Tuesday, November 5, 2013

Advance Warning


This post is my replies to two reader emails. The first one was to "Victory", one day after my Gold as a FOREX Currency post went up. And the second one was to "Burningfiat" on Friday.

Hello Victory,
"... My thinking is this, won't the end of $ support be clearly visible in the currency exchange rate? Isn't that where the rubber meets the road, there really should be no guesswork needed. The US is a perpetual net exporter of dollars and has long ago hyper-inflated…"
There is definitely a glut of dollars right now. In September the Fed announced its new "reverse-repo" operations. There is, of course, a lot of debate about what those are really about, but I think it is obvious that they are to mop up the glut of dollars and raise short term interest rates in money markets and t-bills. The Fed even said so. They said that these operations will raise overnight rates in the money markets so that lenders can actually earn some interest.

When there's a glut of dollars, it's hard for banks (who create dollars) or money markets (who auction existing dollars) to make money on interest because there's so much competition for the limited pool of borrowers. Too many dollars drives interest rates to zero and even negative in some cases. So the Fed is actually competing against real organic borrowers for its own liabilities. The Fed will pay you to lend your extra dollars back to the Fed, even though what the Fed is "borrowing" are its own liabilities. So the Fed is creating synthetic demand for its own product to drive overnight and short term interest rates higher.

You're looking for a crash in the USDX to indicate the imminent end, but I have always expected a spike in the dollar, and I think Another expected that as well. I have written in the past that we could even see the USDX spike (very quickly mind you, not a slow rise) to something like 150.

What we see right now is big money piling into short duration, even overnight, assets. To escape, that money will have to pass though dollars once again. Where the rubber meets the road, in my opinion, is not anywhere inside the monetary plane. Instead, it is where the monetary plane intersects the physical plane, and that is in prices, the prices of real physical things, the price of physical gold and the price of (primarily imported) necessities. That's where I expect to see the break, in one of those two places: the LBMA or a real price jump in necessities. Whichever one comes first, I think it will quickly cause the second one to follow.

What that means, practically, is that either physical gold goes into hiding first, or there's a sudden devaluation of the dollar against the physical plane, meaning necessities, especially those necessities needed by the USG which must be imported. When that happens, the USG will print whatever is needed to keep its imported necessities flowing in under the aegis of national defense. Actual hyperinflation will follow.

When this happens, or a top level disruption within the LBMA, all that money piled into short duration assets will panic out and bid for dollars which it needs in order to pile into anything else. This will briefly drive the dollar way up on the USDX. It may even happen before you know what's happening, because big money tends to panic before small money even knows there's something to panic about. Remember this story from Unambiguous Wealth 2?

"Compare these big money folks to the average guy who rides the bus. You miss a bus, so what? It's inconvenient but another bus will come. It takes a long time to sink in that another bus isn't coming. It's not until there is such a big crowd waiting at the bus stop for the next bus that people start thinking "even if a bus comes there are too many people to fit on one bus." In that mindset the surest way to cause a riot is to send one bus i.e., not enough buses. You have to fight to get to the front of the queue. This is a bank run mentality.

And this is a key difference between the average guy and the big money. Big money isn't used to being kept waiting. Big money owns the "bus company". They know the buses aren't going to run before the little guy. They panic early. There was an electronic bank run around the time of the Lehman collapse. That was one of the reasons why governments around the world stepped in with fresh deposit guarantees. But there were no lines outside the banks to alert the average guy to what the Giants were up to.

Right now gold is $1,712 per ounce. If you have $200,000 in ambiguous claims floating through system-space, your account is right now worth 116 one-ounce gold coins of unambiguous wealth. But here's the thing. You are never going to beat the big money to that panic button. There are enough gold coins on the market right now that you could get your 116 of them without affecting the price. But if you're waiting for the first signs of panic, you're not going to get anywhere near 116. You'll be lucky to get six or seven.

There's only one way to beat the Giants to the gold, and that is to run in front of them."
Apply this reasoning to the signals you are watching. Even though you aren't waiting to buy gold coins at the last minute, you are still looking for signs that systemic transition is imminent. So what you want to look for are signs that big money is panicking, not the signs that you think will cause big money to panic. Because chances are that the really big money will see those signs before you do, and panic before you even know they are there. Therefore, signs that you think should be making big money panic, when it's not panicking, are probably the wrong signs. See?

In the comments section, it often seems like the Freegold holy grail is to be able to predict the proximate cause, and therefore get some advance warning, and therefore be the first to make a correct timing call on Freegold, even if it's only by days. But if you follow my reasoning, then it is most likely a waste of time trying to gain some advance warning. The advance warning is in the logic, and in the A/FOA archives. And the holy grail is simply buying physical gold now, before it happens. That alone will make anyone look like a genius in hindsight.

Some people look for rising short term interest rates as a sign of systemic stress, while others look for rates to fall to zero or below. Some look for a falling DX while others look for a spike. That's all monetary plane stuff, and not where the rubber truly meets the road. As I said, the Fed is trying to levitate short term rates right now, so why would rising rates indicate stress? To me they indicate that the Fed has sufficient control over the monetary plane, which I kind of assumed it did. What it has no control over is where the monetary plane intersects the physical plane.

"So my question is really this, until we see the $ drop rapidly on the FX market don't we know that official support from someone besides the USG is still in full effect. And the corollary that FG will not be imminent until this support is withdrawn, which we would see immediately in the FX market as a $ devaluation?"
We could see a sudden drop in the USD versus other currencies in the FX market, or we could see a spike. But I think we will eventually see some sudden, unexpected and highly unusual volatility. That's what I would watch for if you're one who likes to watch the pot, waiting for the water to boil. Watch for unusual and extreme volatility, because that should be what we see when the monetary plane comes unhinged from the physical plane. And don't forget the concept that there can be a head-fake right before a phase transition, a sudden and major move in an unexpected direction.

For me, I already have the advance warning in the logic and the A/FOA archives. I try not to watch the pot, but instead to explain the logic to others, because I think that's better than trying to predict how the monetary plane markets will behave at that moment when the physical plane lets go.

Sincerely,
FOFOA

Hi FOFOA,

Hope all is well!

Do you have an opinion of the latest strange GLD inventory update behaviour?

Could it be a sign of rumblings further down in the machine room? Or do you really think it's all just meaningless pot watching? :)

/BF

Hello BF,

I certainly think it is interesting, but the short-term variations we see don't change my opinion of what is happening behind the scenes. I think the consistent drain this year is a sign of rumblings further down in the machine room, but I find it hard to believe that the reporting anomalies are reverberations from the same thing that is causing the drain. More likely, I think, there is probably some explanation for the reporting anomalies that we just don't know about, something that we haven't even considered.

The indisputable story is that GLD has lost 36% of its inventory, 487 tonnes in 10 ½ months. Title to that gold was transferred to someone. The only question that matters is whether it was transferred into BB reserves (the plenitude view) or into private ownership (my view, and obviously the correct view ;). That's more than 46 tonnes per month.

The BBs probably have at least twice that much coming in through mining and scrap (just a guess), so let's imagine they have 100 tonnes coming in each month. The outflow is obviously higher than the inflow, but the pressure is widely distributed across the LBMA. So the rumblings in the machine room are widely distributed and therefore isolated from what we see in the reservoir drain reporting. GLD is where the buck stops, where they obtain that shortfall of incoming gold, but it is not likely going to a specific buyer. More likely, it is simply restocking the subterranean stream.

The point is, I wouldn't expect the underlying cause of the drain to transfer "short term vibrations" into the daily reporting of the drain, I only expect it to show up in the greater trend. Therefore I think it is more likely that there must be a more mundane explanation for the reporting anomalies that we see, something we simply don't know about and therefore haven't even considered. That's the way I apply Occam's razor to a situation like this.

I expect the short-term machinations of the system to appear outwardly normal right up until the moment the pistons seize up and the whole machine comes to a grinding halt. That's the way these things usually seem to end. So I expect that could happen at any moment, without visible warning signs. In hindsight, I think we'll realize that OBA was right, it was just a hair's breadth away. But watching the pot can make even a hair's breadth feel like an eternity from the watcher's perspective.

So yes, it's interesting, but Occam's razor tells me that we are most likely watching the effects of some mundane cause we are not aware of while "superstitiously" trying to attribute those effects to the greater cause which is clearly obvious in the long-term trend. That's fine, and it is human nature to do so, but at what cost? The cost is that a hair's breadth starts feeling like an eternity, and some people can't handle that feeling and end up throwing in the towel.

Have you noticed how many people that have only been following my blog for a year or so eventually start making emotion-based predictions that Freegold must be 5, 10, or 20 years away? I have been at this for more than five years, and I still have the same view I had in 2008, that it could happen at any moment and each moment that passes brings us one moment closer. In fact, I think it must be almost here right now! And I think the reason I am able to maintain that view is that I have never been a pot watcher. I have always paid more attention to FOA's logic and the long-term trend than to the short-term vibrations.

The long-term trend is that the commodity bull/dollar bear market ended more than a year ago, even though dollar inflation *policy* is firmly in place. Shortly after that, the GLD drain began. And shortly after that, support for "foreign dollar settlement with CB storage" reversed and began declining. This is very close to what FOA said in one of his last posts: "The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollar's timeline as we are already stretched to the leverage limit. They know that [the Fed] has but one policy to use and that will be super printing."

Anyway, keep up the great work with your auto-pot-watching app! I do enjoy the short-term show, even if I don't put much stock in it. ;D

Sincerely,
FOFOA


884 comments:

1 – 200 of 884   Newer›   Newest»
Gary (not the evil one!) said...

Excellent and timely post FoFoA... thank you!

Robert said Or you may die waiting, waiting, waiting . . .

I don't look at FG the same way as you... obviously. If we take Another's words and apply them - then buying physical Gold is the opposite of market-style pot-watching. I can't tell you the number of friends I have who are disappointed with their adventures in this dysfunctional Market. A couple of them don't sleep well. Most are depressed - all trying to time events. "Buy physical Gold with each your excess wages - save in Gold... and live your life. I'm not "waiting". I know if FG doesn't happen in my lifetime - I will pass the security of physical Gold onto my children. To me this is thinking like a Giant - generational. My guess is that FG will happen sooner, rather than later - but I realize this is just a guess. This attitude of "why hasn't it happened now' or "why it won't' seems like trader-talk. Like you can't wait to convert your Gold (or Silver, or Apple shares or whatever) to dollars and buy things... as if these 'things' will complete you. I suspect many will look back at this time with great fondness. Because I don't believe that what is eventually, or imminently, coming is going to be as enjoyable as life is... right now (for most!). I don't waste much time 'waiting' and 'contemplating' being anxious, impatient, guessing. Life is too short. This is what physical Gold has done for me... events will happen when they happen and if you obsess over looking for tell-tale signs - you may feel it is, a lot, of time wasted. As this post shows our guesswork (Pro + Con) will eventually be irrelevant.

Best,

Phat Expat said...

Timely, necessary... Tracking

Phat Expat said...

Going along with this, and admittedly short-term, the USD is in a bullish posture with a near-certain impact to the paper price of physical. On top of that, interest rates are also in 'bullish' mode. Should this continue, all those bullish on real estate (if that is even possible), will be amazed as properties drop accordingly. Hmmm... Friday is a day of near-term resolution.

jojo said...

Very timely. Repost from last thread:

Robert-

I disagree that it's a question of timing. I think the more one understands gold AND FG theory (one in same? or does that make me uber Kool aid drinker) the less timing will matter.
FG is not about timing.


"jojo, I don't think its a question of understanding gold or understanding the FG theory.It's predicting the timing. And timing is everything."



"If you see physical gold as part of your disaster preparation plans, you can stack a little and get on with your life."
And you'd be doing so to the best of your understanding.

"If you see physical gold as the lottery ticket to untold riches, you need to recognize you are making a bet against a future that has yet to unfold." Again, doing what is understood personally.

How is that different than what I said?

Roacheforque said...

Is there anything to look for that will tell us when the problems have started? At first the US$ and gold will go up together against all other assets! (Another).

And then the part about $100 dollar intraday swings on spot (your volatility "tell").

Honestly, with all the writings of A/ FOA (FOFOA) I can not always recall who said which and frequently confuse A with FOA the most.

But the concepts are retained, and endure. Let us hope the logic will prevail, for if it does not ... well, let's just not go there.

Edwardo said...

If you are looking for a freegold positive news I'd like to suggest this.

Robert said...

Gary (not the evil one), you are reading something into my words that simply is not there, and I take your condescending attitude as an insult. No, I am not waiting to trade my gold for dollars to buy Apple products to make my life complete. No, I am not looking to trade in and out of a position. I also see gold as a long term wealth reserve, and I actually expect a Freegold revaluation . . . someday. However, I am concerned that if I am overweight physical gold and have no other assets, and if the current gold pricing mechanism continues well into my retirement, that I may be *forced* to liquidate at an inopportune time. See the difference? If you are a superproducer looking for a place to store excess wealth, if you have enough assets that you do not need to consider the things I need to consider, if you can live a comfortable life even if Freegold is 50 years away, then congratulations. But I am not there yet.

jojo, I answered your post in the last thread.

One Bad Adder said...

Gary (nteo) : - your attitude pretty well sums up my ethos as well mate - time ...as we understand it ...is and will remain irrelevant to Gold.

Edwardo: - While reading your linked article, I conjured up an image of Vultures madly picking the last morsels of flesh from a long-dead carcass ...which the Lions (having eaten their fill) had abandoned long ago.

One Bad Adder said...

FoFoA: - It's a hard Row to Hoe (this FreeGold anticipation) mate - I've been at it now since '98....and "still" searching for the elusive "tells".
...someone's got to do it I s'pose ;-)

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

Bron responds...

http://goldchat.blogspot.com.au/2013/11/fofoa-more-on-lbma-survey-and-coatcheck.html


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

@Robert

My apologies if you thought I was 'condescending' (then or now).

From your response to jojo:
And it would be a costly mistake if you were forced to liquidate your physical gold to pay your bills.

If you had been saving in Gold (not just buying one day with the hopes of selling the next!) then under what normal retirement circumstances would you need to totally liquidate? as opposed to selling off slowly? To me, this is what is meant by 'own as much Gold as you understand'. If you are uncomfortable that FG won't happen in some sort of timeframe that you perceive to be acceptable to your retirement plans - then maybe you shouldn't own that much Gold. It sounds to me like a trade-attitude. I don't hold Gold to trade for dollars... but to protect me from the dollar (this, BTW, is a huge difference with a SilverBug who wants to trade his Silver for more dollars). This is why Giants hold Gold through generations not, necessarily, as a trade. You can see it doesn't always work as a SoV from one week to the next.... but over time. Sometimes that is longer than your lifetime!

it doesn't do you any good if it happens the day after you die

I suggest you think of your legacy - rather than your immediate future. If you are uncomfortable holding physical Gold for your retirement (as it may be in this period paper Gold decreases in $ value) - then don't. Hold as much as your are comfortable with. You don't sound comfortable at present with timing FG. My advice is 'don't' try to time it. Live your life. Above all else - holding Gold should give you peace of mind - NOT make you a pot-watcher, anxious, frustrated, second-guessing or only seeing it as a trade for a comfortable retirement. Personally I find it healthier to think of Gold as protection rather than as a Villa in Argentina or Maserati. THIS is how I understand the phrase 'own as much Gold as you understand'.

If you are not all in yet, you still have some homework to do.

I don't think that is what it means at all. I believe that it refers to how you approach this philosophically not monetarily - like a trader. Frankly, you sound as if you are in some sort of panic that FG won't happen soon enough... and you'll somehow be stuck with Gold when you want dollars... to buy things or retire. If you are having trouble thinking this way - then don't own that much Gold!

I'll leave you with my favorite F.O.A. quote:
"So there you have it. When you strive to master the all-important art of timing your investments, the most crucial time is every payday in which you are, in truth, selling yourself--selling your own time, labor, and productivity. Are you being paid-in-full on each payday, or are you accepting an empty paper promise of payment built upon the strength of and the continuation of the confidence of everyone in society. Are you worth payment-in-full? Have you ever received an ounce of honest money for a day in your life? You can perfect your investment timing by being paid in Gold--you would be paid-in-full at the very moment that you sold your productivity. But in an acknowledgement of the currency structure of the present realm, for your own convenience, take your dollar paycheck and first use it to pay your various bills to all of the others who have been duped into accepting dollars for the sale of their own products and services. Anything left over represents your excess production, and is almost suitable for saving. Since your employer probably paid you originally in dollars, it is up to your own discipline to convert this excess into Gold to effect your own immediate payment-in-full."

If this makes sense to you - then, by all means, follow this sage advice. If you have concerns about retiring with enough to live comfortably - then maybe you need to find a different trail... or diversify, as some suggest, until you are comfortable with that position.

Robert said...

Gary, I don't think you're actually listening to what I am saying. There is a communication problem here. I don't know where you get the idea that I have a trader mentality, or that it sounds like I might get stuck with gold when I really want dollars (I don't even live in the U.S., so why would I want dollars? And I mentioned diversification among gold, real estate, stocks and bonds -- note that cash is not one of the four categories). Why do you get the idea that I am in some sort of a panic? Certainly not from anything I have said! I would be very nervous to be "all in" physical gold because I very specifically do NOT consider myself to be a market timer or a trader. That is why I suggest that a smarter approach is to be diversified -- very specifically because than helps insulates you from the "time the transition" mentality.

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

@Robert

I would be very nervous to be "all in" physical gold

Yes, that is the sense I get from you, Robert. Never has it been more obvious that anything outside of Gold is speculation aka gambling, IMO. I am not nervous and sleep like a baby with a AU Maple under by pillow each night. :)

Owning Gold, or any investment, is more than its monetary value. One of the 'trader' friends I know - can't drink with us anymore - he has such bad ulcers. If you are more comfortable diversifying holding T-Bills, cash, Apple, Silver etc. - more power to you. Owning Gold I never have to 'check' how my investment is doing against $ - because $s revolve around Gold! I only look at SPOT to determine my next buy cycle. Whatever makes you comfortable owning is the key. I see 'understanding Gold' as giving one definitive peace of mind (investment-wise). If you get that same euphoria just dabbling in Gold (and 'speculating' - as everything else is!) then I am happy for you, my friend! The phrase 'own as much Gold as you understand' doesn't need to be condescending - it could very well mean "own as much Gold as you are comfortable with!"

Peace,

Motley Fool said...

Fwiw, I think that is much better terminology.

Own as much gold as you are comfortable with.

The other statement implicitly holds that you are an clueless idiot if you do not hold gold. Whilst this may be true, it is not the sort of thing to say to a person, regardless.

My 2 cents.

BaronSilverBaron said...

FOFOA:- " it (Freegold) could happen at any moment and each moment that passes brings us one moment closer. In fact, I think it must be almost here right now!!

Right! I'm off to order my Bentley before the rest of you here drain the supply.

Robert said...

Gary, let me try a completely different approach, because there is an important point I was trying to make that seems to have gotten lost. Suppose a 60 year old FG believer has a net worth of $1 million but no pension to speak of except for the government pension plan. I pick $1 million because it is a nice round number. What is the most rational thing for this person to do? He thinks he understands FG (but like FOFOA he "does not do timing"), but he is skeptical about making investment decisions based on subjective feelings about what he is "comfortable with." What is the smart thing for him to do? What is the rational thing to do? To keep it simple let me present two options, though of course there are many more possibilities.

Option 1: "Diversified" 25-25-25-25 allocation gold, real estate, stocks and bonds. Option 2: "All In": 95% gold, no real estate, no stocks, no bonds. 5% cash and personal property.

Now let us suppose FG comes in 2014! If he took the Diversified approach, his gold goes to $10 Million in purchasing power. Woo hoo. Vindication! The real estate is a wash. Bonds go to zero (he doesn't care about them anymore anyway). Stocks are a mixed bag but basically a wash. He lives the good life and sends a generous tip to our host FOFOA.

If he took the "All In" approach he now has wealth beyond his wildest dreams. He now has $38 Million in purchasing power and thanks his lucky stars he never bought a house, or stocks or bonds. Even bigger vindication! He sends an extremely generous tip to our host and enjoys fine wine for the rest of his life.

But, but, but . . . now let us suppose FG does not come in the next 25 years. With the Diversified approach, assets go up and down, he rebalances periodically, and he gradually sells off part of what he has to supplement his government pension. Or maybe he gets some income from the stocks and bonds part of his portfolio. It may not be much, but it is something. His expenses are relatively manageable and predictable. Thankfully he does not need to pay rent because he owns his home. He can live a relatively carefree life.

With the "All In" approach he periodically has to sell off gold – sometimes a little, sometimes more than he would like -- to supplement his pension check. It has to be gold because this is his only asset and it generates no income. He has to pay rent because he does not own his home. He is at the mercy of the exchange rate as he trades in his savings for a medium of exchange to buy necessities (and luxuries) in the physical plane. If paper gold declines, he has to sell a larger and larger portion of his savings. Hmm. Maybe cat food doesn’t taste so bad after all?

Do you see how it was a risky gamble to go "All In"? Do you see this has nothing to do with how much he "understands" gold? My point was that even if you understand FG theory, it is more *rational* to pick the Diversified approach because you still enjoy significant upside if FG comes, but you still have other options if the timing is later than you expect.

I am not criticizing FG. I actually believe in it. I am criticizing the “All In” approach as being an irrational choice.






Roacheforque said...

FOFOA,
Not sure why this post is not being picked up by Blogger, it still shows the Forex post as the latest post in my links section FYI.

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

@Robert

Firstly, don't feel the need to convince me of your diversification logic. You've developed quite the scenario. Bravo.

now let us suppose FG does not come in the next 25 years.

So the physical Gold purchased will be worthless? Perhaps you are mistaken - Stocks can go to zero - Gold cannot. FG doesn't have to arrive for Gold to go up in value. Surely you are aware of this. Look at what has happened to the Net worth of those waiting the past 16 years for FG. 4-5X their investment? It's not like you lose your life savings by investing in RIM or something. PGAs who started at 55 - may be of the 'cat food' variety. I doubt it but... what about those that started at 22? Right, they could retire at 50, if desired. So what you are really saying is that the later you latch on to this concept - the, potentially, worse timing could be for you. Well, I'll give you a point there. The basic premise that seems to elude you is that saving in Gold each month is SAVING. Period. Everything else is speculating. It seems your entire scenario is based on obtaining cash, hence, I find these statement at odds.

I don't know where you get the idea that I have a trader mentality

I mentioned diversification among gold, real estate, stocks and bonds

What do you intend doing with the stocks, Robert? Trade them... for cash? Best of luck with your timing on those. I mean that. Seems like uncertain times - better keep your eyes peeled to the Ticker-tape at all times... you may need to do some fast-footwork, aka buy Google, sell Apple - be a real J.P. Morgan (pssst... some call this trading!)

Hmmm... trading for $s. It's kind of like the guy who wants more cash in times of imminent Hyperinflation. (not saying you are that guy or that HI is imminent!) Of course PaperBugs live and die by currency - which, as I hope you know, always goes to zero given enough time. Ahhh... something else for you to 'time'. Best of luck - seems the Hourglass is running. I'm sure you'll catch and convert your stocks-to-cash-to-Gold the day prior.

Funny, how you rarely hear stories of people 'making it' in Gold - I'm sure there are - maybe Sprott? - but mostly people who own Gold tend to hold it (who can time?)... or, the better option, would be to spend it... or pass it on (legacy).

I should qualify - 'All-in Gold' is after being debt-free and owning your home. So, I guess, like most, I have diversified into RE too... if that helps my case. :)

S P said...

Robert:
I understand fully not going all in gold. It carries risk and one does after all have to live and eat in the meantime.

Still, I personally find it curious why anyone would today would hold bonds or equities. If you own a private business or are a major shareholder or something like that fine, but relying on equity for capital gains (wiped out in any crash) or dividends (a pittance) is unsound. As is the case, more so, with bonds. And speculating in real estate is only for the criminally insane.

Bottom line is to get a cash income, spend some, and save the rest in gold. The income can be from work, a business, rental property, pension, social security, etc.

Alternatively if one simply can't get enough income, the alternative is prepping, storing, etc. Live so that you need as little currency as possible.

Cash income + gold + preps is very sound, IMO.

MatrixView said...

FOFOA, could you please enable the RSS feed for your blog. It used to work automatically, but seems to be an author choice since blogspots recent update.

mcmagicfly said...

Robert> yes that's very fair reasoning. We all know there is a major reboot coming our way, could be months or years away, likely the biggest event in human history so far, because of the accumulated complexities and interdependencies to this point, so to play such unprecedented volatility with one card, no matter how well researched and logically deducted still feels like gambling..

I won't repost the juicy paragraphs here, it would be too long, you can spot them on your own. These are two articles from the same author, dated june and november this year. What I'm reading not only between the lines is, they expect major paradigm shift, but in the same vein acknowledge the stagflation in the west has got some more time to fully develop. The chinese still maintain the generational learned core believe, that the empires at home or abroad eventually go extinct in horrible agonies again and again. No rush.

http://english.caixin.com/2013-05-06/100524193.html?p2
http://english.caixin.com/2013-11-05/100599385.html?p2

mcmagicfly said...

S P> that's even more prudent plan.
Sorry, for mixing up the dates, they use other format with month number going first, so it's may and november.

Victory said...

Robert said, 'I don't even live in the U.S., so why would I want dollars?'

lets try a little word replacement: 'I don't even live in the U.S., so why would I want physical gold?'

...lets think long and hard on that one h/t Another

-v

Reality Show said...

Robert, if I may, it seems you are still using the monetary plane as your denominator.

Robert said...

Realitz Show: In what sense? I specifically added the words "in purchasing power" to convey the magnitude of the revaluation. FOFOA did the same, didn't he, hence all the references to his $55,000 prediction. I meant it in the same sense. NOT in the sense that I would be overjoyed to hold $55,000 in debt instruments instead of an ounce of physical gold.

Victory: You completely lost me. I only referred to "dollars" to point out that Gary was putting words into my mouth and that I had never mentioned dollars before.

Gary: In the most general terms, the purpose of buying stocks and bonds is ultimately the same, is it not? The purpose is to end up with something of value that you can exchange for something in the material plane. Besides, I never understood this blog to take the position that nobody should ever own any stocks or bonds. Rather, I understood the message to be that (i) physical gold is by far the best place to be when the RPG Freegold revaluation occurs, BUT (ii) nobody knows the timing -- its like waiting for an overdue earthquake, AND (iii) before the revaluation occurs, the pricing mechanism for paper gold will keep the price depressed and we should all expect it to crash before the reset occurs. FOFOA, did I get that wrong?

SP, thanks -- it seems like you got my point. As to why stocks and bonds, I can only say this: If we go on a hyperinflation trajectory, I expect the stock market to take off first before everything collapses. If we go on a deflation trajectory first, I expect bonds to do well until everything collapses into a front lawn dump. And when and if it all collapses, the physical gold you own will make it easy to forget you ever owned those stocks and bonds.

MMF: I think a major reboot is coming, but in an interconnected world it is possible to build a stack of cards really really high (higher than many here might suppose) before it comes crashing down.

I guess I have posted enough for today. Maybe a few here caught my point. I wish that there was a more skeptical and critical environment here in the comments. I do agree that the "All In" crowd is an unhealthy majority. But regardless, I try to learn what I can and appreciate the contributions here.

Polly Metallic said...

My view of the sensible amount of gold ownership is rooted in this FOFOA quote:

"We, and I, as physical gold advocates, don't need timing for this position! Timing is for poor, paper traders. We are neither and our solid, long term, one call over several years to hold physical gold will confirm our reasoning. There is no stress for me to own this ancient asset as it is in a good proportion to all my other wealth."

Note the worlds "all my other wealth." So, I take from this that FOFOA is likely wealthy enough to own his own home fully paid for, live without debt, and have other tangible assets that he considers wealth. What are they? We don't really know. Most people who are saving their surplus productivity in gold are sufficiently well off that they're going to enjoy life, buy some "toys" and not be in a position that they must liquidate gold during an economic downturn. Or during retirement (except periodic incremental sales if that was part of their original plan.) Anyone who ends up in a bind and needs to sell gold did not purchase the gold with truly surplus income. I would say they overextended themselves buying more gold than was consistent with their financial condition.

Should people "buy more than they can afford?" hoping for a windall? It's probably not wise. If you have a Plan B in case gold is in a downtrend and you need money prior to transition, go for it.

Years ago my husband and I took out a ten year home equity loan and borrowed more than we needed so we could buy more gold. The idea was that the gold would appreciate enough to offset the additional funds. It worked. Gold went from about $450 to 1800+ during that time. Of course it's possible gold could have dropped, but the extra amount we borrowed wasn't going to break us in any case.

The amount of gold a person holds vs. their "other wealth" is a personal matter. I would merely recommend that the "other wealth" be largely some other form of tangible asset that won't go to zero if currencies implode.

Daniel Yu said...

@Robert/@Gary(not the evil one),

Allow me my 2 cents worth. I think you are both correct and there is a mis-inderstanding of the words used by @Robert. I agree with Robert when he states that he disagree with being "All in gold.". I think he means you can not be 100% into gold, because in the real world we need paper currency (in this case US$) for everyday expenses. Even after the FG revaluation, we still need paper currency for everyday transactions. Therefore a diversification is needed between gold and other assets and cash. The point is what is the mix? The answer is simple (as always) - It Depends .... on your goals, your total worth, what you need and want in everyday life, etc.

I think what @Gary meant when he states that you should be "All in gold." is that Excluding what you need for your expenses (based on your lifestyle), ALL your other investments should be in physical gold - no stocks, bond, paper equities - excluding cash, and real estate like your house. The main reason is that all of the other paper assets can go dow to zero value, all the hard assets can be confiscated by the government or is not portable when you need to run! Only physical gold is compact enough in a very portable form and weight, to allow oneself to run and move, if need be.

Robert, as for gold being needed to be partially cashed in when needed - that is what it is for (to be used when needed). Also note that it is possible that the paper price of gold could go up, higher than today, even before FG arrives (since we are talking about the time until reset).

In summary, if I was 60 years old with $1million, I would put $500k into physical gold coins (Eagles, Buffaloes, Philharmonics, Pandas, Kangaroos and Lunar Series [snake, dragon, horse, etc.]). I would keep my $200k house, if it is fully paid up. Keep $50k in the bank for needed transaction. Keep $250k in cash on hand.

The reason for the specified gold coins are due to 1099-B reporting requirements in the USA. These are required to be reported by the dealer when you sell:

Gold maples - minimum of 25 oz.
Gold Krugerrands - min. of 25 oz.
Gold Libertad/Onzas - min. of 25 oz.
Gold bars totaling 1 kg. or more.

t au said...

Okay, for anyone that is going to be watching the pot, might I suggest some fine empathic music to listen to as you while away the hours.

http://www.youtube.com/watch?v=Hz64hWng2vM

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

The purpose is to end up with something of value that you can exchange for something in the material plane.

Not necessarily. I wouldn't consider "security" 'something in the material plane'. This is why Giants always hold Gold.... and traders try to 'time'. Your statement makes you sound like a trader to me.

You seem to avoid the HI comment - so can we assume you feel this is off the table? Scenario (squeezed timeframe): Your stocks skyrocket, but you don't realize it is nominal gains, you hold... and jojo buys the last AU ounce (it was a Buffalo). Timing wasn't on your side. The potential losses are fighteningly catastrophic.

(i) physical gold is by far the best place to be when the RPG Freegold revaluation occurs, BUT (ii) nobody knows the timing -- its like waiting for an overdue earthquake, AND (iii) before the revaluation occurs, the pricing mechanism for paper gold will keep the price depressed and we should all expect it to crash before the reset occurs.

...by far the best place to be when

No, you are trying to time this. It is the best to be at any given time because of #2. You cannot time this.

its like waiting for an overdue earthquake

So don't wait. Live your life.

Robert, don't bank on #3 - it's a more theoretical - no one knows how this will play out - we only anticipate that it will play out. So, maybe you can see where I feel that adhering to one and two means diversification is unnecessary. Since #2 says you don't know the timing, why would you feel the need to gamble? (anything outside of physical Gold is a gamble). Yes #1 - Gold will be the best place to be and since you can't time it (even FoFoA may have already been right and we have seen the paper crash already this year! That may be it. No one can tell you with any certainty) Since you cannot know the timing and the revaluation is so, comparatively, huge - why risk you being 75% in paper (or whatever your, personal, hedge)?
I would say all markets are not particularly rational in the past year - making that form of 'diversification' more gamble than not. Outside of high-end Art and RE, I'd be leery of anything else.
I'm not gambling on Gold. I'm not gambling on anything. I just save my excess in Gold.
That is my thought process. I trust you may disagree but can appreciate my stance.

I don't know where you get the idea that I have a trader mentality

Because everything, at present, outside of Gold - is a trade. Everything outside of Gold is speculation.

I have a friend who went from 2 million to $200,000 in the Market in the past 3 years. I encouraged him to keep aside 10 ounces of Gold (which he still has.) So what has he done? right back into some mining stocks (says they are cheap.) He will always have a trader mentality. Trying to gain yield on his cash. Because cash helps him keep his Jaguar (which he still has). Yeah. Sure. WHATever.

Get in a position where you don't need to gamble your money to make more money. I'm sick of all the friends who lose that this game. 95% lose, but they continue to be seduced by the market and potential gains.
Greed. Get rid of you some.

/SleepingVillage/ said...

OBA,


Hard Row to Hoe

athrone said...

Robert,

I believe your thinking to remain diversified is correct. I also believe the difference between you and gary is age/investment position. Someone who is 60 with $1M will have a different perspective than someone who is 30 with $20k. The latter can afford to speculate/gamble with an all-in lottery mentality, the former cannot.

I think you will find that gary (and others) who are all-in/gambling are younger with less assets. That is OK but is misleading for people who are closer to retirement...

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

@athrone

gary (and others) who are all-in/gambling are younger with less assets.

Sorry, (Jeopardy buzzer sound). You use those instincts to trade with?

Just to be clear, I will be 51 in two weeks. I have no debt and own a large home (with my lovely Asian wife and our two children - Kyle and Sean.)

For me 'all-in' (which is not what I preach, btw, I simply save my excess in Gold!! dammit! :) ) is after being debt free and owning your home - as I have already stated.

One Bad Adder said...

If I could make the following point svp?
Gold acquisition - in particular from a FG perspective (24K held close) is the very antithesis of "Investment".
"Gold Investments" are better categorized as Paper vehicles (ETF's, metal-on-deposit, Mining shares and whatnot)
Gold Investment (in FG vernacular) is an Oxymoron.
Maybe I'm just splitting hairs? If so, my apologies ;-)

athrone said...

Gary,

So you are not all-in at all, you have a very large allocation to Real Estate? Either way it is not the age that matters but age is generally correlated with assets.

Michael dV said...

Here is an Advance Warning:
http://hosted.ap.org/dynamic/stories/V/VENEZUELA_SICK_HEALTH_CARE?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2013-11-06-00-10-00
What is happening in Venezuela now is coming to a country near you soon.
As a physician I see problems creeping up in the American system. We see problems getting certain drugs (that should be easily available) and wide spread confusion about the coming changes to our system.
I do not want to be alarmist but there problems (in the USA) could explode if the dollar takes a dive. We would be in the exact situation our South American neighbors are in....unable to import needed items because of a shortage of internationally acceptable currency.
Even before that however we will see the problems caused by a centrally controlled system. Those who demand control do not know how to manage or how to make things work. They just want the control and do not seemed too concerned about the consequences.
It all reminds me of Stalin and the famines. It was more important to show off the new system that to get results.

One Bad Adder said...

Gary: - For me 'all-in' (which is not what I preach, btw, I simply save my excess in Gold!! dammit! :) ) is after being debt free and owning your home - as I have already stated.

On that point we part company mate!

There is nothing more important for your personal and familiar security than to acquire a reasonable amount of FG at this stage of the game.
Any asset class that relies on others to determine its valuation (nowadays) is potentially a mill-stone around your neck - mortgaged, un-mortgaged etc ...makes not one skerrick of difference IMHO.

Michael dV said...

Anthrone
I am PAST retirement (but still work). I simply do not see a risk worthy vehicle aside from gold.
Even though my choices are the ones I will have to live with I have determined that equities, bonds and even other commodities are all really just part of the dangerous paper game. Real Estate has it's own pitfalls (uncertain taxation, uncertain ability of renters to pay and uncertain gains down the road.)
All of these issues have always been present but at this point in history all of them seem way too risky. Cash and gold seems to be the right mix. If you are young maybe you try to ride the equities wave to one more peak.
Good luck, the money on the table is real.

athrone said...

Michael dV,

There's nothing wrong with that, if that's what you believe is the safest place for your savings that's OK with me. I'm just highlighting that if someone comes on here claiming to save "all of their excess in Gold" and then has a $300k house, that isn't really saving all of their excess in Gold. Unless Gary has $100k, $200k, or even $300k in Gold, Gold is actually his (very) minority position -- the opposite of what he is claiming when he starts with argue with Robert, for example, in a contest of "who understands F.G. the most" aka who has the largest % of Gold (as their understanding allows).

That is very misleading and dangerous for others who may actually be 100% in Gold in their (large) assets.

Again, if you are a young accumulator or only have $10-20k in "excess" it doesn't really matter how you gamble with your money because there is not much consequence...

sean said...

Nice link Edwardo.
OBA, are they vultures or black swans you can see?

Perhaps another sign in the imminent introduction of floating reserve notes by the Treasury in Jan 29 (according to ZH). Perhaps someone more knowledgeable can give their opinion, but ZH have previously implied (in their typical hyperbole) that these wound indicate the "beginning of the end" and may indicate increasing interest rates to come.

Jeff said...

What the self-described diversifiers don't understand is that 'all in' in the context of the blog means reaching your gold allocation comfort level. This ain't texas hold'em and nobody's pushing all their chips in one pile.

See you at the All Inn, pardners.

Brady said...

Robert,

I believe we understand where you're coming - but there is no set answer as it is up to each individual to determine.

Here's FOA:

Timing?

We, and I, as physical gold advocates, don't need timing for this position! Timing is for poor, paper traders. We are neither and our solid, long term, one call over several years to hold physical gold will confirm our reasoning. There is no stress for me to own this ancient asset as it is in a good proportion to all my other wealth.

There is no trading an economic system whose currency is ending its timeline. Smart, quick talking players will joke at our expense until fast markets and locked down paper gold positions block their "trading even" move into physical at any relative cheap price. Mine owners will see any near term profits evaporate into a government induced pricing contango that constrains stock equity with forced selling at paper gold prices.

My personal view

They will, one day in the future, helplessly watch their investments fall far behind a world free market price for physical gold. Further into the future, one day, mines will make money on the last thousand per ounce price for gold; only the first $XX,000.00 of price will not be available to them.

That's FOA - in good proportion to all his other wealth. Who knows what fully comprised/comprises his full wealth. He was/is at peace with the % of physical gold possessed.

To your hypothetical of a 60yr old with $1M...again, you're going to get various answers depending on who you ask but the only one who can answer that is this hypothetical 60 yr old. If he goes all in without storing up on "necessities", then you may agree the 60 yr old is a fool. If he chooses to hold 0% physical, then you may also agree this 60 yr old is a fool.

No one is saying go all in or X % in physical gold. No one is offering investment advice. Understand, don't understand. Understand & buy physical or understand & don't. Or don't understand/buy or don't buy.

To quote a fav french expression: chacun son gout.

Finally, I think these two words by FOA in the quote above is quite relevant: "no stress" and something each individual perhaps should keep in mind when determining what's best for them.



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

@athrone

So you are not all-in at all

Don't know why you assumed such... because I understood Robert was 'not'?

My own quote from 4:30AM (before your assumption)
I should qualify - 'All-in Gold' is after being debt-free and owning your home. So, I guess, like most, I have diversified into RE too... if that helps my case. :)

I agree with Michael dV
I simply do not see a risk worthy vehicle aside from gold.

I actually consider it an understatement in my case.

Biju said...

One comment about dollar bidding for real estate.
I have made several unsuccessful "competitive" offers for real estate over the past 2 months in Bay area, California. All unsuccessful.

Yesterday made an offer of $860K for a house listed at $849K. The seller took an all cash offer which I believe was lower than ours. Talking to my agent, she has been involved with all cash buyers in $800K's range from China, family money from NY. I think there is a serious "undercurrent" of dollar bidding for physical assets going on now.

mcmagicfly said...

Biju> not disputing the roaring "undercurrent" bidding for physical assets at all, it's clearly there (e.g. HI in arts/collectibles), however its mere existance doesn't guarantee long term performance of those choices post FG/RPG. If you disect the "undercurrent" into smaller more clearly defined categories, some will likely flop in the future big time. Like innercity highrise officespace/apartments realestate and vanity mansions of suburbia, especailly those near traditional hubs of paperwealth spigots, currently still wide open. At least in "my little silly version" of the resource challanged future anyways. However, I don't doubt there will be sharks fast enough to unload it in last minute to greater cornucopian fools.

Robert Mix said...

I am another "Robert", but I largely agree with Robert re not being "All Inn". It violates the rule (important to me) of being diversified.

I really like FOFOA's comment "own as much gold as you are comfortable with."

I do not have a problem with owning some paper assets (stocks, etc.) or real estate, as I have no idea what will happen in the future. But, I sure don't have to tell people here that "paper gold" is toxic..., avoid.

One Bad Adder said...

@ SleepingVillage: - Bro done good Bottleneckin! Dem lyrics, wer dey in English?? ...;-)

tintin said...

Great post.

One part I have a question about;

"...all that money piled into short duration assets will panic out and bid for dollars which it needs in order to pile into anything else. This will briefly drive the dollar way up on the USDX. "

I assume the short duration asset mentioned here is UST bills? if so they need to sell these UST bills to get the dollars, thus the sell of UST bills involves no other currencies.

How could this drive up USD index which is a weighted average of USD/FX rates?

Franco said...

tintin:

If you are trying to get out of t-bills, you will be bidding up the USD. That will drive the price of USD up against everything else.

anand srivastava said...

The separation of MoE from SoV is the most fundamental concept of Freegold. For freegold Euro (aka separation of MoE and State) is not required it is just a very nice to have. Euro prevents the chaos after transition, as it provides a stable MoE for other currencies to peg to.

VtC and Blondie, think that separation of MoE and State is fundamental, and separation of MoE and SoV is just a nice to have, which is what leads them to Freefiat. In freefiat the only thing required is an initial revaluation. Gold will again become suppressed as MoE again fulfills the task of SoV, with Euro taking the place of Dollars.

Remember Blondie's view http://fofoa.blogspot.in/2012/06/blondies-view.html
He thought that only the super producers are producers, rest all are consumers. But he was wrong. We are all producers, who consume less than what we produce. And we are the savers, who want to save their excess production in something which is not ephemeral.

Freefiat solves the problem of Super Producers like Saudi Arabia. In Freefiat, Saudi Arabia will be able to get Gold, if they want. The initial revaluation allows SA to get enough gold after transition.

But ultimately Freefiat is a traders view, not a savers view. Precisely because they do not understand savers. Savers like China, like India. There are no super producers here. The whole country, because of the massive tendency to save, becomes a super producer. For China and India, Freefiat will not work. We won't have separation of MoE and state, for many many years to come. For us Freegold is required. Ironically we are the ones causing the current problem :-). Saudi Arabia is satisfied, consuming just enough gold.

tintin said...

Franco,
In the process of getting out of UST bills and getting the USD, what are you selling and what are you buying?

You are selling UST bills so UST bills dropping in price and rising in yield.

What are you buying?

You are not buying anything. When your UST bills are sold, your broker will send you the US dollars from selling the UST bills.

You are not selling any foreign currencies to get you US dollars, so why should the USD index feel any pressure to go up?

Sam said...

@tintin

"you are not buying anything"

This is not my strong area but the way I understand it you are always buying something and always selling something. In the example you gave you are selling treasuries and buying dollars.

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

There is much food for thought.

See, if people understood that they must hold gold and currency, and if this were to reintroduce balance into the system, then and only then would there be fair pricing in all other assets.

But we don't seem to be there. It actually does seem to be the case that there is mispricing everywhere in the system. An unrelenting systemic bias to inflation in some asset or another, and an unrelenting systemic bias against gold.

It is incredible that the establishment doesn't recognize this. Everybody, everywhere, thinks that their particular position will never suffer in purchasing power terms. Even the billionaires who buy art, surely it's not just to protect themselves from hyperinflation. Otherwise they would just buy gold. It does seem to be vanity, and trading.

I'm afraid things are too far gone at this point. Even the rich will lose much. All things change in time.

tintin said...

Hi Sam,

"In the example you gave you are selling treasuries and buying dollars."

Yes that's right, selling treasuries, but not buying dollars. Dollars are the denominating currency, you get paid dollars when you sell your treasuries.

So where does the USD index come into play in this transaction?

Franco said...

tintin:

Here is another way to look at it: when you sell t-bills, you are taking dollars out of circulation. Now some forex trader wants to buy dollars with yen, but there are fewer dollars in circulation, so the dollar is more expensive in yen (and in everything else).

Michael dV said...

Sean
a problem with many 'indicators' is that if we see the indicator it is already over.
Interest rate for instance, it seems if the 10 year hits 3% the world ends. (At least Bernacke made it seem that way when he woosed out on the taper,)
If any rate goes too far out of range it threatens the derivatives market and thus the world.
Bond failures> nope. can be allowed, same reason.
I'm running out of things to watch that have not already been shown to actually threaten the system.

One Bad Adder said...

@tintin: - with all due respects, the dilemma currently on the front-burner is the "buying" of T-bills (or any of the sub 3 mth T-scrip) as $US-Cash proxies.
"IF" (when) this gets out of hand, DX will explode to the upside ...as "everything" inclusive of $-anything further out in the curve ...alt currencies (Yen, Euro etc), Faux-Gold/Silver, RE, Jetskis etc. will ALL be bidding for Dollars - IMHO.

tintin said...

thanks for all the replies.

Franco, I can now connect the dots from your last explanation: dollars got taken out of circulation by the T-bill sellers, creating a temporary shortage, but the dollar buyers need the dollars right here and now, so up you go the USDX.

thanks.

michael3c2000 said...

http://gizadeathstar.com/2013/11/9000000000000-scandals-problems/
THE PALTRY MISSING $9,000,000,000,000, AND BEARER BONDS SCANDALS (AGAIN!): SPAIN, RUMSFELD AND PROBLEMS
November 6, 2013 By Joseph P. Farrell
Excerpt:
"Well, it’s to the point now I just have to laugh.

When former US Secretary of Defense Donald Rumsfeld announced – the day before 9/11 in fact – that the Pentagon was missing a mere $2,000,000,000,000, the story was buried by subsequent events. We now seem to have the Fed admitting that it cannot find $9,000,000,000,000:
http://www.youtube.com/watch?v=1QK4bblyfsc

Mikal- Gold-backed bearer bonds, TARP, bailouts.... you can't change golden horses in midstream.

michael3c2000 said...

http://www.blacklistednews.com/29_Trillion_Dollars_Given_To_Banks_Since_2008%3F/30146/0/38/38/Y/M.html
Architecture engineered with duct tape and bailing wire defies laws of gravity, economics, mathematics, until it doesn't.

KnallGold said...

Rate cut from ECB, somewhat strange reaction of markets and part. Gold. But yeah, $ up ;-)

anand srivastava said...

IMO Giants need not be a single entity. Remember the super organism post. A superorganism can be a Giant. China is a Giant, but it is not a single entity. It is made up of tiny savers. Similarly for India.

Roacheforque said...

Quite a bit of volatility lately to compliment the Twotter pump and dump. I hear "my algo's are faster than yours" as a fleeting epitaph.

DP said...

PBoC is a single entity, acting on behalf of the superorganism that the Chinese economy embodies.

But that doesn't mean the ants really get a say is what the queens get up to.

michael3c2000 said...

Short interview with James Turk - printing premonitions and good historical comparisons with different decades
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2013/11/7_James_Turk_files/James%20Turk%2011%3A7%3A2013.mp3
Long interview with Jim Willie and three hosts sit in:
http://www.youtube.com/watch?v=GIt_WQu4pJw&feature=youtu.be
The Plane Truth ~ Gas and Gold: Goodbye to the Petrodollar with Jim Willie - http://www.mediafire.com/download/cyh6zdml81scb7h/TMRN_PTS3073_64kbps.mp3
TimeMonkRadioNetwork

Jack Tarragon said...

If you want to watch the pot boil, buy some btc. That should hold anyone over until gold is set free.

byiamBYoung said...

@Jack Tarragon

My favorite spice, BTW.

Bitcoin scares the hell out of me. It has blown up like a tick of late. I sense a pop coming.

Cheers

victorthecleaner said...

Not much time, therefore very briefly:

Don't understand ECB move today. Granted, their low inflation (0.7% annualized) is not only due to lower energy prices, but also producer prices are down. Even if they want to defend their "below but close to 2%" inflation target, cutting their repo rate from 0.5% to 0.25% won't do the trick. If they want to create a little consumer price inflation in order to get the rate closer to 2%, they could (1) monetitze more government debt (because gov'ts spend most of their budget on consumption - this includes wages when the earner consumes later on); (2) provide an incentive to expand consumer loans - this is not going to happen in the aftermath of their credit bubble.

Cutting the repo rate from 0.5% to 0.25% isn't going to do the trick.

So what the heck is going on?

Then, during the press conference, Draghi is asked and he stresses (paraphrasing)
(1) Euro zone has the healthiest fundamentals of all major currency areas
(2) You can see this because we are the only ones with a current account surplus (!)

What??? It is true that the Euro zone has been acquiring a positive current account balance, now around 2% GDP. This is in contrast to the time before 2012 when the current account fluctuated around zero. This is the first time, the Euro zone is getting an external (!) imbalance in their trade account.

Why does he praise the Euro zone for accomplishing this? He certainly knows better. These 2% GDP of current account surplus are by definition balanced by a capital import of equal size, i.e. Europeans purchasing capital from abroad.

Now these huge sums are unlikely to be put into real assets, including direct investments, land, claims on resources, etc. These amounts are simply too big and will lean to an accumulation of paper reserves.

WTF???

The Euro zone is entering dollar support mode again, and Draghi advertizes this openly in his press conference.

Why?

Victor

Michael dV said...

vtc
Interesting point, perhaps he sees the 'unlikely' happening?
Could it relate to swaps with China (seems too large though).

byiamBYoung said...

Watching the pot, indeed. I like to watch China, because those mofos don't follow anyone's script. They act in their own naked self-interest.

So, what are they doing?

Shopping in the USA for anything to turn dollars into stable value.

And here, too.

And here...

Cheers

Craig Ballantyne said...

Finding positive correlation between backtesting results and other phases of testing, including out-of-sample and forward performance testing, is pivotal in precisely estimating the feasibility of a trading system and Forex robot reviews.

byiamBYoung said...

Craig,

Correlating positive renumeration with the backfill of systemic abstraction, the expository response defining a backstopping of data trends to drive forward the presumption of encumbrance.

Additional deviation from the systemic norms presupposes the occurrence of pivotal events in divergence with the associated anomalies. Largely underweighted bifurcating of influx data trends toward a deviation from conventional models by a significant degree. The transition is convoluted by the convergence of beta and delta reversals, and the bloat is apparent in the split of real and rational norms.

Go find a different blog to infect.

Cheers

Phat Expat said...

Yes, the Chinese are a sight to behold. And while I do have a certain affection for some, I am concerned by their rapacious expansion and the ROW is likely as well. Perhaps this recognition is slowly (finally) permeating the halls of 'leadership' and the trading of one semi-tyrant for another full-fledged one is ultimately NOT in their best interests.

And while you can go shopping abroad, purchasing property for example, one fell swoop of the pen and you can kiss that goodbye. Sure, you could go to court and receive some type of compensation, after a few generations, but the property will never be turned back to you. Have a good day. ;-)

Yeah, something very peculiar with these markets. Hmmm...

Jack Tarragon said...

@byiam

a pop then a boom boom boom.

It is probably the freest market out there. Trillions and trillions chasing twenty million should be fun to watch.

Franco said...

byiam:

I profoundly resent your assertion that the convergence of beta and delta reversals are somehow implicated with the convolution of "the transition"! Let it be known that you are blacklisted now.

byiamBYoung said...

@Phat,

"one fell swoop of the pen and you can kiss that goodbye."

Well, good point.


@spicyJack,

I just can't see the whole world cramming themselves into bitcoin. It may very well hold some value, but it will always feel seriously sketchy for the overwhelming majority of the population...including CBs.

If, however, the CBs significantly warm to btc, I withdraw my comments entirely.

Cheers

byiamBYoung said...

@Franco,

Oh, Hell. Now I'm a troll.

Cheers

byiamBYoung said...

@SpicyJack,

This could serve to (in a small way) refute my argument...
Bitcoin ATM

Cheers

FOFOA said...

I apologize to those of you who rely on my RSS feed. I turned it off a couple of weeks ago because one particular 3rd party website is displaying erroneous versions of my posts to a large audience. And because the owner of the website is not responding to my messages, this is the only way I can think of to stop it. If the problem gets resolved, then I will turn it back on. But until then, you can count on my Twitter feed to announce new posts.

Sincerely,
FOFOA

FOFOA said...

For anyone interested in GLD and the LBMA survey, I responded to Bron's comments in the last thread. Here's the link.

Börjesson said...

Victor (November 7, 2013 at 6:02 PM):

Could it just be a question of politics? Maybe the ECB had to throw a bone to the struggling countries to prevent the politicians from stepping in and taking control of the exchange rate, as they are apparently empowered to do under the treaty. Perhaps the threat of them actually doing so had become imminent? Draghi might have decided it was better to give a fairly harmless concession like lowering the interest rate, instead of risking much worse things.

Woland said...

Hi Victor;

I just read thru the Q and A transcript of the Draghi press
conference. The only answer I could find that corresponds
to your reference above is in an answer to the following Q
late in the session:

Q: "Let me go back to the topic of deflation or lower
inflation…….similar to Japan, ………"

Draghi's response, in which he stated that "we are the
healthiest of the major economic zones" because we
have a small primary surplus of .7% of GDP) * a footnote
corrects this to negative .7% of GDP) , is part of a
comparison with the USA ( around 6% primary deficit)
or Japan (around 8%)

From where I sit, all he is saying is that, hey, our economy
is sluggish, but we're doing it without deficit expansion, as
opposed to the U.S. with its 1.6% to 2% growth, but with a
budget deficit of 6% needed to maintain that level. I don't
think there was any reference to "trade" balances.

note: I did not listen to the audio, just read the transcript.

Woland said...

post script;

on pages 4 and 5 of the 10 page transcript, Draghi speaks
in detail as to the 3 reasons why the "founding fathers" of
the Euro sought an annual inflation target (over the medium
term) of less than, but close to 2%. I had not seen this
explanation explicitly set forth elsewhere, so found it of
interest. Have a look….

{;<)>>

罗臻 said...

There is very little cash in the system. Money markets in M2, are credit. Savings deposits are unsecured loans to the bank. Credit is growing very slowly, and all of the growth is due to the federal deficit (150%). This is why deflationists are looking for the day when credit dies and everyone rushes into cash. That's the moment when the Fed either hits CTRL-P and turns all credit into fiat, or the whole thing goes down.

USTs are just future USD. So the Treasury market is not where there will be panic, since if you wait long enough, you will get USD. The panic will be in foreign markets/banks first.
That's why there's news like this: Central Banks Make Swaps Permanent as Crisis Backstop

Motley Fool said...

"Draghi: Well, why did, may I say, our founding fathers actually want to have something below but close to 2%? There were three reasons for this. First of all, they very wisely thought about possible measurement errors in HICP data, so they wanted to keep a significant cushion between price behaviour and deflation. In other words, you may well have a situation where you think that you are at say 1% inflation but, instead, it turns out that you are actually at minus 2%. Unfortunately, this has happened before, in other parts of the world. The second reason is that (and this is very relevant now) they thought about the adjustment within the euro area, the rebalancing of the different country members. They knew that these countries are very different. And so, the possibility of having imbalances was always being looked at and considered. Now, in order to rebalance these disequilibria, countries have to go through a readjustment of their prices ̶ since they do not have the exchange rate, they have to readjust their prices. This readjustment is much harder and difficult if you have zero inflation than it would be if you have 2%. That was the second reason. The third reason is that, as we have discovered in many other jurisdictions, the effectiveness of standard measures of monetary policy is greatly reduced as you reach the lower bound of inflation, as you go down to zero. Finally, there is also a fourth reason why you want an inflation rate of 2%, particularly in the current stage of a recovery which is still proceeding: it is proceeding, but it is still relatively weak, it is uneven, it is fragile (as I have said many times before) and, most importantly, it starts from low levels. So the unemployment rate is still very high. Incidentally, it looks like it is stabilising. But it is stabilising at the top, so it is very important at this point in time to have lower real interest rates. I think that is why it is important to have an inflation rate which is close to but below 2%."

Now why does this reasoning sound familiar? :P

Victor? ;)

Motley Fool said...

ps. Fwiw I think you will find the answer you were looking for in that transcript. It's clearly stated. http://www.bloomberg.com/news/2013-11-07/european-central-bank-president-draghi-news-conference-text-.html

(h/t Woland)

Woland said...

Since we're doing some news related stuff today, I might
as well do an update to "Saudi Awabia very angwy, partie
numéro deux";

via BBC Middle East, Nov. 6, 2013

"Saudi nuclear weapons "on order" from Pakistan"

It doesn't mean "exactly" what you might infer from
the title, (that they are about to get Pakistani warheads
for their chinese missiles) but that they are weighing
several options, particularly in light of their Iran obsession.
Worth a look, IMHO.

{;<)>>

Dr. Boer said...
This comment has been removed by the author.
burningfiat said...

OMFG MF and Woland!!! Thank you so much!

I'm going to save this amazing quote for future "FG vs. FF" twitter wars. It's outright awesome:

"Draghi: Well, why did, may I say, our founding fathers actually want to have something below but close to 2%? There were three reasons for this. First of all, they very wisely thought about possible measurement errors in HICP data, so they wanted to keep a significant cushion between price behaviour and deflation. In other words, you may well have a situation where you think that you are at say 1% inflation but, instead, it turns out that you are actually at minus 2%. Unfortunately, this has happened before, in other parts of the world. The second reason is that (and this is very relevant now) they thought about the adjustment within the euro area, the rebalancing of the different country members. They knew that these countries are very different. And so, the possibility of having imbalances was always being looked at and considered. Now, in order to rebalance these disequilibria, countries have to go through a readjustment of their prices ̶ since they do not have the exchange rate, they have to readjust their prices. This readjustment is much harder and difficult if you have zero inflation than it would be if you have 2%. That was the second reason. The third reason is that, as we have discovered in many other jurisdictions, the effectiveness of standard measures of monetary policy is greatly reduced as you reach the lower bound of inflation, as you go down to zero. Finally, there is also a fourth reason why you want an inflation rate of 2%, particularly in the current stage of a recovery which is still proceeding: it is proceeding, but it is still relatively weak, it is uneven, it is fragile (as I have said many times before) and, most importantly, it starts from low levels. So the unemployment rate is still very high. Incidentally, it looks like it is stabilising. But it is stabilising at the top, so it is very important at this point in time to have lower real interest rates. I think that is why it is important to have an inflation rate which is close to but below 2%."

Victor, you sucker you for official quotes... Can we soon settle this debate?

/BF

Michael dV said...

Drudge and elsewhere report that Obama has secretly lifted some Iran sanctions. I wonder if this was done to entice Iran or was done without much choice.
About 2 years ago the USA cut Iran out of SWIFT transactions. No money wires could go there. Iran apparently evaded the punishment by doing deals that reportedly sold oil for gold.
It was predicted by several writers at the time that cutting off SWIFT would backfire. It would force alternatives and ultimately weaken the USA because of the control the USA has over the SWIFT system.
It is possible that the USA ultimately realized they had screwed up and tried to turn their error into a bargaining chip...even if the Iranians already had the chip.
I can't see what Obama has to gain by closer ties with Iran (other than decreasing the chances of nuclear holocaust which does not seem to be on their radar yet). He alienates Israel and US hawks. Iran is not likely to become an ally. They do not produce anything we need. Like N Korea we only deal with them to prevent them from causing trouble.
My belief is that the administration is just inept and does not really have a plan. Maybe that is just me being naive.

Edwardo said...
This comment has been removed by the author.
/SleepingVillage/ said...

Nov 8, 2013 - the day the short-lived moth of FreeFiat flew into the Flame

RIP>

Edwardo said...

Free fiat is looking quite punk
Draghi shows that it's just so much bunk
What's left isn't sightly
Not saying this lightly
But the theory's been lowered to junk

assimilate-this said...

@victor the cleaner re ECB
Think about interest rate derivatives. Particularly those owned by Deutsche Bank, which are a good portion of their € 55 trillion derivatives book.

michael3c2000 said...

http://jhaines6.wordpress.com/2013/11/08/neil-keenan-update-response-to-karen-hudes/

michael3c2000 said...

http://jhaines6.wordpress.com/2013/11/08/2013-the-chinese-year-of-the-black-water-snake/
The Year of the Snake until January 30, 2014

The dollar days are moving fast
The fast lane has been a blast.
Heads up skies are bluer than blue,
We're mostly water, what's new?
Heads up, look within, avast!

burningfiat said...

It's now a new day here in Europe! So I just wanted to remind everybody that there are four reasons for keeping inflation below but close to 2%. Here ya go:

"Draghi: Well, why did, may I say, our founding fathers actually want to have something below but close to 2%? There were three reasons for this. First of all, they very wisely thought about possible measurement errors in HICP data, so they wanted to keep a significant cushion between price behaviour and deflation. In other words, you may well have a situation where you think that you are at say 1% inflation but, instead, it turns out that you are actually at minus 2%. Unfortunately, this has happened before, in other parts of the world. The second reason is that (and this is very relevant now) they thought about the adjustment within the euro area, the rebalancing of the different country members. They knew that these countries are very different. And so, the possibility of having imbalances was always being looked at and considered. Now, in order to rebalance these disequilibria, countries have to go through a readjustment of their prices ̶ since they do not have the exchange rate, they have to readjust their prices. This readjustment is much harder and difficult if you have zero inflation than it would be if you have 2%. That was the second reason. The third reason is that, as we have discovered in many other jurisdictions, the effectiveness of standard measures of monetary policy is greatly reduced as you reach the lower bound of inflation, as you go down to zero. Finally, there is also a fourth reason why you want an inflation rate of 2%, particularly in the current stage of a recovery which is still proceeding: it is proceeding, but it is still relatively weak, it is uneven, it is fragile (as I have said many times before) and, most importantly, it starts from low levels. So the unemployment rate is still very high. Incidentally, it looks like it is stabilising. But it is stabilising at the top, so it is very important at this point in time to have lower real interest rates. I think that is why it is important to have an inflation rate which is close to but below 2%."

Have a great weekend! #FGFTW

Phat Expat said...

Okay, for the lazy (moi), can someone translate Draghi's comments into plain Inglés? I'm sure he could have boiled that down to a few words (but, wanting to sound impotent, had to verbaliciously pontificate). Danke.

Luke said...

Can someone do a short breakdown between freegold and freefiat? I haven't kept up with the scuffle.

byiamBYoung said...

Agreed. I don't follow.

A short summary would be quite enlightening.

Cheers

FoNoah said...

@Luke and BBY

Try FOFOA's 5-part response to question from Grinners on previous (Forex) thread at Nov-2 11:58pm

Motley Fool said...

srsly?

1. Our measuring not so accurate. Mite think we have inflashon, when we hav deflashon if target too low. Deflashon bad, u know.

2. Sum inflashon, it help when slowly ahjusteng real wages yo.

3. Our otha toolz, they be whack at 0%. They fizzle fo shizzle if inflizzle too low. You feelin me?

4. Sum credit inflation, it help recovery. Dat wealf illushun an all dat jazz.

Simplez?

Da Fool Yo

Motley Fool said...

Here's another nice relevant snippet from that transcript :

"CONSTANCIO: No, the 2 percent were there from the beginning. The difference was that in the beginning it was defined that the definition of price stability was to have inflation below 2 percent without any other consideration. So there was many discussions in the media and in the academic circles that that definition meant that if inflation was minus 1 percent, it was OK, because it was below 2 percent. So in May 2003, we clarified that that was not the case, so it was below 2 percent, but close to 2 percent, for the reasons that the president stated in one of his answers."

DP said...

Nice catch!

Motley Fool said...

The whole transcript is really nice, I suggest making the time. :)

Phat Expat said...

Props to the Fool and his prose; a hero to the common, even if lily-white. ;-)

Phat Expat said...

Yeah, that really is brilliant stuff. Wow...

"The difference was that in the beginning it was defined that the definition ..."

Yep, don't know about youse, but I'm on the edge of my seat...

Sam said...

"Inflation....why would anyone want this?)."

srsly?

1. Our measuring not so accurate. Mite think we have inflashon, when we hav deflashon if target too low. Deflashon bad, u know.

2. Sum inflashon, it help when slowly ahjusteng real wages yo.

3. Our otha toolz, they be whack at 0%. They fizzle fo shizzle if inflizzle too low. You feelin me?

4. Sum credit inflation, it help recovery. Dat wealf illushun an all dat jazz.

Simplez?

Da Fool Yo

Sam said...

"VtC perhaps asks the wrong question at the end...'why would anyone want this'. Human nature would want it to socialise losses. The Euro prevents that from happening."

The Euro won't "prevent" human nature, if it did it would be doomed. Gold will keep the balance and humans will be humans.

Woland said...

For purely personal reasons, I generally tune out when any
discussion of future inflation rates in a post $ reserve, new
Freegold world appear. So,the following is just my opinion,
and I don't assert that it must be correct.

First, with respect to the clarification by Vitor Costancio on
the 2% target, as of 2003, Gary is correct in the following
sense: No one can "know with certainty" all the dynamics
which might emerge in a world recently transitioned from a
dollar reserve to a Freegold system. The main reason is
that these events inhabit the future. Therefore, BIS, ECB
and all the other CB players will follow Keynes' famous
dictum; "When the facts change, I change my mind, sir.
What do you do?" They will respond to events as they
unfold, rather than adhere inflexibly to a rate that made
great sense (Draghi's 4 reasons) in the period between the
Euro's inception and an emergent new (Freegold) regime.
Will the rate stay at or near 2% AG? I personally think
so, but how can anyone be certain?

Moving on, with respect to Victor's quote;

"Yes, you are reading right.I am saying that systemic
inflation is not a property of fiat money, but rather a
consequence of the oil backing of the dollar…. and of
the exorbitant privilege….."

I believe that most of us agree that the second part, (oil
backing the $, hence exorbitant privilege) is one true
source of systemic inflation. I would argue, however,
that fiat money IS systemically inflationary in the following
sense;

IF new fiat money were created and equally distributed to all economic participants, creditors included, then while prices
would rise in nominal terms, in real terms there would be no
or little effect. (No distributional advantage within society)

However, fiat money originates at a limited number of foci,
and flows with a significant and variable time lag throughout
the system, benefiting those "closest to the printer" far
more than those furthest way. The incentive to gain an
undeserved advantage from this "purchasing power TIME disparity", whether by "printing" or credit growth backed
by the debt of that printer, is far less restricted than in
a system based on a reserve asset, whether fixed or
floating, which can be possessed equally by all users,
and not subject to "time lag disadvantage".

I would expect that, wherever this advantage can be used,
whether for private or government gain, it will be used.








Woland said...

BTW, Motley, you been hangin' wid Poopy lately??
3. Our otha toolz……. fizzle fo shizzle…….

Michael dV said...

I met a Russian woman a few nights ago. She said her grandmother (the woman was in her ?early 30s?) had been through the split up of the USSR and she insisted that silver had been used as a medium of exchange during a time when currency was devalued and confiscated (I guessing early 1990s).
I tried to talk her out of this silly notion and told her that it did not jive with my FG beliefs but she persisted.
So...here and there silver might be handy.
I wonder what the history of silver in Russia is. Could there be some historical use that we are not aware of that would make this a special circumstance?
I did not have time to fully interrogate her but if any old commies on the blog (yes you Aquilis) have insight I'd be interested.

Motley Fool said...

Woland - No.

I also agree with you that fiat is by nature inflationary, and thus disagree with victor that all such would pass once the dollar is severed from oil.

As to those four reasons in a time comparison...I do not see that much can change. Gary's claim that 3 will be irrelevant makes no sense to me.

1. Oh right, so their tools of measurement will miraculously be more accurate?

2. Ahhh yes of course. The world will be static, no technological advance or change in taste will occur and there will be no need for real term adjustment to the economy. Yup. -.-'

3. The technical aspects that makes different tools of monetary policy less effective at close to the zero bound will suddenly disappear post freegold. Uhuh.

4. The change in human behavior that is observable between a deflationary, static and inflationary regime will what change? Save in gold and the human becomes inhuman?

I would also like to remark on this :

"Sam, I didn't day the Euro would prevent human nature, you dope.

I said it would prevent the socialising of losses."

Socializing of losses is human nature. You dope.

As regards restraining the banks...why are they less restrained today? How could we make them even more so? How about less? (implicit sovereign backing anyone?)

So yes, while it has nothing directly to do with gold, still, in a fg system they will be restrained.

TF

Oakay Nobmilka said...

Everyone again saves in currency.

Currency is bank credit.

Savers demand banks create credit, for them to save in.

Thus eliminating credit-driven malinvestment and rendering the world very different because _______?

Oakay Nobmilka said...

You deny currency = bank credit?

That to enable savers to save in currency, therefore, the banks must create sufficient credit to accommodate them? Or tolerate deflation.

Oakay Nobmilka said...

Do you deny the ECB can inject currency to maintain stable prices and avoid deflation by buying gold?

Of course not. Who from?

Will that lead to a stable gold price?

Yes, that doesn't sound like it would avoid rising, does it?

Thank you and good night. ;)

Aaron said...

Gary Morgan, you haven't answered jack. All you've done is try and weave FOFOA's thoughts in with your own vomit in an ever shifting thought basket of non-sense. It's apparent you don't even understand your own thoughts let along the thoughts of anyone else. If you were to state your thesis today, you would simply change it tomorrow and again the next day. How many different identities have you used on this blog to push your gibberish? I think you're up to seven now -- or is it eight? You were getting more traction under the name Sugarlover over at Screwtape. Why don't you go back over there and entertain those folks for a while?

Motley Fool said...

'There seem to be growing numbers who understand the severing of the link with gold well enough, but the implications of the severing of the link with the nation-state remain totally unappreciated.'

Hehe, there is also torturing something to fit ones idealism.

I have appreciation for that severance, but what I see is simply a lack of future excessive governmental debt backed by a captive tax base.

Furthermore the severance does not preclude socialization of losses, merely the forced and excessive nature thereof. You would do well to heed Sam's words. If the ECB tried to do so, it would fail as monetary union.

I would also like to note that the ECB defines price stability in currency as inflation close to but below 2%. Something that bears keeping in mind when reading Noyer's words.

Anyhow, this is becoming dangerously close to arguing about how many angels can dance on the head of a pin.

I am happy to see what the future holds and let it be the judge.

Oh, and thanks for the condescension. That amused me.

TF

Motley Fool said...

Just to clarify, the events in Cyprus, where under-capitalized banks had deposits taken and bondholders take a forced haircut, this is not socialization of losses of some form?

O.o

I have tried a variety of drugs, I'm curious what you are using. Seems like good shit.

Motley Fool said...

Hmm, fair enough. There is a qualitative difference. Let's see what happens.

Indenture said...

Don't cuss! I can tolerate deep levels of random thought but no profanity. Please.

Sam said...

Did people in general seem more angry about the Cyprus event or the bailouts? Remember when they floated the idea of all depositors losing some money? Yes, a bank deposit is a liability of that bank to you. I can see the bankers now screaming that phrase over and over at the deaf ears of the angry rioters.

S P said...

Based on my understanding, the euro is, at its core, a survival project. A project that is based on the understanding of the eventual demise of the petrodollar/treasury complex, and a way to smooth the transition for the people involved in the eurozone.

That's it. It's nothing more than that. It is not an attempt to create a perfect system. If it is, they are failing miserably.

Post freegold, the euro loses its reason for being. All bets would be off for it, just like all bets are off right now for the dollar.

People need to understand that freegold does not mean stasis. Post freegold, we will not have a world in which all countries and currencies remain the same for 1000 years. We will continue to have all sorts of political and economic change.

Aquilus said...

@Michael dV,

First, let me say I have no direct experience with the Soviet Union and I am not Russian. I do have hyper-inflation first-hand experience as well as enough communist experience to have been a full blown old communist, but nevertheless I was a proud pioneer and enjoyed all the blessings of living in paradise first hand.

But let's not digress and get into the heart of the issue.

You see, what she tells you is that her grandmother used an asset (of whose value was somewhat easy to estimate at transaction time) for trade when there was not enough currency available.

She might as well have talked about bottles of vodka, cans of sardines, packs of cigarettes, and a thousand other easy to exchange assets.

Such trades are not usually done at supermarkets and gas stations Unless that silver was in coin or pre-weighed form (such that the value can be immediately estimated in dollars at that time), there's no way she even used it directly in exchanges with other people. More likely, she took it to a pawn shop, or sold it on the local black market.

Sold it for what? For rubles if she planned on spending the whole amount very soon or dollars for the portion that she would not spend right away. Surprised?

But wait, why not gold too? Because it was illegal to possess gold in the Soviet Union outside of personal jewelry. So what gold; who had it?

But even if they had had it, it would have been treated just like any other asset at that time – world market price.

Now, some assets get a better market price than others: in Russia vodka and cigarettes probably beat the pants off silver and sardines, but it's a question of local tastes.

Notice also that she also did not tell you that her grandmother made a killing using silver to buy up things that deflated massively against it in the hyperinflation. That's because that did not happen. Silver kept up with inflation and probably not even that.

But look, who's really counting at a time like that??? If your currency goes down in purchasing power by a factor of 30 and your silver purchasing power is reduced by 2, you're seeing it as a clear win! A 15 time re-val of silver vs your money, no? Now at that time, they probably wished they had US dollars as they probably APPRECIATED in purchasing power (demand for a stable liquid MoE), but vodka and cigarettes probably did just as well..

So what is my point? The point is that any tangible asset, including silver will do better than the local currency in hyperinflation. And if silver is what you had, and it helped you gain a 15 time purchasing power over the currency you got in your fixed pension or monthly salary, then you'll remember it as a great win! And you'll never know what you missed out on by not having something different during the crisis - you'll swear by what got you through, no? Human nature - we make ourselves look good in retrospect.

Aquilus said...

And we're not even talking the current situation whereby choosing the right alternate medium (gold) today gives you the incredible leverage not just against the ruble, but against many, many decades of the entire world's productive capacity!

So, yes, silver will never go to zero, and will run circles around the existing dollar's purchasing power when the time comes, but it will only do it because it keeps pace with hyper-inflation (maybe not 1 to 1 because commodities are over-priced today and tend to lag hyperinflation anyway as demand for them collapses, but even 10 times or 5 times less purchasing power is great vs holding dollars that go 1000 or 1,000,000 less, no ???).

But it sure won't match guessing the right next reserve asset that has to re-denominate current (and future - time is a factor here) world wealth and production: gold. Instead of a reduction in purchasing power, if you guess correctly you get a multiplication in purchasing power.

So choose gold as the asset that you buy with money you'll don't need to live on for decades. Then use cash, liquid assets, income producing assets, equity holdings (beware of debt holdings), as well as your job/business to continue producing income during the crisis in order to protect that gold through the crisis.

At that point (after the crisis is over, not during the crisis) you'll have no problem recognizing the gains, and you can smile at other people's stories of how they heroically used their silver to survive the great crisis and how great geniuses they were to have silver on hand because it outdid cash by a factor of 2000 (which you will see as it lost 80% of its real purchasing power when paper lost 99.999% of it as 0.2 / 0.001 = 2000 times).

We guess at this next reserve asset together, yes?

Old Commie Aquilus

Sam said...

Conrad Aquilus. Your insights are invaluable. Thank you.

Jeff said...

For Biju:

http://www.theatlantic.com/china/archive/2013/11/why-chinese-people-buy-so-many-homes-in-palo-alto/281234/

Edwardo said...

I have heard one financial guru after another discuss Quantitative Easing and its impact on interest rates and the stock market, but I’ve heard no one make clear that close to 30 percent of federal spending is now being financed via the printing press.

Poor Larry, he needs to RTB .

MSC said...

Michael dV,
My better half is a Russian and she lived through the USSR break up. She tells me she isn't aware of anyone trading in Silver at any time - and that dollars were suddenly the preferred new medium of exchange.
She tells me the exchange rate went from 6 Rubles to a dollar to 18 to a dollar overnight, (at which point she invested her life savings in chocolate - she was 14 at the time), and the ruble son further devalued to 24:1, by which point everyone abandoned it.

She's been a reasonably easy convert to saving in gold given her own personal experiences....but she did still need persuading as she never realised herself that the Dollar could end up a modern equivalent to the ruble.

Phat Expat said...

Gee, not to be Captain Obvious but this time just might be different since THE reserve currency is at risk. The goto for the common man will be silver (and other assorted trinkets). Those fortunate to hold gold, and able to defend it, will come through just fine. Relax, have another Remy; I am... Excellent rec MdV! The key was letting it breathe.

Polonius said...

Dear FOFOA,

I copy below (in two parts due to Blogger's character limitation) the comments of a usually clear thinking newsletter writer who insists the POG is well and truly its free market value. Would you care to address any of this?

Part 1
"There are many misunderstandings about the relationship between "paper gold" (gold futures and gold ETFs, primarily) and physical gold. For example, a popular and persistent misunderstanding is that the price of physical gold has been falling in the face of a bullish supply-demand picture due to machinations in the "paper" market. In an effort to clear-up these misunderstandings, here are some facts and economic realities.

We'll begin by pointing out the fact that supply is always equal to demand, with the price shifting in order to maintain this equivalence. Specifically, if demand starts to increase relative to supply then the price will rise by whatever amount it takes to restore the balance, and if demand starts to decrease relative to supply then the price will fall by whatever amount it takes to restore the balance. It is unequivocally impossible for the market price of anything to fall if demand is increasing relative to supply.

But, according to some commentators an increase in the demand for physical gold relative to the supply of physical gold has been more than offset by an increase in the supply of paper gold.

The above claim is nonsensical on more than one level. First, it is not possible to satisfy someone's demand for physical gold by supplying them with paper gold. Consequently, if the demand for physical gold is rising relative to the supply of physical gold then the price of physical gold will rise to maintain the axiomatic supply-demand equivalency, regardless of what is happening to paper gold. Second, since every sale goes hand-in-hand with a purchase, an increase in the supply of paper gold MUST be accompanied by an increase in the demand for paper gold, with the price change being the only reliable indicator of whether the suppliers (the sellers) are more or less motivated than the demanders (the buyers).

On a related matter, it is sometimes said that the selling of futures contracts creates the impression that there is more supply than is actually the case. OK, but if this is true then the buying of futures contracts creates the impression that there is more demand than is actually the case. This prompts the question: Why is it a problem if the sellers of futures contracts create the impression of greater supply, whereas it is perfectly fine if the buyers of futures contracts create the impression of greater demand?

The above question actually isn't relevant, because the fact that every sale of paper gold must be accompanied by a purchase of paper gold means that any increase in supply due to the selling of paper gold will ALWAYS be exactly offset by an increase in demand due to the buying of paper gold. Again, the price change tells you whether the buyers are more eager than the sellers or the other way around.

On another related matter, some gold bulls complain about the selling of "paper" gold due to the resultant downward pressure on the gold price. They don't seem to realise that if there were no selling then there could be no buying, and that it would be impossible for speculators, as a group, to become net-long gold futures unless "the commercials" were willing to go net-short gold futures.

Polonius said...
This comment has been removed by the author.
KnallGold said...

Draghi's quote, oh yeah :-) . But compared to last time in May when he used the word "frustration" in regards to the low IR's, he appeared quite upbeat.

There were some interesting words before he left, unfortunately its not in the official presscon tube and when he stood up for leaving he had a certain grin on his face. Can't find a tube.

Nevertheless, the rate cut has brought up some stir from savers having to pay for that (again). Particularly from Germany where this rate cut received harsh critic. Its understandable and I must say I can relate to it because right now, there's simply nothing anymore to be a valid savings vehicle.

Even Gold is gone, you also just lose. The discomfort of falling in between in a transition. Theoretically, the euro system is hybridian in nature and would allow something for both sides. Lots of Corinthian acanthus but still no Golden column...

Yeah it's a cruel cruel world for savers atm. FG would deliver us but what if you never heard of it? Well, just trying to explain the rising fire at the HMS castle which could infect a broader populace.

And what if the falling Gold price - is indeed simply signaling deflation? And not what we try to interpret into it?
Once you drank from the Cult's Secret Elixir though, the resolving thoughts automatically will pop up from your brain, even if you don't want it.

Roacheforque said...

We hasten to reiterate, though, that paper gold's influence on physical gold (and vice versa) does not make it possible for the price of physical gold to fall during a period in which the demand for physical gold is rising relative to the supply of physical gold.

WTF??

Back in the real world, it bears repeating that all currencies are indeed "locked together for value" or perhaps we could say that they are "tied togther for credibility" against a single asset - gold.

Which in essence is to say that the primary objective of the current system and the interests that seek to preserve it, is to maintain the credibility of debt.

As Ford would say, "That is Job 1". And Freegold is the fallback against the eventuality that debt will fail, and with them ALL paper assets to the largest extent of any such failure in the history of time.

So what politicians say and do regarding currencies should be no cause for alarm, as they cannot be weighed against the truth of gold.

Inevitability is the champion of Freegold.

MatrixSentry said...

And what if the falling Gold price - is indeed simply signaling deflation? And not what we try to interpret into it?
Once you drank from the Cult's Secret Elixir though, the resolving thoughts automatically will pop up from your brain, even if you don't want it.


What of it? That is what we anticipate.

The Window is open and the view is resolving.

Phil_O_Dendron said...

Interesting article from Koosjansen about 1974 gold/oil/europe/arabs

do you think Another was somehow involved on the European side


http://koosjansen.blogspot.com/2013/11/gold-and-monetary-system-potential-useu.html?spref=tw

MatrixSentry said...

Thanks Comrade Aquilus! Nothing like getting an account from someone who had boots on the ground. Unlike others, you have street cred.

Edwardo said...

Knall wrote:

And what if the falling Gold price - is indeed simply signaling deflation? And not what we try to interpret into it?"

Of course the falling paper Gold price is signaling deflation. It certainly isn't falling because of inflation. And when paper gold falls far enough, guess what, acquiring the real thing, as opposed to paper gold, will be well nigh impossible since, A.) mining output will flat line B.) above ground stock will be in the hands of those that have no intention of selling and C) all the folks who traditionally save in gold will still want physical.

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

Apropos liqueurs, if you can stand bitterness, try to get some Absinthe. It was invented in the nice Val-de-Travers in the french part of Switzerland and is made of Wormwood, Anise, Fennel and other herbs.

Its surrounded by myths and has lots of culture attached to it, there are even pure Absinthe bars. Dilute it 1:5 with water dripped over a sugar cube and this magic turbid, greenish color develelops. Usually I prefer it without sugar.

Since 2005 it can be bought legally again, but I must say the one I got before (only via an insider) has a much more balanced and complex aroma. Something for the true connaisseur, this green fairy. The Bohemians loved it.

Google the pics and you'll understand her whispers :-)

Biju said...

Thanks Jeff.
I can tell you Chinese investors are starting to spill over to neighbouring towns which are also nearly good. With property taxes capped at 1.25%, investors feel they are good.

One example a Chinese investor I came to know bought a $800K property all cash since daughter to study at UC Berkeley. The house is not going to be used by daughter but by parents when they visit here. They do not plan to rent it, thus locking up both real estates and rental market also driving price here. I also think that the tech industry doing good is also helping real estate market. In the town, I am looking it is mostly retired folks who bought a newly build home in late 1960s home are selling and moving.

Woland said...

Phil O Dendron;

Thanks for the link. We've seen some of the policy thrust
before, ( Thomas Enders education of Kissinger, etc) but
there are some very worthwhile quotes in the Jansen
piece. Much appreciated. {;<(>>

Phil_O_Dendron said...

Woland - glad I could help a little. I am looking forward to being able to look back on this era and with the full understanding of hindsight.

FOFOA said...

Hello Polonius,

Sorry your comment got caught in the spam filter. I don't know if your newsletter writer was referring to me in particular, but if so, then he is operating on some big misconceptions about my understanding of market fundamentals and the issues that I have been exploring for years now.

The issue of "paper gold" he defines as "gold futures and gold ETFs, primarily." On this issue, I would recommend Gold as a FOREX Currency and redefine "paper gold" as "spot unallocated, gold futures and gold ETFs" in that order. Futures daily volume is about 10 times that of the ETFs, and spot unallocated volume is about 10 times that of the futures (and 100 times that of the ETFs).

On paper versus physical, he says, "paper gold's influence on physical gold (and vice versa) does not make it possible for the price of physical gold to fall during a period in which the demand for physical gold is rising relative to the supply of physical gold." Well, actually it is possible. The LBMA operates the top tier of the paper market (spot unallocated) on a system of physical reserves which, to the LBMA, are the "slack in the flow" of physical gold coming into the LBMA and then going out through allocation and delivery.

In the same way that LBMA reserves will automatically increase when more physical is flowing in than out, their reserves will also automatically decline when the opposite is true. This is the situation which he says is impossible, but it is precisely what we see today. Today we have a gold price that is below the profitable level for most mines, and we also have a declining flow from scrap as well. So the normal inflow to the LBMA (global flow is around 4,000 tonnes per year from mining and recycling) is declining while physical demand from the East is steady to rising. In this case we would expect to see an automatic draining of the bullion banks' physical reserves.

On this issue, I would recommend a few different posts. First read Five which explores the tiered structure of the physical gold market and how paper/physical parity relies on the flow at the top level only. Next I would recommend the section titled "GLD – The Coat-Check Room View" from my Open (Window?) Forum, paying special attention to the concept of the "subterranean stream". And then I would recommend this recent comment which should round it all out, as well as the above post, Advance Warning, this part in particular:

"The indisputable story is that GLD has lost 36% of its inventory, 487 tonnes in 10 ½ months. Title to that gold was transferred to someone. The only question that matters is whether it was transferred into BB reserves (the plenitude view) or into private ownership (my view, and obviously the correct view ;). That's more than 46 tonnes per month.

The BBs probably have at least twice that much coming in through mining and scrap (just a guess), so let's imagine they have 100 tonnes coming in each month. The outflow is obviously higher than the inflow, but the pressure is widely distributed across the LBMA. So the rumblings in the machine room are widely distributed and therefore isolated from what we see in the reservoir drain reporting. GLD is where the buck stops, where they obtain that shortfall of incoming gold, but it is not likely going to a specific buyer. More likely, it is simply restocking the subterranean stream…"


Sincerely,
FOFOA

FOFOA said...

This was part 2 of Polonius's comment which was deleted:

Part 2

"Now, it is true that the paper gold market can influence the physical gold market and the physical gold market can influence the paper gold market. Actually, it makes more sense to consider gold as a single market comprising various forms of physical gold and various forms of paper gold, rather than as separate paper and physical markets. In any case, if the price of one form of gold rises or falls relative to another form of gold, an arbitrage opportunity will emerge. That's why the prices of the most liquid forms of physical gold (400-oz bars trading in major financial centres, for example) are always very close to the price of the nearest COMEX futures contract.

We hasten to reiterate, though, that paper gold's influence on physical gold (and vice versa) does not make it possible for the price of physical gold to fall during a period in which the demand for physical gold is rising relative to the supply of physical gold.

Moving on, it is worth mentioning that the influence of the futures market on the physical market will generally be short-term, the reason being that every sale of a futures contract must be closed via a subsequent purchase and every purchase of a futures contract must be closed via a subsequent sale. To put it another way, in the futures market every supplier must eventually become a demander and every demander must eventually become a supplier, where "eventually" is usually a few months or less.

Here are some additional points worth considering:

First, in the gold futures market the longs will, on average, be more 'naked' than the shorts, especially during a multi-year gold rally. The reason is that many of the short futures positions established by commercial traders will be hedges against long positions in the physical, whereas almost all speculative long positions will be entered as pure bets on a rising price with no intention to take delivery. That's why there are more rapid-fire price declines than price advances, even during a bull market.

Second, there are occasionally rumours that the holders of paper claims to gold with the right to convert their paper into physical are being forced to settle in cash. However, if this were happening on a meaningful scale there wouldn't be rumours, there would be high-profile lawsuits. Also, if the sellers of paper claims began to regularly renege on obligations to deliver physical gold then that market would cease to be of interest to anyone wanting physical gold. As it is, very few participants in the paper markets want to take possession of the physical bullion.

Third, the large commercial traders, chief among them being the bullion banks, are regularly accused by some gold bulls of manipulating the gold price downward, but the following chart shows that the commercial net-short position in the gold futures market fell steadily during the recent large decline in the gold price. In other words, commercials were net BUYERS of gold futures all the way down from the October-2012 peak to the June-2013 trough. It should be obvious to any rational market analyst that you cannot put downward pressure on the price of an investment by purchasing the investment."

victorthecleaner said...

Oh, burning,

as long as oil is sold only for dollars, the ECB needs something like 2% inflation (at least in the long run).

Two remarks:

1) If Draghi ignored the 2% target today and let inflation drop towards zero, this would be an indication that he is expecting an end of oil only for dollars, at least on a time scale of 5 to 10 years.

(remember: If Euro zone inflation had been 0% rather than 2% since 1999, the Euro would be at $1.70 rather than the $1.35 as it is today. There is no way the Euro zone would have retained its balanced trade account in that scenario. The 2% inflation target cushions the pressure on the Euro to rise.)

(further: Draghi's explanation cited by Woland is what you usually feed the press guys. It's as blatant a bullshit as Greenspan's remark that you could see bubbles only with hindsight. Q: What's the problem with 2% deflation if that is caused by declining energy costs or by an improvement in productivity? A: Nothing. Deflation is only a threat if it is caused by a collapse of confidence in credit/banks/bonds/the future - one of the most prosperous periods in the history of economics, the second half of the 19th century, coincided with mild deflation.)

Back to (1) above.

2) Eurozone inflation will decline further towards 0% because the rate cut has no effect. Draghi must know this. So the ECB move is about exchange rates rather than domestic inflation.

So what does this tell us about what they are expecting?

Victor

victorthecleaner said...

assimilate-this,

Think about interest rate derivatives. Particularly those owned by Deutsche Bank, which are a good portion of their € 55 trillion derivatives book.

That's a very intriguing remark. If you wonder about rate cuts that obviously don't make sense, there is actually a precedent: in spring 1998 if I remember correctly.

Take a look at the old USA gold archive to see the rumours on what this meant for LTCM.

So wait for news about Deutsche then .... and let's see whether Schauble or his successor will eventually have enough cash to bail them out. The Euro zone definitely needs a test run of their new bail-in mechanism, best before the banking union is operational and best in such a way that the outcome is obviously inevitable as in "nobody could have seen this."

MF,

So in May 2003, we clarified that that was not the case, so it was below 2 percent, but close to 2 percent, for the reasons that the president stated in one of his answers."

Nice find. That's when it was clear that the dollar would survive the turn of the century.

Victor

Phat Expat said...

Thanks for sharing KG, will have to give that a try. I can handle some bitter but will likely need the sugar to go with it. Will be in parts of Switzerland during this leg so something else to look forward to. Hmmm... How much are livers going for these days?

Phat Expat said...

The US has the most ridiculous property laws in the 'developed' world. In very few countries can you purchase large tracts of land, let alone single family homes. I wouldn't count on current trends to be sustained; especially if the populace begins suffering on a large scale.

Michael dV said...

It seems to me that China's obvious desire to have physical gold, it's ability to easily buy all that is to be seen (i.e. they have 1.2 $T in UST reserves and the entirety of GLD is at about 28$B) means that there has to be a disconnect between paper and physical gold.
We understand that at the CB level and IN SIZE that gold does not move at the current market price. How do other's explain this? The answer is that they don't explain it, they mostly do not consider it.It deserves and answer however.
Polonius' writer states 'there would be high-profile lawsuits.'
In this statement he assumes that therefore all the physical that is desired can be had....what about China?
Perhaps they really don't want gold? They have been buying record amounts. How does his writer explain this huge gap between what China could EASILY have and what it is getting.
They sure got all the other 'commodities' they wanted.
I would suggest that this writer can't be referring to fofoa or they have not read much.
We have explanations here (thanks to our host) most others do not even ask the right questions.

Edwardo said...

We have explanations here (thanks to our host) most others do not even ask the right questions.

Too true, sir.

Victory said...

...looks like Bron got busy with work again



Victory said...

Oldie but Goodie this is so Freegold



Robert said...

Wrong attitude, Victory, wrong attitude. I hope Bron sticks around, and I do not expect him to comment every day or even every week. The comments section of this blog needs more skeptics, particularly people who are in the gold business. That's how you learn.

One Bad Adder said...

@ 罗臻: - In relation to a Deflationary Collapse, you said -
USTs are just future USD. So the Treasury market is not where there will be panic, since if you wait long enough, you will get USD. The panic will be in foreign markets/banks first.
You had me ...up to the above Sir.
The achilles-heel in a Global Fiat Regime (such as that which holds sway nowadays) is TIME ...and as such a long-dated $-denominated T-Bond (say one with 15Yr's to run, or ANY time affected $ - Bond, Note, Scrip etc) will be shunned along with all / any foreign paper IMHO.

Biju said...

OBA,

I think "Chinese characters" has a point. you may be waiting for 3 moth T-Bill going negative, but you may get a dollar crash before that happens while you wait.

I too think the dollar is the place to look at. Bond holders change from UST to dollar with FED QE in a gradual manner. Every one is looking at yield and says everything is fine, though yield is low due to QE. But yet at the same time, those Bills/dollar Reserves may have been slowly converted to physical assets. Dollar may be the place to look instead of US Bills, because on the US monetary plane, FED has lot of latitude.

ampmfix said...

Google translates: 罗臻 by: Luo Zhen

burningfiat said...

Hi Victor,

What is your guiding principle in deciding whether central banker statements are in category:

a) Feed the press bullshit (like this Draghi quote apparently)

b) Truthful utterances (Noyer speech about saving in currency falls here I assume)

From your comment I would almost tend to think pro-Freefiat remarks automatically falls in category b), while not so pro-FF remarks falls in a) in your world-view.
I know that can't be though (that would be conf. bias), so please enlighten me, so I can also learn to separate CB wheat from chaff in this masterful way. TIA

/BF

Edwardo said...

Robert wrote:

The comments section of this blog needs more skeptics, particularly people who are in the gold business. That's how you learn.

Robert, the truth is that one needs to have a very particular (and, most pertinently, rare) vantage point-such as Another had- to advance the discussion. I dare say there are quite a few folks in the "gold business" Bron and Jim Sinclair come to mind, that operate with a certain kind of lens that, at times, has proven to be not just unhelpful, but downright obstructive to the furtherance of genuine understanding.

As for skeptics, well, there are so few good ones compared to those who masquerade as good faith questioners of the thesis.

Victory said...

Robert, I only kid Bron; I've been watching ;-)

burningfiat said...

PS. Victor, I forgot to mention how truly impressed I am with your talent for discerning CB'er truth from lies also intra speech. For instance Trichet's Dec. 2012 speech where you never miss an opportunity to emphasize the pro-FF quote "There are no risk-free assets" while ignoring Trichet's other point (not so pro-FF) "There are no risk-free signatures".
Again, in admiration of your unique ability,

/BF

One Bad Adder said...

Hey Biju: - I wasn't disagreeing with "LZ" ...simply pointing out that IMHO "dollar-denominated" doesn't imply immunity from an initial Deflationary rout.
The various antics du-jour (Fed et-al) point conclusively toward defense of maintaining the status-quo ie: Faith in the Future. Plan B is (will be) a futile attempt to maintain a Faith in the Present (Dollar denominated Cash / T-bills) ...and ultimately on down to Gold (24K variety) which requires NO Faith whatsoever ...IMHO.

Biju said...

Any one hearing the thumping sound of the nearing super duper Bull market in stocks and inflation ?

I think stocks are going to make all time highs in next 6 months. I have done extremely well with Euro stock index in 401K. US markets are also poised for lift off - just my opinion and I am positioned as such.

Victory said...

Finland and Sweden recently made public the storage locations of their central bank gold reserves

About half (86.4 tonnes) is located at the Bank of England and according to the article, the Head of Communications for the Bank of Finland wrote that: "Throughout these years no more than half of the gold has been invested. Gold has been invested in for example deposits similar to money market deposits and gold interest rate swap agreements. Gold investment activities are common for central banks. Risks related to gold investments are controlled with limits, decentralising investments and limits regarding run times."

The author of the article goes on to say: “Half Finland's gold is stored at the Bank of England, and "no more than half" is "invested". If any "investment" is to take place it would be in London. It is not immediately clear what is meant by invested, but presumably this is a result of translation of what has happened from English into Finnish plus explanation for a non-specialist readership. However if it has been invested, then by definition it is no longer in the possession of the Bank of Finland, and will most probably have been sold into the market in return for a promise to redeliver at a later date. This follows the Austrian National Bank's admission to a parliamentary committee a year ago that it had earned EUR300m by leasing its gold through London.”

Hmmm…HSBC, the custodian of GLD and LBMA market maker/clearing member, stores GLD's gold bar inventory in its London Vault right.

HSBC lists all of GLD's inventory bars by serial number and refiner on GLD’s website

This is kind of interesting…

‘CENTRAL BK OF THE PHILLIPINES’ is listed as one of the refiners, among many (I guess they do the dirty themselves in the Philippines.) Gee I wonder if any other bars came from central banks, maybe they were ‘invested’ maybe ‘for example deposits similar to money market deposits and gold interest rate swap agreements’ ?

Remember FOFOA's 'What about Sprott's 4,500 tonne export 'gap'?,' maybe some of that GLD drain is headed back home (being repatriated;swaps unwound/leases called in)?

To much of a stretch?

victorthecleaner said...

burning,

What is your guiding principle in deciding whether central banker statements are in category: [...]

How about truth as a criterion? That would be as usual, wouldn't it?

If the ECB lowers the repo rate from 0.5% to 0.25% (last week), this is not going to contribute to rising consumer prices. So claiming the contrary would be a category (a) statement.

Claiming that the Euro is the healthiest block *because* it is acquiring a current account surplus doesn't make sense either, and so this is in class (a), too.

On the other hand, it is true that sovereign debt can no longer play the role of *the* safe asset in order to mediate trade flows in the same fashion as before, and so a new means is needed. The "currency itself" (I read this as CB reserves) can play this role provided it is managed appropriately. This is plausible, and so this is a candidate for a category (b) statement.

Finally saying they are targeting "below ***but close to*** 2%" inflation because this gives them a margin of safety before they reach 0% is a mixed bag, isn't it? They have indeed managed to stay in the rage of 1% to 2% most of the time, and so it is plausible that this was indeed their target. This obviously entails a margin of safety compared with 0%.

On the other hand, there is no reason why it would be prudent to fight declining consumer prices **in all circumstances**. For example, if their energy imports became substantially cheaper and this resulted in falling consumer prices, it would be madness to fight this type of "deflation" (whereas fighting a widespread collapse of credit does make some sense in some cases - although isolated cases such as Cyprus or Greece with enough advance warning weren't even in this class)

So the explanation provided for the 2% target is only part of the true story.

Make sense?

Victor

victorthecleaner said...


If you agree that cutting the repo rate isn't going to help with their inflation target (that will be easy to decide, just have some tea and watch Euro zone inflation decline further), you ought to ask what else does it do?

One obvious effect was an immediate 3 cent drop in the Euro exchange rate. As the rate cut doesn't materially affect the Euro zone's trade position, the reaction in the forex market seems to be more about "what the market thinks" rather than about fundamentals. The Euro fundamentals are unchanged, i.e. acceptable to somewhat nice.

Btw why did the Euro *drop* as opposed to *rise*? Given the market reaction to other rate cuts, one might have expected the Euro to jump, no?

So the rate cut might even be the political cover for an intervention that was scheduled to take place anyway.

Given Draghi's comment about the recent current account surplus of the Euro zone, it could all be about the exchange rate after all, don't you think?

This was the reason for my initial remark about supporting the dollar...

Victor

Reality Show said...

Hi Robert, I meant that my view through the lens shows me that, if the real estate is fully paid for and the gold is in physical possession, a 25/25/25/25 portfolio diversification would amount to 50% debt and 50% equity.

ein anderer said...

For the few Germans reading this blog: Here is an interesting (German) interview with Karlheinz Brodbeck, Professor for Economy, Statistics and Creative Techniques:

http://ondemand-mp3.dradio.de/file/dradio/2013/11/10/dlf_20131110_0715_e6f557f6.mp3 (13 min.)

The interview was aired via Deutschlandfunk November 10, 2013. Some POVs used also in FG theory are covered in this interview too, IMO.

There were several more publications the last weeks in german newspapers which show that the bubbles of derivatives and US debt comes more and more into mind of main stream writers. The lowering of ECB’s interest from .5 to .25% is seen as part of an ongoing currency war between US-D and Euro. More often than before they say that the US debt bubble will implode, sooner or later.

BTW, @jojo: Thought again about the »buy as much as you understand«. I think now that our host wants to tell his readers: »Don’t buy because you are a FOFOA fan. Try to build up your own understanding.« Seen from this POV the advice is very wise.

Happy transformation to all.

burningfiat said...

Victor,

Thanks for your reply

How about truth as a criterion? That would be as usual, wouldn't it?

Right! Could be awesome!

They have indeed managed to stay in the rage of 1% to 2% most of the time, and so it is plausible that this was indeed their target.

Right! So this is actually not bullshit, but could be the truth as HICP is not going to get magically more accurate 'AG', rebalancing intra-zone could be easier with an inflation target higher than 0% and monetary policy effectiveness could be greater given an inflation target higher than 0%:

Draghi: Well, why did, may I say, our founding fathers actually want to have something below but close to 2%? There were three reasons for this. First of all, they very wisely thought about possible measurement errors in HICP data, so they wanted to keep a significant cushion between price behaviour and deflation. In other words, you may well have a situation where you think that you are at say 1% inflation but, instead, it turns out that you are actually at minus 2%. Unfortunately, this has happened before, in other parts of the world. The second reason is that (and this is very relevant now) they thought about the adjustment within the euro area, the rebalancing of the different country members. They knew that these countries are very different. And so, the possibility of having imbalances was always being looked at and considered. Now, in order to rebalance these disequilibria, countries have to go through a readjustment of their prices ̶ since they do not have the exchange rate, they have to readjust their prices. This readjustment is much harder and difficult if you have zero inflation than it would be if you have 2%. That was the second reason. The third reason is that, as we have discovered in many other jurisdictions, the effectiveness of standard measures of monetary policy is greatly reduced as you reach the lower bound of inflation, as you go down to zero. Finally, there is also a fourth reason why you want an inflation rate of 2%, particularly in the current stage of a recovery which is still proceeding: it is proceeding, but it is still relatively weak, it is uneven, it is fragile (as I have said many times before) and, most importantly, it starts from low levels. So the unemployment rate is still very high. Incidentally, it looks like it is stabilising. But it is stabilising at the top, so it is very important at this point in time to have lower real interest rates. I think that is why it is important to have an inflation rate which is close to but below 2%.

Excellent!


Claiming that the Euro is the healthiest block *because* it is acquiring a current account surplus doesn't make sense either, and so this is in class (a), too.

In this $IMFS system it actually does! If you're a surplus country in this world, you can't do nothing but accrue credit. Hence this explains why we live in $IMFS and not Freegold-system.

The "currency itself" (I read this as CB reserves) can play this role provided it is managed appropriately. This is plausible, and so this is a candidate for a category (b) statement.

Or one could stop being bone-headed and start hoarding real wealth instead of signatures (be it sov. debt signatures or central bank signatures)!

Sometimes I feel you're just being stubborn for the sake of being stubborn in this debate. Prolly just me, as others don't seem to take much note of/participate in this discussion... (Our hosts excellent rebuttal of the FF view can be found in that link)

/BF

Edwardo said...

Prolly just me, as others don't seem to take much note of/participate in this discussion

Trust me, others are taking note even if some of us have decided not to participate.

victorthecleaner said...

burning,

Our hosts excellent rebuttal of the FF view can be found in that link

LOL. There is an army of straw men slaughtered on that page. If I find an argument that's worthy of taking up and discussing, trust me, I will respond. Still waiting though...

If anyone wants to figure it out (why the Euro is engineered to be managed as a store of value, and why this does not contradict the ascent of gold to the role of the primary reserve), they can take a look at the condensed copy of the discussion at NNW or at my snippets. It's all in there, and if you are familiar with FG, you'll be able to understand it.

But why do I care? Those who genuinely wanted to figure it out, have been able to do so, and they have moved on... (Blondie, costata, ... - for various reasons)

The fact that these chaps are some of the cleverest contributors among the old FOFOA crowd, I have always found reassuring.

And, finally, best of all, it is most likely only some 5 to 10 years, and we will all know.

Victor

byiamBYoung said...

Admittedly, I am a junior varsity contributor here when we get deep in the weeds on things like like this Free fiat discussion, but I think this is a valid comment, and so posit it below.

I bet that the overwhelming majority of readers here are mostly concerned with understanding and preparing for the wild transition that the freegold revaluation promises to be, rather than the far less impactful topic of whether gold or fiat or pork bellies will fluctuate 1% or 5% or even 10% post FG.

Get my ass through the transition with my wealth intact, and whatever happens later is surely something I can handle/adapt to.

I truly admire you guys, and I am humbled by the level of understanding all parties here bring to the table.

But on this side of the transition, I'm looking at windfall versus devastation. Post transition, I'm looking at rounding errors.

Cheers

Roacheforque said...

The two sides of the argument do not seem to be far enough apart to merit much more discusssion than has already been offered (IMHO). It is a matter of degree.

But in the end, efforts to store value in paper have always failed relative to the discipline of gold. This is how we arrived at the present. As for the future, I do not think it will take 5 more years to "reveal all".*

* Though none of us truly knows what "deals" have been made behind the same doors as Another's, or which Giant "awakes" and when ...

One Bad Adder said...

Hi Victory: - The very essence of a Giants perspective toward Gold is that seeking to earn a Paper-based Interest (aka entertaining Risk) is a ludicrous, irrelevant and laughable exercise.(as espoused by Another)
CBGold, ETFGold, PeoplesGold, CollectiveGold ...aka FaithGold is currently trapped, earmarked, ...or otherwise destined elsewhere before emerging "somewhere / sometime" as Individual FreeGold.
It's all bound to get real ugly ...sure as eggs ...IMHO.

Franco said...

ZeroHedge has an article with quotes from a secret telegram from 1968 to the Secretary of State and a memo from 1974 to Paul Volcker discussing such topics as the creation (and purpose) of the SDR, gold, petrogold, etc.:

http://www.zerohedge.com/news/2013-11-11/what-confidential-1974-memo-paul-volcker-reveals-about-americas-true-views-gold-rese

M said...

@ VTC

"The Euro zone is entering dollar support mode again, and Draghi advertizes this openly in his press conference. "

Yep.....

The first sightings of aliens will be when they come to support the dollar. Everyone on the planet is doing their part. We just need the rest of the galaxy to do their part.

Phat Expat said...

Not that I'm closed to the concept of FF, but how can the Euro be considered an SOV when there is the overhanging threat of bail-ins? Just where am I saving those all those Euros, in a mattress? Hmmm...

Lord Sidcup said...
This comment has been removed by the author.
Lord Sidcup said...

Phat Expert

"but how can the Euro be considered an SOV when there is the overhanging threat of bail-ins?"

The bail-ins are not an overhanging threat, they are a certainty. Exec. board members of the key institutions now talk about about bail-ins a lot (connected to the banking union).

For simplicity we can say that each currency zone has a choice in how to deal with it's huge, unpayable debts; save the currency or save the banking system.
Printing saves the banks (nominal performance), but destroys the currency. Bail-ins (a CB confiscating currency units they could print freely if desired) will destroy banks & bank deposits, but will not damage the currency.

Neither FG nor FF devotees would claim bank deposits as a SoV. The public will wake up to this and will give a lot of thought to what they save, and where they put it.

Phat Expat said...

LS
" Bail-ins (a CB confiscating currency units they could print freely if desired) will destroy banks & bank deposits, but will not damage the currency."

Well, you might say "not damage the currency" but is that reality?

"The public will wake up to this and will give a lot of thought to what they save, and where they put it."

But I do agree with this, and that brings us right back to...

Motley Fool said...

For lulz : http://www.maxkeiser.com/2013/11/raoul-pal-on-why-bitcoins-upside-is-5000-x-the-current-price-of-gold/

Woland said...

Hi Franco; Phil O Dendron posted a link ( via Koos Jansen)
further up this thread to your article.

Jeff said...

Someone says we're a bit slow here. The clever students have been promoted, and only the plodders are left. How awkward for us.

We bid them farewell as they advance to planes of enlightenment at which we can only guess. Godspeed, Sidhartha Gautama; we who toil in earthbound obscurity salute you.

anand srivastava said...

I guess there are two differences between FreeGold and FreeFiat.
1) Euro targets 2% or 0% inflation.
2) Gold stays stable with slightly increasing value over time in Euros, versus wild fluctuations in price in Euros.
3) Giants will be storing Euros (kind of like US Treasuries) instead of Gold. Its not clear to me if they will be selling off their Gold to buy Euros AG.

Are there any other differences?

Point no.3. Some discussion on why I added it :-).
If Giants do buy gold instead of Euros to save their excess wealth, then how it is different from FreeGold. Point 2 is actually a consequence of Giants buying gold AG. The Giant buying gives it a stable rising value, which FreeGold predicts. I don't really care too much about Point 1, that is really upto ECB.

michael3c2000 said...

http://naturalsociety.com/8-natural-antibiotics-immune-system-ditch-pharmaceuticals/
Heads up, and be well!

Michael Pierce said...

ZH had a link to interesting gold documents from the Nixon era. Especially, see document 61 (and those around it) at http://history.state.gov/historicaldocuments/frus1969-76v31 You can choose pdf, epub or mobi.

Excerpt:



There is a belief among certain Europeans that a higher price of gold for settlement purposes would facilitate financing of oil imports... Although mobilization of gold for intra-EC settlement would help in the financing of imbalances among EC countries, it would not, of itself, provide resources for the financing of the anticipated deficit with the oil producers. For this purpose, it would be useful if the oil producers would invest some of their excess revenues in gold purchases from deficit EC countries at close to a market price. This would be an attractive proposal for European countries, and for the U.S., in that it would not involve future interest burdens and would avoid immediate problems arising from increased Arab ownership of European and American industry. (The Arabs could both sell the gold and use the proceeds for direct investment, so that the industry ownership problem would not be completely solved.) From the Arab point of view such an asset would have the advantages of being protected from exchange-rate changes and inflation, and subject to absolute national control.

Woland said...

Hi Michael;

I think you excerpted one of the more interesting paragraphs,
in that, while we pay a lot of attention to the Arab (Saudi)
interest in accumulating gold, and lack of trust in paper, we
might not remember the worry, already evident in 1974, that
future massive oil surpluses might lead to Arab dominance
of global industrial businesses. The U.S. and Europeans
wanted to keep those "higher yielding" assets under their own
control, and encouraging the pre-existing Arab preference
for gold in settlement of trade imbalances satisfied both parties needs. Then, about 6 years later, the "oil priced in
$, in return for a falling price of gold" scheme kicked in.
{;<)>>

Franco said...

Motley Fool:

I saw that article about Bitcoin versus gold...that's some of the stupidest shit I've seen in a long time. "One Bitcoin should theoretically be worth 700 ounces of gold". WHY???

Victory said...

Bron is back with a rebuttal; well done...looking forward to FOFOA's retort

Sir Tagio said...

Franco,

I believe they compared the total amount of bitcoins that can ever be created to the total number of ounces of gold to derive the 700:1 ratio (i.e., there's 700x more gold by ounces than bitcoins, ergo a single bitcoin is worth 700x ozs of gold). The sheer stupidity of articles like that do more than anything else could possibly do to convince me that bitcoin is being played as a massive pump and dump opportunity. It's a gambling opportunity, not a store of value, IMHO.

DP said...

1. Gotta love Monetarists.

2. Presumably when BTC is trading for more than 700X an ounce of gold (which of course it might, if you happen to be selling your gold at the very worst moment eva… or just because, y'know, BTC is much more than 700X as good as gold anyway as anyone can see!) they will get over their Menstruist beliefs, and then it'll be fundamentally supported by something else too!

These mosquito bites will look like juicy, juicy mangos!

poopyjim said...

(1/2)

Nice Draghi quote burningfiat! One would think that would put an end to this but noooo we're too far down the rabbit hole now. Victor is a good analyst but I think drilling down in the knitty gritty so long has made him miss the forest for the trees.

I don't find the freefiat "debate" particularly interesting. The assumptions upon which freefiat is based seem utopian in my view and I can reject them out of hand based on common sense. I describe the assumptions as utopian because they stem from a worldview of, "if we just eliminate X, there will be happiness and peace on earth!" Marxism, Nazism, and Randian free-market idealism are all utopian worldviews of this kind, where X = "the rich," "Jews," and "government," respectively. I believe Blondie subscribes to the third, which serves as the ideological basis of freefiat. In retrospect I think that a lot of his earlier writing (which has since been removed) is stained with this particular bias as well.

I found I had to abandon a lot of my preconceived ideas in order to really comprehend the material on this blog. With freefiat it's the reverse; if you find you're failing to "understand" freefiat the problem is probably that you lack the prerequisite ideology. With freefiat, ideology comes first, then understanding. ;)

Anyway, freefiat assumption #1 (as I understand it) is that the US & $IMFS are the main driver of fiat currency inflation in the world, and that once $IMFS is gone there is no motive for central banks to inflate their currencies. This is true to some extent as $IMFS does force countries to inflate their currencies. However, the notion that there would be no inflation absent $IMFS is ridiculous because central banks have always been harlots for their host governments and they always will be, and currencies will be inflated as a kind of tax on their users as they always have been. There is no CB "independence," CBs are utterly subservient to their host governments.

I can see why this assumption is appealing to Victor though because he has a very clear anti-American bias. One time Victor stated essentially that if not for the USA meddling there would be peace in the middle east. This is Victor's underlying worldview in my opinion: "If we just get rid of USA there will be happiness and peace on earth!" If you perceive the world with the USA as the ultimate bogeyman, then I can see how pinning the perceived malady of fiat currency inflation exclusively on the USA might be appealing. But if you don't perceive the world in this way this assumption is pretty specious.

By the way the notion that there would be peace in the middle east if only the USA would back out is laughable. Blood has been spilled in the middle east for centuries among sunnis, shiites, Jews, and Christians, and if humanity even survives blood will continue to be spilled there for centuries to come as those fault lines still exist and there's no sign they are going away.

poopyjim said...

(2/2)

Assumption #2 is this mistaken idea of what ECB "independence" actually is in practice. It is NOT (in my view) the total separation of the ECB from political influence of the member states. Indeed there are very clear signs that the ECB as an entity is quite influenced by European politics. The ECB is merely independent to the extent that it cannot be compelled to destroy the currency by funding an individual nation state's budget deficiency. All governments are profligate but not all are equally so, so the amount of printing will be naturally constrained by the least profligate member states. These varying degrees of profligacy guarantee that you will never achieve the consensus required to print the currency into oblivion. However, those member states all remain profligate, and will all gladly consent to benefitting from a bit of seigniorage, and the ECB (being the group harlot) must oblige.

So even if one were to stipulate that 0% inflation is somehow desirable (which I don't agree with at all), it should be readily apparent to anyone that it's impossible! It ain't happenin' man! There is no utopia! Everything sucks now, and everything will suck come freegold. It will just suck differently.

Sam said...

I've created a new coin. The Samcoin. I've only made 5 and I promise I won't make anymore. Please divide that by the ounces of gold in the world to get Samcoin's value. I'm willing to sell 4 of them today and I accept cash, check, and credit card.

byiamBYoung said...

Sam,

Do you accept Bimbcoins? If so, I'll make a couple for you.


Cheers

Motley Fool said...

Vtc

" It will thereby also continue to assist the gradual economic recovery, as reflected in confidence indicators up to October."

"In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets declines further and that the resilience of banks is strengthened where needed."

"These decisions are in line with our forward guidance of July 2013, given the latest indications of further diminishing underlying price pressures in the euro area over the medium term, starting from currently low annual inflation rates of below 1 percent."

Last translated : despite the rate cut, we won't breach our mandate.

A trade surplus of 2% ie. roughly $330 billion is also not the end of the world. It is insufficient to support US over-expenditure even if all of it went to UST's, which it won't.

To answer your first comment.

"as long as oil is sold only for dollars, the ECB needs something like 2% inflation (at least in the long run)."

Explain and defend please. I am particularly interested in the first 3 words.

"1) If Draghi ignored the 2% target today and let inflation drop towards zero, this would be an indication that he is expecting an end of oil only for dollars, at least on a time scale of 5 to 10 years."

Is this on the above assumption, that with no $IMFS there would be no fiat inflation?

"(remember: If Euro zone inflation had been 0% rather than 2% since 1999, the Euro would be at $1.70 rather than the $1.35 as it is today. There is no way the Euro zone would have retained its balanced trade account in that scenario. The 2% inflation target cushions the pressure on the Euro to rise.)"

This is part of an attempt at explanation I presume. However, there is the historical example of Germany which increased it's exports whilst it's currency was strengthening. This example in the least tells us that nominal exchange rates is not the be all and end all of value exchange.

"Q: What's the problem with 2% deflation if that is caused by declining energy costs or by an improvement in productivity? A: Nothing."

Disagree. Productivity gains for example are generally made by either capital investment or research. Neither of these make sense to do in a depreciating currency environment as the person to spend first loses competitive advantage in eg. capital expenditure to any competitor who does so after, in the present (broken) patent system at least. The same incentives come into play for consumers, and while not having such a strong influence here, and such withholding has an effect of future currency value. This is bloody basics man.

"Claiming that the Euro is the healthiest block *because* it is acquiring a current account surplus doesn't make sense either, "

It doesn't? Oh right because running the biggest trade deficit makes you the clear winner. Usa #1!

The village Fool (since I obviously don't get FF eh?)



Victor The Cleaner said...


Some personal comment.

Last week, I was travelling - partly business and partly to see old friends. I had a few spare minutes and managed to look at twitter and send some brief tweets, but I didn't have enough time to check the comments here.

Apparently, Gary (the evil one) posted some arguments relating to currency as a store of value. (Some other readers just told me by email - I didn't know when I came back here because it had all been deleted by then).

Does someone still have a copy of that discussion? Does blogger still send emails with all comments to subscribers? If yes, somebody will probably still have the emails of that discussion.

I'd most appreciate if somebody would email me a copy of that discussion. If you don't have my email, you can go to

http://victorthecleaner.wordpress.com/about/

and get in touch and neither your nor my email will appear in public.

Victor

DP said...

(Forwarded the comments to Victor)

Victor The Cleaner said...

MF,

Explain and defend please. I am particularly interested in the first 3 words.

Has been discussed in detail. I am getting tired of playing the find-the-reference-nanny again and again. Go and find the reference yourself!

However, there is the historical example of Germany which increased it's exports whilst it's currency was strengthening.

I suggest you take a look at the figures first: Average annual inflation in Germany during Deutschmark times before 1999 was slightly higher than average annual inflation in Germany under the Euro since 1999. So the German currency has already been slightly stronger since the introduction of the Euro. Not much left of that "argument", isn't it? You can also take a look at some long term charts of the major currencies and inflation rates, and you will find that 2% was a rather plausible guess of the required rate BG (=before gold).

Victor

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