am (currently) willing to pay. Ask me post transition and I'll tell you all about the great really old cognacs.

Phat Expat said...

MdV
Well, you know, import fees and all that. Will be interesting post-transition to see how things price out. And yes, will be interested in knowing the 'great really old cognacs'; I'm getting quite comfortable with cognac as my end of day drink(s). Thanks.

Paul said...

http://armstrongeconomics.com/2013/10/24/gold-perpetual-propaganda/

ampmfix said...
This comment has been removed by the author.
ampmfix said...

MdV, Phat, maybe you should try sometime a Spanish brandy, like Gran Duque de Alba, Cardenal Mendoza or Lepanto, nothing to envy the French ones.
http://articles.washingtonpost.com/2011-04-05/lifestyle/35229753_1_brandy-gran-reserva-cardenal-mendoza

FOFOA said...

Hello Grumps LaBastard,

You are about this close to getting the ol' FOFOA ban hammer for the same reasons that other trolls have been banned. In fact, you are starting to sound like two of them. Like AD, you are posting way too many comments which are apparently meant to distract and derail any productive conversation (12% of the comments in this thread are yours), and like Gary you are annoyingly reposting my 4-year-old comments for whatever purpose you think it serves. I'm not sure what that is, whether you think it supports your argument or discredits me. In either case, it is annoying troll-like behavior when you post a link one day and then repost the entire comment from that link the next.

Reg Howe's 2001 gold suppression theory, Barsky and Summers' 1988 theory, and Keynes' 1930 Gibson's paradox (based on Gibson 1923), all of which are different ideas, have no bearing whatsoever on Freegold. Reg Howe's gold suppression theory doesn't even rely on BS (Barsky Summers) being right. It only relies on someone thinking they were right and using that theory as the reasoning for systemically suppressing the price of gold.

The original Gibson paradox, on the other hand, is not even about gold. It is about the positive correlation between the general price level and interest rates. BS shifted the focus to the relative price gold and relative (real) interest rates in order to try to connect the gold standard Gibson paradox observations with the post-gold standard years.

BS assert that the Gibson paradox holds in a "free gold market" based on data from the 1973 - 1984 gold market because there was no government fixing as under the gold standard or Bretton Woods:

"Under the gold standard, higher prices meant that an ounce of gold purchased fewer goods, i.e., the relative price of gold fell. Since under the Gibson paradox long-term interest rates moved with the general price level, the relative price of gold moved inversely to long-term rates. Assuming, as Barsky and Summers assert, that the Gibson paradox operates in a truly free gold market as it did under the gold standard, gold prices will move inversely to real long-term rates, falling when rates rise and rising when they fall." -2001 Reg Howe

So that's a negative correlation between the price of gold relative to the general price level and real interest rates. The BS conclusion was stated thusly: "Increases in real interest rates raise the carrying cost of nonmonetary gold, reducing the demand for it." -1988 BS

I don't know if BS is BS or not, but it doesn't matter because it doesn't apply in Freegold even if it is right. And there is certainly room to question whether BS is right.

"Figure 7 shows our long-term real interest rate variable with the level of the PPI index of nonferrous metals prices relative to the CPI. The results are, if anything, even more striking than those for gold, providing further support for the asset pricing approach to metals prices." -1988 BS

So they found that industrial commodity metal prices seemed to be negatively correlated to real interest rates, but gold to a lesser degree than non-ferrous metals as a whole. Imagine that! Gold behaving like an industrial commodity, but to a lesser degree. Guess what else is also negatively correlated, but to a much much lesser degree. Fine art!

Cont…

FOFOA said...

2/3

How about a few more BS quotes:

"Note first that the real gold price from this period (1973-1984) is very nearly a random walk... [In quarterly data from 1973:1 to 1984:2 , the first 5 autocorrelations of the change in the log real gold price are .10, —.06, .33, .08, and —.19, with an asymptotic standard error of .15.]"

"After 1980… Some of the variation in our proxy for the expected real yield on bonds ought to be regarded as spurious."

"Real interest rates are not the only determinant of the relative price of gold. Yet the impression that real rates have been high since 1981, and that these high rates have been associated with a low relative price of gold vis a vis the 1980 level is unmistakable." -1988 BS

Really, I'm not trying to make fun here, but simply to point out that BS found a negative correlation between a "random walk" of real gold prices and "spurious" real interest rates and concluded that the correlation is "unmistakable" yet "not the only determinant" of the relative price of gold. I might add that it might not be a determinant at all. Correlation does not necessarily imply causation.

Let's think for a minute about the "key Gibson Paradox period" (as per BS), which was 1879-1913 in the US and 1821-1913 in the UK, and wonder if the Gibson correlation could have even been a "determinant" in the relative price of gold at all. Gold coin was base money during that time. That means that all gold was money, but not all money was gold. In other words, "gold" was a subset of "money". (All gold was of course not legal tender money, but the relative value of all gold was obviously tied to the changing value of real money, i.e., credit. If you question whether credit was money then, please see J.P. Morgan's testimony before congress in 1913 which can be found in Moneyness 2.)

During that period, we saw both deflation and inflation, that is, the general price level went both down and then up. As such, the purchasing power of the monetary unit inversely went up and then down. When prices went up, the purchasing power of money went down, and gold got dragged down along with it since gold was a subset of money. But as I said above, BS shifted the focus of the original Gibson paradox correlation off of the general price level and onto gold. They said it makes more sense that way. But for that to be true, then it must have been the dishoarding of gold, a mere subset of money, that dragged the purchasing power of all money down during the "key Gibson Paradox period", and not the other way around.

Average-income savers, who are risk-averse by nature, have always hoarded base money during deflationary times and been forced into secondary media (monetary assets) during inflationary times. That's what sets them apart from investors. They aren't after the gains you can make through risk, they simply try to avoid a loss of purchasing power. Why do you think the bond market is so much larger than the stock market? It's because most people are savers, and today, bonds are perceived as the best low-risk asset. The truly wealthy, on the other hand, have always gone for the very best of the best real assets.

This is how Freegold is different from all previous systems. It will, for the first time in history, put average-income savers on equal footing with the truly wealthy.

Cont…

FOFOA said...

3/3

The minimum entry price into the world of the best-of-the-best real assets that the wealthy buy is simply out of reach for the average-income saver. Sure, you could buy a $10,000 painting, but it's not quite that simple. Real assets of the kind I'm talking about rise in value perpetually. Not all expensive collectibles do that. But there are a couple of professors who have developed an index for high-end art going back to 1810, and their findings are remarkable.

If you are really interested in how the price of gold will behave in Freegold, forget about the inverse correlation between long-term real interest rates and the PPI index of nonferrous metals prices or the behavior of savers during a gold standard inflationary period, and take a look at the best-of-the-best real assets used by the truly wealthy for centuries. You can start by searching the "Mei Moses World All Art Index vs. S&P Total Return and FTSE since 1952."

That's a start, but gold will still have a distinct edge over art and the rest of the real asset universe only available to the wealthy. Those are all unique assets and therefore vulnerable to poor individual choices, while every atom of physical gold is exactly the same. So there is no risk of poor choice when buying physical gold. Also, the transaction cost for high-end assets can be as much as 30%, making "buy and hold (for a long time)" a necessity, while the transaction cost for gold will be nothing by comparison. And the transportation, storage, preservation, and insurance costs of real assets dwarf that of gold, even today.

There are many more differences as well. The return on art can be amazing, 20% or more in some cases, but like all assets, the higher returns come with greater volatility and risk. Gold, being the wealth asset par excellence, will have a low but consistent return with little to no volatility and risk, just what true savers want, and just what our monetary system needs as a primary reserve asset. That low return and low risk will come from gold's fungibility (all gold is the same, as if there were a million copies of the same pieces of fine art all worth the same high price) and wide distribution. And in a globally-distributed physical-only market, it will be immune to hot money flows and, therefore, immune to bubbles. Investors won't be interested in gold, because for a little risk, they will be able to make a better return. So only the savers will stick with it.

So whether you would like to explore this fascinating glimpse into the future, Grumps, or simply keep beating your head against the wall, thud after monotonous thud, I'll offer you the same deal I offered to our trolls of yesteryear. You can continue to add to the permanent record of this blog, but only if you limit yourself to one comment per day so as to leave room for other discussions. Your one comment can be more than one page as long as they are sequential and obviously numbered, but only one comment per day. So make it a good one! ;D

If you go over, even once, I will start deleting your comments mercilessly and indiscriminately. Trolls get banned, not for the content that they post, but for the intentional disruption they cause. So post one comment per day, or post more and then they'll all be deleted and you can run over to Screw Tape Files with the other trolls and boast to a receptive audience about how FOFOA censored your right to free speech.

Sincerely,
FOFOA

Phat Expat said...

ampmfix
Yeah, really starting to gain an appreciation for a variety of liquors (also wanting to have an extra stock for transition). Of these 3: Gran Duque de Alba, Cardenal Mendoza or Lepanto; which would you recommend to start with? Thanks.

ampmfix said...

Phat Expat
I have tried only Lepanto and I thought it was very good, the bottle is also very nice (I keep them). At those price level they are all outstanding to me, maybe an expert would say otherwise... I would start with the cheapest and work my way up if needed, here is a price comparison:
http://brandy.findthebest.com/d/e/Spanish

Cheers!

Roacheforque said...

Bravo FOFOA,
Your patience and intellect far outweigh my own.

I do believe collectors of rare items, as they fine tune their niche and bring the outside world into that niche find the glory of human nature (I must possess what I now understand) to yeild a bit more like a 300% return in a period of, say, 1 week?

It really takes no more time than that to prove a point, like "so you can see, this is truly a product of the Federal Hill Glassworks"

But I have settled for as little as 30% return if I know it will serve a larger purpose long term for a 300% return on a higher ticket item "down the road".

As for gambling, one can become fixated on e-pyramids, k-cycvles and g-paradoxes only to eventually (hoprfully?) discover that counting cards only works in a fair game.

I do believe that GLB is counting cards in a deck that is constantly changed mid deal (and the dealer holds extra aces to boot) while desperately trying to convince the other players of the mathematical validity of his card counting strategy.

We have already left the table.

Wish you would come forth inmto the comments more often, it is always a refreshing event !!

Cheerio ...

Marco Polo said...

Test

Roacheforque said...

For the "200" I leave you with this:

http://www.tavakolistructuredfinance.com/2013/10/currency-manipulation-derivatives/

Happy!

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