Wednesday, January 1, 2014

Happy New Year!

2014
Year of the Rains



"It won't be long before the rains come
and the ground begins to open…"

Let me start by saying that I do not have a crystal ball, but I do have a lens. My lens is Freegold, and it is quite simply a paradigmatic framework in which to view events past, present and future in a different light. Events that defy other frameworks of understanding and confound their proponents, requiring either complex conspiracy theory explanations or else fluid foundations that must shift every time the wind changes directions, make perfect and simple sense with this lens, which is why I take its necessary conclusions so seriously. Once again, here is one of my favorite quotes from FOA:

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

Last year's New Year's post began with this: "It is tempting to believe that extraordinary events must have been carefully orchestrated by someone. This is the main ingredient in conspiracy theories—denial that extraordinary events are caused by the ordinary.

The reason I bring this up is to help you put Freegold in the proper perspective to understand my use of the term "window" as in "window of opportunity". Freegold will certainly be a high impact, extraordinary event as I understand it, and completely unexpected by most people. But that doesn’t change the fact that it could be, and was, seen coming a mile away.

Extraordinary events are caused by the ordinary all the time, and Freegold will be a good example. It has been rolling in like the tide longer than most of us have been alive. If there was a "conspiracy" surrounding Freegold, it was a conspiracy to forestall the inevitable, by those who had the most to gain, until structural foundations could be retrofitted enough to withstand the storm of transition.

With a long view, we can see several times when massive amounts of resources were expended to keep the wheels on the bus at times when it looked like they were falling off. A popular view is that central bankers do this to retain their own power and influence. But a different view exposed by the Gold Trail reveals that it was being done for a purpose: to buy time in order to retrofit the system to withstand the inevitable transition to Freegold."


"Everyone knows where we have been…"

I dubbed last year the "Year of the Window" which was speculation pertaining to a theory that Aristotle developed beginning around 2005. The basic theory goes like this:

The current system is old and fragile, like a crumbling edifice with minimal, but necessary, structural support. Picture an old brick building with basic earthquake retrofitting, more for the perception of safety required by its residents and to meet public building codes than for actually surviving a serious disturbance.

Brick wall with earthquake retrofitting

The current system edifice has two main structural weak points, both of which require support, and either of which could bring the whole thing down on its own. The two weak points are the overvaluation of the dollar and the undervaluation of gold. If you think gold rose in real terms over the last decade, you're wrong. It didn't. The price of an ounce of gold when the bull market began in 2002 was about 13 barrels of oil. Today it is 12 barrels of oil. In 1999 it was 17 barrels of oil and in 1998 it was 24 barrels of oil. The real price of gold is lower today than it was for most of the time that Another and FOA were writing. But it's not the price that is the problem, it's the flow of physical at that price which requires support.

As for the dollar, it has been overvalued for a very long time. It's a long explanation as to why the dollar is overvalued which I'm not going to go into at length here. But it's basically like this: Saved dollars are backed in extremis by the ongoing net production of the American economy, only America hasn't been a net-producer in a really long time. Not only that, but the sheer amount of dollar-denominated assets existing in a world that has been systemically hoarding and reserving dollars for more than 90 years is above and beyond what even the most productive economy could produce in surplus over generations. It's a systemic flaw "which, when people become aware of it, will be viewed by history as an object of astonishment and scandal."

Again, both of these structural weak points need support, not just one or the other. Either one could bring the whole system edifice down. And please don't be confused by "the undervaluation of gold" as one of the weak points. Again, the weak point is not the price, but the flow of physical at that price. So if the central banks wanted to support the current system, they wouldn't do so by suppressing the price, but by supplementing the flow. It's really that simple.

Structural support for the dollar is equally simple. In order to support the global system edifice, foreign net producers need to continually hoard and reserve more and more dollars to keep the dollar overvalued in real-production terms. Not financial terms, mind you, but in real goods and services imported by the United States. From 1980 through the turn of the century, structural support came primarily from Europe, and from 2001 through 2013, it came mostly from China. I wrote about this structural support for the dollar side in Inflation or Hyperinflation:

This is the structural support that holds the whole system together: foreign CBs perpetually gorging themselves on Treasuries. It's not that they might sell their stock of Treasuries. The real threat is that they might slow or stop their rate of accumulation relative to our rate of emission.

On the gold side, support for the flow of physical has two components or "legs": the commodity gold market component and the official CB component. From the early 80s through the turn of the century, the gold price was on the decline. The flow during that time was enabled and supported by the CBs backing the gold mine forward hedging part of the commodity gold market with their own gold to keep the mines producing and, toward the end of that period, by making deals with one or two of the world's largest physical gold consumers, "Oil" and "Big Trader". Ultimately, however, the CBs had to become the primary suppliers themselves.

You can read more about this support for the gold side in Checkmate:

Apparently, according to Another, even all of the new gold coming out of the mines each year was not enough to satisfy the East's taste for physical without an eventual revaluation.

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

The west to east gold flow comes from three basic sources: Western dishoarders, Western gold mines and Western CBs. Think about these three sources in terms of support for the flow of physical at the commodity gold market price. Obviously gold mines are an important—although not the only—component in that structural support, and therefore the profitability of gold mining is an important element. But in the absence, or at least reduction of flow from the other two sources, mining becomes a relatively more important leg of support for the current system edifice.

One thing we learned from Another was that back in 1979 the BIS resolved to extend the dollar reserve system for a while. This resolution included the expansion of the paper gold market through CB leasing and gold mine forward hedging, so that the mines could increase the amount they were producing each year without a change in the price. In 1985, global mining production was at about 1,550 tonnes per year.

It is only through Another that we learned what they (the BIS, meaning the European central bankers) hoped and expected would happen, which was a five-fold increase in the flow of gold from the mines. Even if Another was exaggerating a little in that statement, which I doubt, the disparity between what he said they expected and what actually happened is so vast as to leave plenty of room for exaggeration without affecting the point of the statement.

A five-fold increase would have meant the mining of 7,775 tonnes per year, but what actually happened was that global production plateaued at about 2,550 tonnes per year in 2000, and stayed there. There are probably a number or reasons for this, but one of them is surely that, even as technology improves, the efficiency it provides is offset by the declining marginal grade of the ore that is uncovered.

The point is that this is quite possibly the natural peak level of new gold production. And that "peak" would have been nearly impossible to predict back in 1985, although 7,775 tonnes per year does seem wildly optimistic, which makes me wonder how and why they came up with such optimistic expectations. Another explained it thusly: "Don't ask where they got this, as they are the same people that bring us government finance and such."

Sometimes I wonder if that "five times over" was what they figured at the time as being necessary for Western mining to eventually become the primary supplier of the eastward flow, since Western dishoarding had its obvious limits. In any case, the variance between estimates and actuals is well-established, though not usually that far off. (Note that, while European CBs had most of the official gold reserves, Europe has only 2% of the unmined reserves. Most Western mining supply comes from dollar bloc countries like the U.S., Canada and Australia, plus South Africa. So if Western dishoarding dried up prior to Freegold, it was preferable to the BIS for Western mining to pick up the slack rather than the European CBs.)

Here's something interesting that Another wrote in February of 1998: "When we speak of these [Giants] one must know that they purchase much larger amounts than Berkshire. Most cannot understand that it is difficult to take five or ten million oz./gold in physical in a month or less… At this time the market is very, very tight for large money to go into physical. Paper, yes! I could move five billion US into paper metal very fast, but not physical."

What's interesting about that paragraph is that it gives us a rough size for the Giants he was talking about. 5M ounces is about 150 tonnes, so he was talking about 150-300 tonnes per month. Obviously there are not too many Giants of that size, but even one Giant taking the average between 150 and 300, or 225 tonnes per month, would require 2,700 tonnes per year. Gold was $300/oz. at that time, so he was talking about a Giant with $1.5B-$3B in surplus currency per month to convert into physical gold. 7,775 divided by 2,700 is less than 3, so there can't have been more than two such "Giants" in the world (plus the "third world no ones") that the BIS was concerned about. My guess is it was "Oil" and "Big Trader" (the Middle East and the Far East, or more specifically, the Saudis and China/HK) plus the "third world no ones" that the BIS thought required, in aggregate, that "five times over".

Here's something else interesting that Another wrote around the same time: "The central underlying questions from the beginning of these "Thoughts", was always, "will the CBs become the primary gold suppliers in the continued support of low oil prices" and "will the oil producers accept a world gold market that supplies only "non-mined" gold"?"

Why "only non-mined gold"? That's because, not only had the gold industry failed "to expand production some five times over" in the preceding decade and a half, but the price of gold had recently fallen below the cost of gold mining for the first time ever. This, I think, was the primary reason that Another showed up in the first place. The first to appear was "Big Trader" in December of 1996. In November of '96, gold had dropped from $379 down to $371, and here's how Another later paraphrased Big Trader's comment:

"This was not far from the time that "Big Trader" said that "if gold drops below $370 the world would see trading volume like never before seen". The rest is history. Now the CBs will have to sell 1/3 to 1/2 of their gold just to cover what's out there. To use the Queen's English "it ain't gona happen dude"!"

Another wrote that in October of '97, then in November he wrote this:

"How will this all end? As the CBs never sold much of their gold, they are still locked to the deals thru the BIS. In the real world it was stocks of gold outside the governments [Western dishoarding] that got traded. And that trading multiplied many times. Today, more gold is traded than exists! This paper today, has become the "gold pricing standard" without backing. There is no way out! As we have now reached production cost, we have reached, "THE END"!"

So apparently $370 was an important price level at that time, probably related to the profitability of the Western gold mining industry, because below that level, Another said that the CBs would have to become the primary suppliers. And apparently they did, for a while. Here's more from Another in March of '98:

"On March 18, the Belgian Central Bank said it sold 299 tonnes of gold last week. This sale/purchase was ongoing, completed and announced during the time frame of my post ( of Date: Mon. Mar 09, 1998, 07:55 )

This purchase was completed by the BIS for its account and held in five CBs. It was made at appx $305us. As this transaction was made public within the 5 to 10 day time frame, did that mean gold would move to its new range of $320/$360 in that time also? No. What it does show, is that the BIS has made a decision to "no longer support the LBMA gold paper with CB gold"!"


So there was some CB support in '97 and '98, and then the BIS announced in the WAG in '99 that it was strictly limiting future gold sales and leasing operations. That's when the BOE ponied up another 400 tonnes at Brown's Bottom.

The point I'm getting at is that it was ALL about that price at which gold mining is profitable. Apparently that was somewhere between $320 and $370 in the late 90s, and when the POG spent a good portion of '97-'01 below that level, the CBs had to become the primary suppliers to the eastward flow. Of course that's not to say that the mines shut down during that time. They didn't, because they had already hedged many years out.

What we can see in hindsight, when looking back at this period from 1979 to present, is that the price of gold has roughly tracked the cost of gold mining that whole time. From 1979 through 1996, the POG was a little above the cost of gold mining, yet the mines were able to expand production by developing new technology and new locations with funding from forward sales, the sale of paper representing the gold that was still in the ground.

Then, 1997 through 2001 was a stressful time on the system and its central banks because the POG spent a considerable amount of that time below the cost of gold mining, forcing the European CBs to support the crumbling edifice of sub-$370 gold flow from '97-'99, and the BOE from '99-'01. Coincidentally (or not), that was the same time period that Another and FOA were posting.

Then, from 2002 through 2012, the POG was once again a little above the cost of mining. And now, during most of 2013, for only the second time in all of history, the price of gold was consistently below its production cost. Notice, very roughly, that from 2001 through 2012, the nominal POG and the nominal cost of energy (oil) both rose around 5X. Oil rose from roughly $20/bbl. to $100/bbl., and gold rose from $300 to $1,500, roughly the present cost of sustainable gold mining.

During that same time period, another 30,000 tonnes of gold were mined and added to the above-ground supply. That's roughly the same amount of gold as is held by all of the CBs combined. So while that amount falls short of what even a single Giant absorbing 225 tonnes per month would have required, it is still a significant amount of new flow, with the 1,353 tonnes that eventually made it into GLD representing less than 5% of the decade's total.

Today we have reports that suggest China, alone, may be importing around 2,000 tonnes per year. Oil is still at $100/bbl., and the POG is probably a good $200-$300 below the magic number for sustainable gold mining profitability, only this time the mines are, by and large, not hedged, the CBs are apparently not interested in becoming the primary suppliers again as they were in '97-'01, and the Western investor/trader mindset has had it with the paper gold market.

I'm trying to give you the general overall picture of what I mean by structural support for the crumbling system edifice so that you can see how it was removed, precisely, in 2013. It's not any one thing, but a combination of many. On the gold side, support for the flow of physical includes both official and unofficial (or market) components. The official component is the CBs, and the market component is the Western dishoarding of physical while also embracing the paper gold market enough to keep Western mining profitable.

From 2002 through 2012, Western investor sentiment toward paper gold was high (gold peaked in euro terms in September of 2012). In 2013 it was low. From 2002 through 2012, gold mining was profitable. In 2013 it was not, and some mines simply quit. If the sources of eastward flow of gold were hampered or reduced in 2013, we'd expect to see something, or at least I would. Perhaps we'd see the CBs max out their self-imposed 400 tonne per year gold sales limit. But we didn't. What we did see in 2013 was the draining of 550 tonnes from GLD.

Above I wrote, "…so he was talking about a Giant with $1.5B-$3B in surplus currency per month to convert into physical gold." GLD's loss averages out to 45.8 tonnes per month. At the average POG last year, that's about $2.1B in physical gold, per month, that left GLD and went somewhere in 2013.

Back around 2005, Ari started noticing European central bank policy references to the year 2010, which he interpreted as a general time frame in which a window might be opened (structural support removed) such that a natural transition of systems could occur with minimal disruption thanks to preparation and foresight. Then, following the 2008 global financial crisis, he looked for signs that the time frame might have been pushed back. In late 2010, he wrote in an email: "As for the new timeframe, I'd say that the reported EU plan "to make private bond holders shoulder some of the pain from any sovereign debt restructuring after mid-2013" is as good an indication of a benchmark as any I've seen."

This is the basic theory on which "2013 – Year of the Window" was based. You may not believe that the current system is fragile, and therefore needs support, but the BIS, the European central bankers, have believed it since at least 1979, and have acted accordingly. If Another is to be believed, they were worried that the launch of the euro, combined with the withdrawal of their support for the dollar and the gold market in 1999, would usher in the new Freegold paradigm right at the turn of the century.

That didn't happen for the reasons I have explained (the BOE, China and the commodity bull run), and by 2005 they may have noticed some adjustment to their new Eurosystem that they hoped to implement before the transition did ultimately occur. That sentiment may have been what Ari picked up on. The 2004 renewal of the WAG/CBGA reaffirmed the same limitations on support laid out in 1999, but the subsequent 2009 renewal lacked the limit on gold leasing. Perhaps this was a reflection of some renewed purpose for extending their support at that time.

In any case, following Ari's theory, I kept my eye on 2013, and one year ago today I asked the question: "Will 2013 be the year of the window?" To answer that question, I proposed a test:

"If the recorded price on Friday, January 4th, 2013 is EUR 1,246 or lower, it's game on for Freegold meaning that the window of opportunity is now open because official support for paper gold has apparently ended. In other words, there may be no system support the next time something breaks. But if the recorded price on January 4th is EUR 1,389 or higher, it's six more months of kick the can. And if it's anywhere between EUR 1,246 and EUR 1,389 (which it is today) then the €PoG will be too ambiguous to be predictive one way or the other."

Of course there was nothing magical, scientific or even mathematical about my test, it was simply me looking for an unambiguous sign—or at least a significant indication—one way or the other, in case there was something to Ari's theory. And yes, I do believe there is something to his theory. But as it turned out, the January 4th snapshot came in at €1,261.18, delivering mostly ambiguity and no definitive confirmation either way.

So was 2013 the Year of the Window as I suspected? Well, as the year unfolded, it sure appeared to be!

New Year's is that special time when we look back at the year that was, and forward to the prospects of the next. Looking back, 2013 was quite a remarkable year. Over less than one week in April, the price of gold tumbled $200, from $1,575 down to $1,375. As I said, the first ECB snapshot of the year was €1,261.18, and 6 months later it was down €341, to €919.92. 550 tonnes of gold were drained from GLD, over 40% of its inventory built up over eight long years, gone in one! Also in 2013, we witnessed what is apparently the end of structural support for the dollar!

Now see if you can spot the trend, and the dramatic change in 2013, in the following data. In 2010, the U.S. trade deficit was $498B, and foreign official holdings of Treasury securities that year grew by $456B. In 2011, the trade deficit was $560B, and foreign official holdings of Treasuries grew by $426B. In 2012, the trade deficit was $540B, and foreign official holdings of Treasuries grew by $386B. Of course the final numbers for 2013 aren't in yet, but here's what it looks like. The trade deficit in 2013 will probably be around $485B, and foreign official (that is, foreign central banks, i.e., "structural support") holdings of Treasuries grew by a mere $20B through October, $24B extrapolated through December. Here, I made you a handy chart to help you visualize it! :D


Let's take a quick look at some of the other remarkable charts from 2013:


That last one is a chart of every single quarterly snapshot since New Year's 2002. It's a little bumpy because, on shorter time frames, you pick up some of the market's normal volatility. Personally, I think the chart of yearly snapshots is much more useful in identifying any significant change in the larger trend:


So was 2013 the Year of the Window as I suspected one year ago today? While the year got off to an inconclusive start, I'd say that, in the end, it played out rather decisively. But you decide for yourself. Can you see how the structural support of the last 30++ years, as Another and FOA explained it, was gone in 2013? That's what "Year of the Window" meant. The window is now open.


"Everyone knows where we have been.
Let's see where we are going!"

This is the part where I post a bunch of A/FOA quotes and you try to spot the recurrent theme! ;D

ANOTHER (10/17/98; 22:57:24MDT - Msg ID:638)
Every season has the special feel to the skin and this winter will bring the sand storm as not before. It is not our place to change this weather, rather to wear the correct garments. I have always found the winter, it does change much too quickly for the traveler with all clothes. These traders will not move with the speed of sand and will find no shelter in paper skins. If the gods be gracious, these seasons will change slowly, yes? Thank You

6/29/98 ANOTHER (THOUGHTS!)
How long do persons continue to make these paper claims to "bonds", "stocks" and "currencies" that are produced in numbers as the leaves on the trees? These seasons of spring and summer of twenty years time, have offered a harvest to gather wealth that lasts for centuries. When the economy of the dollar, becomes as your "Autumn" and arrives suddenly, they will pause from this foolishness. In that time, the savings for the future of their children will be as these dried "leaves" of winter, blowing in the wind!

Date: Thu Mar 26 1998 00:35
ANOTHER (THOUGHTS!) ID#60253:
Time passes, thoughts change, people consider and value is perceived differently. Persons say, "the seasons are all the same", but we know "the weather is never the same". A storm approaches YOUR SHORES from across the pacific!

Date: Sun Apr 26 1998 00:06
ANOTHER (THOUGHTS!) ID#60253:
Political, legal and military "currencies" do come and go with the "Seasons", but "gold currency" did keep promise for citizens of changing times!

Date: Sat Feb 07 1998 18:45
ANOTHER (THOUGHTS!) ID#60253:
Without speaking in parable ?
Buy physical gold and hold it close. Real wealth can not know time, it is good for all seasons. It will buy you honor during a time without truth!

ANOTHER (12/2/99; 18:06:06 #20082)
These years be right for ones who save gold. One good ear knows meaning of wind in trees. The leaves come down as seasons change. Fools see falling price of gold as "death of tree", they chase its price as leaves on the ground. Know you all, it is the season that has died.

Time will prove all things. Ones of simple thought, such as I will save the wood, not the leaf as they buy the gold, not the price!

Trail Guide (02/11/00; 17:21:28MDT - Msg ID:25055)
Our use of digital currencies for trade always flows like a river that's strong and wide,,,,, and it always flows to its end in the sea. The water takes it into the air and rains it again upon the headwaters for another trip,,,,,a new currency starts again.

Trail Guide (10/17/00; 06:31:36MT - usagold.com msg#: 39207)
So, every investment era has its beginning and end. We (I assume you are a bullion holder like myself) can stand back and watch this paper gold system dissolve while gold the real international currency moves on. Our wealth in gold, whether large or small will weather this storm and produce some spectacular gains for our living standard. All because we made the hard choice to stand aside the misguided torrent that was an unavoidable river of Western thought.

FOA (12/02/00; 11:40:02MD - usagold.com msg#49)
I believe this storm will become worse as many paper assets are buffeted by its destructive winds. During this time the transition of currencies will place a more proper price on all the paper values we now hold to be so true.

In this light we should know that our real things in life will not change all that much. Your tools, chairs, clothes and cars will remain yours. Houses and land, TVs and boats, all will retain the exact same "value" they always had. What will change is our ability to use our currency and paper assets as a medium to measure the "real value" that's always so inherent in these items, yet so well hidden in our perception of today. Yes, the currency price of things will greatly change, even as their "use value" moves little. Such is the nature of dying paper money systems. Such is the ending of a currency timeline!

Trail Guide (2/24/2001; 7:15:55MT - usagold.com msg#: 48858)
Storm clouds are blowing in and I want to walk with a few private friends before the wind. Never know, might have to board up a window in the thick of it. (smile) OK, be back when able.

TrailGuide

ANOTHER (04/14/01; 18:08:54MT - usagold.com msg#: 51887)
Walk the gold trails of my good friend, do I. On my feet are "strong sole" of thick leather, purchased with much knowledge of physical gold. These shoes not go bare before our journey is done. On trail I see your "thin sole" gold investments cast aside and scavenged by beasts. Their owners walk no more as these investments took not this hard road of dollar transition. Many more will wear paper gold wealth thin before this walk be done. Only physical gold will see sun after this storm.


A recurring theme in A/FOA's 4+ years of writing was change in nature—the changing of seasons, falling leaves, storms rolling in, coming rains and flooding waters—as well as the nature of change. Here's a fun little story about rain and water:

FOA (08/24/01; 10:54:30MT - usagold.com msg#101)
A guy begins building his house of wealth in the middle of one of these dry washes. A known gold expert comes along and tells him; "hey buddy, that old stream bed floods from time to time". The Bug says,,,, yea I know, but I only plan to be here for a quick trade or two,,,,, I know it's unstable and washes out every so often,,,,,, taking all paper values with it. I'll just catch some good sun between the rain,,, I'll be ok.

Well,,,, years go by and the rain comes and he gets washed out a few times more than usual,,,,,, but the guy still stays,,,,,, even though the paper gold price keeps getting washed ever lower. Then,,,,,,, a huge unending wash comes even when no rain is falling. After seeing his house of wealth float away with a falling paper price he decides to walk upstream and find out why all this water keeps driving the gold price down??

By god,,,,,,,, miles later he finds a government dam that suddenly started releasing tonnes of water all the time. He raised hell and said it wasn't right,,,,,, but the man at the valve said they aren't doing anything any different than what this type of "paper market"-- I mean stream bed,,,,, was built for. This is a derivatives market, son,,,, meant for betting on the flow,,,, not building a house from it!

If all the public is just speculating on when the rain will fall,,,, why is it so wrong for the government to do it,,,,,, and help maintain your lifestyle to boot. Besides, if all your gold talk is so right,,,,, then we are catering to gold advocates and making physical prices more reasonable???

But the Bug says,,,,,, hey, this isn't a natural market,,,, I mean stream flow!! This bed was only suppose to flow between natural dry and wet spells,,, like a real free bullion market! In reply the valve man asked,,,,, who the hell told you that??? The Bug answered:

I learned it from My Broker!


And then there were FOA's parting comments, titled "There comes a time":

FOA (11/12/01; 16:31:28MT - usagold.com msg#132)
There comes a time

There comes a time in all things when one must do nothing and simply wait. This is an ages old truth that crosses all the boundaries of life's endeavors; for everything is not always in the doing, but also in the watching. Any good farmer knows that he does not grow a crop; he only prepares his field so the growing, he knows is coming, can take nature's course.

My friends, we have crossed time and space, while plowing these fields of understanding, and the unfolding drama before us must now sprout its own life. For now, it is my time to watch the trail and let the crop develop. Indeed, it will and it will do so for all to see.

Enough has been said to prove our reasoning is true, especially when the fields become full and in a shade of physical green only our seeds will produce. And planted them, we did, by hand, one at a time, over many years.

Enough has also been said about myself as this story was never about me; perhaps too much untruth was also said by others?

I am going to travel for a while and watch the trail from a distance. It won't be long before the rains come and the ground begins to open; in that time I will return. Until then; this farmer will rest from this work.

Thank you USAGOLD and all the fine people that make this media the best gold site in the world! Another time, we WILL hike again.

Sir Douglas
Your Trail Guide

FOA (12/16/01; 15:27:34MT - usagold.com msg#133)
(No Subject)

Seasons Greetings and a Happy New Year to the entire USAGOLD GROUP. Certainly, this includes every reader / lurker at the forum, hikers on the Gold Trail and the staff at CPM!

Of course, the largest thanks must go to Mr. Michael Kosares; as this media would not exist without his enormous efforts. Thank you Michael (smile)!

We rest from discussion during this holiday season; a season that also happens to be ushering in one of the most dramatic financial changes the world has seen in our time. As the rains arrive and our crops begin to grow :

---- "We watch this new gold market together, yes?" -----

A happy (smile) to all!
TrailGuide


What do you think FOA meant by "the rains"? I don't think he was referring to a 10-year bull market in gold and silver (and the rest of the metals as well). Anyway, that has already come and gone, and surely you remember this storm reference:

"However, everyone that is positioned in physical gold will carry this storm in fantastic shape. This is because the ECB has no intentions of backing their currency with gold and every intention of using gold as a "free trading" financial reserve. None of the other metals will play a part in this."

So what do you think constitutes "the rains" in FOA's parting comments? I have my own idea, but I think there's a good chance that, by some point in 2014, we'll all be able to identify "the rains". That's why I dubbed 2014 the "Year of the Rains". With the fragile system edifice now wholly unsupported, the window open, and all forms of "gold" despised by Western investors even as the East is importing record amounts of physical, I'd say it's high time the rains come and the ground begins to open. It's been coming for some time. And with a little good fortune, maybe, just maybe… :D

Happy New Year to all of you! All the best—and try to stay dry—in 2014... Year of the Rains!

Sincerely,
FOFOA


232 comments:

1 – 200 of 232   Newer›   Newest»
Phat Expat said...

Yes! Happy New Year! And I mean it too... And it will be. Peace.

S P said...

Happy new year to all.

Defend the precious.

MIA said...

Happy New Year from down-under. Be safe out there...be prepared ... raincoats, umbrellas, the shelter of a good tree...belts and braces...

Bjorn said...

http://m.youtube.com/watch?v=0FIXOQuhi_U&desktop_uri=%2Fwatch%3Fv%3D0FIXOQuhi_U

Happy new year!

FoNoah said...

The Ark is built - I am ready for the rains.

Happy New Year from FoNoah!

burningfiat said...

Happy new year everyone!
Great post FOFOA and great title for 2014.

The rains are the prelude to the storm. The beginning of the end. The storm brings the death of $IMFS. The ground opening up from the rain is the new system being born and eventually coming into full flourish!

Friends, don't fear the rain. Without it, no growth in the field of understanding!



From the rain, the smell of earthy, mossy air.
From sorrow, happiness...

MatrixSentry said...

Thank you FOFOA and Creedence Clearwater Revival.

"Caught up in the fable I watched the tower grow
Five year plans and new deals wrapped in golden chains.
And I wonder still I wonder who'll stop the rain.


2014, Year of the Rain. Feels right as rain to me.

2013 was a year of watching through an open window. Those with eyes to see (and a lens for focus) could see the ominous signs of rough weather building on the horizon. Perhaps a few others could only hear distant rumbling of thunder. Most however only contemplate the comfortable partly cloudy days that seemingly have gone on forever.

It was a year of preparation. fortifying shelter for the inevitable storm. Purposeful and determined, yet it was not a hectic time. I find the new year arrives with a heightened sense of urgency. Where there was clear sky overhead, I only see heavy steel grey skies. Trying to complete the last minute preps, hoping the skies do not open up while running about. Can the deluge only hold until April?

So from my vantage point, the window opened in 2013, I see nothing that says support for the bloated USD has resumed. I still see a subterranean gold flow that is overwhelming available stores above and below ground.

Who'll stop the rain indeed.

Please start the year off right and tap the open window icon.

Happy New Year to all. A nice resolution this year would be to read the blog in its entirety. Or perhaps to RRTFB. You won't regret it.

Franco said...

FOFOA:

Thank you for the latest entry. I am curious, when you calculated the amount of dollar structural support by foreign CBs, did you consider only Treasury bonds and notes, or did you also include "agency" bonds?

BaronSilverBaron said...

Happy New Year
I now have my umbrella and really should now be BaronGoldBaron. The silver has long gone.
One thing that I can't get clear:-
"Apparently, according to Another, even all of the new gold coming out of the mines each year was not enough to satisfy the East's taste for physical without an eventual revaluation. "
What really is the real factor behind the "East's taste" for physical?
I know there is the obvious thoughts like fiat currency, corruption and manipulation but that doesn't really get to the essence of this overwhelming "taste" for physical that the West seems to lack.

Jeff said...

Happy new year BSB,

Corruption and manipulation and fear of fiat are the vocabulary of western minds. Easterners have other reasons; the biggest difference IMO is their understanding of the time dimension.

FOFOA: But the East, and especially the Saudis, still liked their physical gold. And they still got it, even with the gold window closed. These guys in the East don't care about the currency price of gold, they just want physical gold at whatever price in exchange for their net-production to hold for the unknown future.

(...)

Gold’s value really comes from intergenerational Giants who have no need to ever sell it. They really just net-produce and net-produce and they do it willingly for more and more gold, and then just sit on that gold until they die and pass it on to the next generation. And they will keep doing this no matter what the $PoG does. They're not buying it for its weight, but for proven long run currency exchange value!

(...)

And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequalled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.

(...)

As far as gold having a lower value because of destruction of wealth, that is not the case. First of all, the fiat “matrix” disappears and leaves the underlying real world intact, just like the real matrix in the movie being turned off. Yes, there can be a depression and whatnot, but gold has this strange ability to stretch its value out into the time dimension rather than just a snapshot of our 3D world. This is a result of the giants having an intergenerational proclivity for the stuff. Has nothing to do with us shrimps, except to the extent that we get to go along for the ride. This post talks about that time dimension. It’s how gold can have a higher gross value than all paper wealth in existence today. And how gold can keep its value even in times of recession: http://fofoa.blogspot.com/2010/06/how-can-we-possibly-calculate-future.html

KnallGold said...

... and too much rain leads to waterfalls...

Oops, just found this, maybe false alarm, avoid-gold--the-last-correction-took-20-years . Although he might be a bit too optimistic for creditgold to re-emerge...

Rose of Avalanche - LA Rain

Happy New Year! Saving lasts longer!

Indenture said...

Thanks FOFOA ,for reminding us where we have been and where we are patiently going.

BaronSilverBaron said...

@Jeff
Thanks for the info and reminder.
The average Chinese seems to be more in tune with the Giants than we are in the West judging by the way they cleaned out a Mall in Shanghai of all the Gold on sale.

Lisa said...

Happy New Year everyone, and remember - strong hands

Knotty Pine said...

Wonderful post FOFOA! Thank you and Happy 2014 all!

Regarding Another's reference to the rains: Perhaps with Alan Greenspan in a panic about the financial repercussions of 9/11 and Bush urging the good old US consumer to fire up the credit cards and buy stuff Another envisioned that foreign $USD support would likely end. Perhaps he didn't foresee China's rapid growth and support of the dollar.

Enjoyed the song, Knall Gold, thanks

Luke said...

No mention of a two tiered gold price back in ~2000? You give examples like the following, when I thought a huge part of Another and FOA's story was gold was selling at that time to the Giants at $XXXXX.

"Gold was $300/oz. at that time, so he was talking about a Giant with $1.5B-$3B in surplus currency per month to convert into physical gold. "

So Giants were not paying more than the "paper" price?


Treasury holdings are no longer rising among foreign CBs, so where are all these overseas dollars going? They have to go into some US "investment", so why does dollar support have to come from treasury support?


Really enjoyed the article though. I might not understand everything that is happening behind the scenes, but things are certainly changing and that's easy to see.

Luke said...

One more thing. I would appear to me that the revaluation of 20-50x in real terms some/most on this blog are expecting isn't directly related to mining flow. Mining flow could be fixed with a 2 or 3x revaluation. Mining flow could though cause a physical shortage, with would disrupt the paper markets causing a massive revaluation most on here might be expecting.

Then you also have gold on CB balance sheets and its use as a "debt extinguisher". CBs could establish or support a 30x price, but when?

I would love to see an article from FOFOA where he links all of these possible catalysts.

DP said...

I thought a huge part of Another and FOA's story was gold was valued at that time by the Giants at $XXXXX.

Testing said...

Dear Fofoa,
Quoting your post:
"Above I wrote, "…so he was talking about a Giant with $1.5B-$3B in surplus currency per month to convert into physical gold." GLD's loss averages out to 45.8 tonnes per month. At the average POG last year, that's about $2.1B in physical gold, per month, that left GLD and went somewhere in 2013. "
...
"What's interesting about that paragraph is that it gives us a rough size for the Giants he was talking about. 5M ounces is about 150 tonnes, so he was talking about 150-300 tonnes per month. Obviously there are not too many Giants of that size, but even one Giant taking the average between 150 and 300, or 225 tonnes per month, would require 2,700 tonnes per year.
Gold was $300/oz. at that time, so he was talking about a Giant with $1.5B-$3B in surplus currency per month to convert into physical gold. 7,775 divided by 2,700 is less than 3, so there can't have been more than two such "Giants" in the world (plus the "third world no ones") that the BIS was concerned about."

My comment/question
Back in 1997-2001 had an oil price of roughly U$S 20 /bbl. Now is U$S 100/bbl. If those were Giants supplying oil, and this supply surely hasn´t decreased (most probably increased), its value at today´s price should have increased 5 fold to U$S 7.5B – U$S 15B. This should mean 175-350 TN gold / month (about the same total as in 1997). 550 TN out of GLD should suffice for 2 – 3 months tops (just for the Giants).
Total mine supply is 2500 TN / year (goes mostly to Big Trader and "third world no-ones").
Western dishoarders are supposedly tapped out.
So that leaves only CBs. If, as you say, CBs aren´t supplying physical gold, where is it coming from then?
Any help, FOFOA or anyone else?
Thanks!

InowB4 said...

Another prophetic song lyrics:

Like the sand can seep right through your fingers so can all your day
As those days go by you'll have me there to help you find the way.
The way I feel with you I know it's got to last forever.
And when the rain begins to fall
you'll ride my rainbow in the sky
And I will catch you if you fall
you'll never have to ask me why.
And when the rain begins to fall I'll be the sunshine in your life

You know that we can have it all and everything will be allright.
Time goes by so fast
You've got to have a dream
To just hold on.
All my dreams of love began
With the reality of you.
You and I believe
That all our dreams will last forever.
And when the rain begins to fall
. . .
Though the sun may hide
We still can see
The light that shines for you and me

(sung by my PM's) :-))

Nickelsaver said...

FOFOA,

Great post to start this year off.

"So what do you think constitutes "the rains" in FOA's parting comments?

I believe "the rains" refer to the collapse of the paper gold market and subsequent hyperinflation of the dollar.

"I believe this storm will become worse as many paper assets are buffeted by its destructive winds. During this time the transition of currencies will place a more proper price on all the paper values we now hold to be so true."

Right now we are seeing it rain within the paper gold market. We are in the midst of that storm and are soon to see the worst of it.

This storm will soon give way to Another storm, that of the devaluation of the dollar.

The repricing of gold is the event that marks the transition between the current storm and the next great deluge. All opportunity to escape the deluge will be lost once this current storm meets its conclusion.

The window of opportunity to escape the flood is starting to close. The day that gold goes into hiding draweth nigh...

Knotty Pine said...

Luke,

QE would not be necessary if foreign dollar support still existed. From My Candid View Part 1:

"You said it seems like our trade deficit is where it is because, perhaps, the world demands that we run a trade deficit. This is Triffin's dilemma, and perhaps the world is fine with it. But even if it wasn't, it seems that the deficit is voluntarily large, and could be contracted. But here's the thing. The US private sector already contracted its portion of the trade deficit. If you only look at the US private sector, we are now essentially running an austere surplus against the USG and the ROW combined. The USG is running a deficit against the US private sector and the ROW combined. So the trade deficit is now entirely attributable to the excessive spending of the USG.

If the world demanded this, then there would be no QE. QE is the clearest sign that we are running a trade deficit that is no longer supported by the ROW. QE is the evidence that the ROW has essentially pulled the plug and is fine if the USD collapses, because if they were still lending all excess dollars back to the USG, then foreign purchases of new-issue Treasuries would match the trade deficit. QE is evidence that our trading partners are now spending some of those surplus dollars on foreign goods and services rather than lending them to Uncle Sam. And it is also evidence that Uncle Sam will not cut his intake of foreign goods and services even though this is happening."

Regarding the "two-tiered" gold market try this post.

victorthecleaner said...

A happy new year to everyone !

Nice post, FOFOA. We know that it is impossible to predict asset prices in the short run. Still, I'd say that a serious stock market decline is now as likely as it hasn't been for most of the past 100 years. Should that happen indeed, with stocks sharply down and probably some renewed problems in the credit markets, how could (London) gold not drop another few hundred dollars? See you again below $1000...

Victor

Luke said...

Knotty, that wasn't my question.

Blake said...

FOFOA (or anyone) please provide a source/link that contains the 20B figure regarding 2013 foreign purchases of newly issued USG debt?

jojo said...

Luke,
Between DP and KP, your question is answered.

jojo said...

Luke said...
No mention of a two tiered gold price back in ~2000? You give examples like the following, when I thought a huge part of Another and FOA's story was gold was selling at that time to the Giants at $XXXXX.

"Gold was $300/oz. at that time, so he was talking about a Giant with $1.5B-$3B in surplus currency per month to convert into physical gold. "

So Giants were not paying more than the "paper" price?

DP said...
I thought a huge part of Another and FOA's story was gold was valued at that time by the Giants at $XXXXX.

=============================================

Luke said...

Treasury holdings are no longer rising among foreign CBs, so where are all these overseas dollars going? They have to go into some US "investment", so why does dollar support have to come from treasury support?


Knotty Pine said...

""If the world demanded this, then there would be no QE. QE is the clearest sign that we are running a trade deficit that is no longer supported by the ROW. QE is the evidence that the ROW has essentially pulled the plug and is fine if the USD collapses, because if they were still lending all excess dollars back to the USG, then foreign purchases of new-issue Treasuries would match the trade deficit. QE is evidence that our trading partners are now spending some of those surplus dollars on foreign goods and services rather than lending them to Uncle Sam. And it is also evidence that Uncle Sam will not cut his intake of foreign goods and services even though this is happening.""

Knotty Pine said...

Luke, you seem fixated on the two-tiered gold market hypothesis and FOFOA's math. I can't answer for FOFOA but in light of the fact that none of us can know the exact price gold may have traded for in what Another called the "interbank" world the only price we can use is the paper price at the time. The post I linked to in my comment describes in detail what Another described as "the real price of gold in the central bank world".

"Treasury holdings are no longer rising among foreign CBs, so where are all these overseas dollars going? They have to go into some US "investment", so why does dollar support have to come from treasury support?"

Why do surplus dollars held overseas have to "go into some US investment"? Foreign support of the dollar via treasury purchases was funding excessive government spending until the support waned. Now we have QE.

M said...

I got a new post up too.

Its just a laugher though but I go through some math that i've always wanted to post

http://freegoldobserver.blogspot.ca/2014/01/why-dont-westerners-understand-concept.html

victorthecleaner said...

Here is something to think about:

The support from the commodity market for gold is disappearing because the London gold price is at or slightly below production cost, and so mining output is likely to decline, but definitely not going to increase (while demand for physical gold most likely increases with falling price - the picture here is a constant amount of dollars per year going into gold).

The primary expenditure of the gold mines is energy, primarily diesel fuel. Recall that the gold/oil ratio has been close to 12..15 for most of the past century.

Firstly, this is one reason for why gold mining in aggregate isn't doing spectacularly as a business. As soon as the price of your product goes up (London gold price), your major expenditures (oil) also go up. This alone is a good reason for not touching mining shares.

But this also means that one could easily lower production costs by lowering the oil price.

How likely is this?

I have repeatedly speculated that Saudi Arabia has a ready capacity of 15 million bbl/day. If true, then so far, they have decided not to use it. But there are a few other sources of additional capacity that may come onstream during the coming year:
1) Iraq recovering from decades of war and chaos
2) Libya recovering from civil war
3) Iran, the embargo against which is in the process of being relaxed
4) perhaps others?

So will the gold/oil ratio eventually leave the range of 12...15 bbl/ounce and move up towards 25...30 ? That might make gold mining profitable at much lower gold price.

Victor

DP said...

China's massive foreign investment, in one map

Lay your cards out

Luke said...

My mistake, you did answer that part. I asked that question to get to the others one, which I why I thought you hadn't. Anyways, if the ROW is reinvesting in say US corporate bonds rather than US treasuries, wouldn't this still be seen as supporting the USD. What makes the USG so special?

Bullion Baron said...

How did you calculate $20b to October?

Using figures from CSV @ http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticsec2.aspx

I got $79.7b increase (measuring Dec 2012 to Oct 2013, Grand Total field).

Presumably the lack of increase in foreign holdings this year largely a result of Fed buying for QE3/4 (?) (http://research.stlouisfed.org/fred2/series/TREAST), so we may see a return to foreign buying as they taper... or not.

Interesting post as always.

Knotty Pine said...
This comment has been removed by the author.
FOFOA said...

Hello Bullion Baron,

"I got $79.7b increase (measuring Dec 2012 to Oct 2013, Grand Total field)."

You used all major foreign holders, including private sector. I used only "official" foreign holders because I think that's more representative of what I call "structural" support, and it paints a clearer picture of the declining support from the foreign public sector (foreign CBs and governments). But no matter, as long as you compare apples to apples, it still dropped off a cliff. I compared "official" to "official" each of the four years. If we use your totals for each year, it comes out like this:

2010 - $687.5
2011 - $566.3
2012 - $548.0
2013 - $79.7

That's an 85% drop in 2013 using all major foreign holders. Using official holders, it's almost a 95% drop. Here's what my chart would look like using your method, both public and private: chart

Sincerely,
FOFOA

jojo said...

Luke,

"My mistake, you did answer that part."

Since 2 people answered you and I made you aware of it, it's unclear who you are addressing.
Regardless, you seem to have missed the bolded part above so here it is again:
"QE is evidence that our trading partners are now spending some of those surplus dollars on foreign goods and services rather than lending them "

Bullion Baron said...

Thanks for clarification on numbers FOFOA.

So based on your theory that the lower uptake by the foreign official sector is based on falling structural support for the dollar you would not expect to see foreign buyers return as Fed tapers (presuming they continue the taper)?

I'm not well versed in the area, so could be reading it wrong, but looking at some 10 year auction results, the volume of bids is very similar over the last 3 years (bids roughly 3x number sold):

2011
2012
2013

I can't see anywhere on the site where the bidders are separated by entity / location, but this look likes the interest may still be there from foreign sector, but just being outbid?

RJPadavona said...

Happy New Year!

Another great post, FOFOA. Maybe 2015 will be The Year Of The Rainbow with a pot of gold at the end.


Luke said...

Jojo, I am asking what makes USG debt so special. If the ROW is recycling their dollars into the US in other ways(not saying they are), wouldn't this still be supporting the USD.

Beer Holiday said...

I think he meant it's raining debt.... to grow the green grass on your front lawn. The seeds of hyperinflation are sown.

A front lawn dump :-)

FOFOA said...

Hello Luke,

Foreign official sector buying of Treasury securities, especially by a big net producer like China, is structural support. Private sector Treasury buying is willy-nilly support at best. All that money that goes out through the trade deficit comes back in somewhere. The significance of the USG's budget deficit being larger than the trade deficit is that the entire trade deficit from 2009 onward is attributable to the US public sector, i.e., the USG.

Therefore, the portion that comes back to the USG through Treasury securities represents support for the edifice. If the CBs are doing it, like they did for the last 30+ years, then the support is structural in that it is not a matter of foreign private individual net-producer investment preferences. Dollars that come back in through investments other than Treasury securities are not supporting the edifice, at least not after 2008. (Prior to 2009, there was some structural support via China purchasing MBS.) Rather, they are building it even bigger and making it more fragile and unstable. I'm sure that some of the $400B that went out last year but didn't come back as a loan to the USG went into the stock market. That's not support for the system edifice; it's just building it bigger. If the USG didn't get that money, then the money that the USG deficit-spent had to come from somewhere else... QE!

The USG is going to spend its budget regardless. Think of all outgoing USG payments as the creation of new money each time the USG cuts a check.

Now, in a totally separate circuit, think of money given to the Treasury by the ROW through the purchase of Treasuries (or by US citizens paying taxes) as money being destroyed.

Did you ever see the movie 'The Prestige' with Hugh Jackman and Chistian Bale (and David Bowie as Nikola Tesla)? If not, I don't want to spoil it for you, so here's your spoiler alert. Don't read the next paragraph if you don't want a great movie spoiled for you!

The movie is about a magic trick called 'The Real Transported Man'. The way the trick works is it presents the illusion of teleportation, as if the magician has created a teleportation device. He stands in the machine and then a moment later he appears on the other side of the room. But the secret is that the machine is actually a duplication machine, not a transportation machine. It creates a brand new exact copy of him on the other side of the room, and the original, he, himself, is dropped through a trap door and destroyed, actually killed in a drowning tank. These tanks with dead bodies pile up in a warehouse basement where they are hidden away from public view. Each time the trick is performed, there's a new dead body that the magician's assistant has to hide.

This is kind of like the magic trick the dollar does as it passes through the Treasury. It appears to just pass right through, but what in fact happens is the dollar going in is destroyed, and a brand new one comes out every time the USG cuts a check.

Cont…

FOFOA said...

2/2

The reason why it's important to think of it this way is because you have to realize that the USG's ability to make payments is not really dependent on the inflow of dollars from the ROW and/or taxpayers. The simple act of the USG cutting a check creates new money. The only question is whether or not old money was destroyed at the same time. If it was destroyed, by the ROW buying Treasuries or a US taxpayer paying his taxes, then the aggregate quantity of circulating credit money did not change by the USG's act of writing a check. If none was destroyed, then that very act expanded the quantity of credit money in circulation. In other words, the USG's payee spent brand new money into existence.

So that's how giving those dollars back to the Treasury removes them from the global marketplace where they would otherwise go into something else. If the ROW instead spent those dollars, on foreign goods and services, or even on other US investments like the stock market, then they would continue to circulate, but the USG would keep spending regardless. So, in that case, you have those dollars circulating PLUS new dollars from the USG's budget deficit circulating. But if they give them to the USG, then you only have the new dollars circulating while old dollars are destroyed.

Meanwhile, as the ROW gives dollars back to the Treasury, they draw lines in the sand designating how many dollars are owed back to them. Those lines in the sand are the hoarded dollars as savings or reserves that overvalue the dollar.

Money is not contained in investments. It flows through. For every non-Treasury investment purchased, there is also a seller. That seller receives the money and then spends or invests it elsewhere. In other words, it continues to circulate. But dollars used to purchase Treasury securities are destroyed. That's the difference.

This view reveals the mechanism that will escalate a simple dollar devaluation into a full-blown hyperinflation. Personally, I think the flow of undervalued physical gold will dry up (at the top level in which it flows) before the dollar devalues. But if it doesn't, then the dollar collapse mechanism is already in place and the structural support that has prevented it is now gone.

Sincerely,
FOFOA

Ben2 said...

Structural support!!

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

Louve said...

About The rain and The window...
The goldmetal's value will start floating freely as soon as the financial industry disconnects with the real economy.
Electronic mispricing of gold is part of the entire falsified financial industry. The real debt-driven economy is a matter of systemic deficits (West) and surplusses (East).
For many decades, the financial industry had to be percepted as your wealth. This pseudo wealth is increasingly not backed by the real economy, because of the global debt over-saturation. The complete disconnection is in full progress and going parabolic. The money bubble is heading for historic extremes, whilst the real economy is failing, despite the management of gloom & boom perceptions.
This is exactly what drives the flows of physical gold ! These flows are becoming less manageable. Because those who see the disconnection between the pseudo-wealth of the financial industry and the real wealth of a productive economy, leave the non-wealth financial industry for what it is and embrace goldmetal as the one and only wealth-reserve-asset.

Roacheforque said...

Let us hope these rains nurture the flower of understanding ... wherever it may grow ... such that those who are faithful to the current debt based system can embrace the coming equity based system with open arms.

Or at least refrain from jumping out of very high windows.

ein anderer said...

FOFOA,

great post, thank you very much. Easily to understand ;)
»So what do you think constitutes ›the rains‹ in FOA's parting comments?«
As your nice video is suggesting: It’s the rain of Dollars, QE, right?
A great 2014 to all. Keep the precious ;)

KnallGold said...

" Zhanglan
• 2 days ago

I am in Sanya, Hainan Province, and this afternoon 99.99% Gold bars from 10 - 200g were on sale at CNY304 per gramme- US$1560 / oz (a premium of 30% over what we are told is the Spot price) .."

http://www.ingoldwetrust.ch/new-years-eve-gold-rush-shanghai-shopping-mall

Just a blip but some day it might get more systemic. Who knows what giants would say today if they had to give a thumbs regarding flow...

FOFOA could be right that physical flow might dry up before $ devalues. That would be the quicky scenario versus the longer drawn out $ devaluation. The $ right now appears in a waiting position, not really moving.

Wile E $ not yet looking down, at that 400billion gap between the red and blue line in FOFOA's $ support graph. The big and growing pus-sy pimple of exorbitant privilege filling the void. Until it pops...

Josh R said...

Thank you FOFOA! The education I get here is worth a college education in itself.

So QE is potentially a two for one bang for the buck scenario? A new dollar is created into existence by GOV spending and another lies dormant at the FED potentially to be released? And on top of that even more new dollars of credit through ZIRP pouring through the system, leaking into it?

This is a damn ready to break. Or to stay with the them a cloud ready to open up.

DP said...

Dollars at the Fed are reserves used among the banks and USG (and those few bits of paper in our wallets, which are merely "between banks" for the moment).

Commercial bank deposits are what the rest of us receive and spend among ourselves.

Whenever USG spends, it has the Fed create a new reserve dollar in their system (a debt of USG to someone else). USG buys something from someone, and the reserve dollar passes to the vendor's commercial bank to clear the transaction in the Fed-banks-USG circuit. The vendor's account is at this point credited (the bank owes them the dollar — all dollar deposits are bank liabilities), and the reserve dollar that moved from the USG account at the Fed to the commercial bank's account at the Fed… is now part of this commercial bank's reserves.

So really USG can only (with the able assistance of the 'independent' Fed) create the reserve dollar. The vendor's commercial bank is the one who must create the "credit dollar" (bank deposit liability) that the vendor receives and can then pass to someone else in a subsequent transaction.

The subsequent transaction may be paying USG taxes or buying a US Tbond/bill — in which case the dollar passes back from the commercial bank's reserves to the USG account at the Fed, and the corresponding deposit liability is removed from the banks-and-us circuit. It is debited from the reserve account of the commercial bank and credited to the USG account at the Fed instead (reducing its overdraft).

Or the subsequent transaction is to someone other than USG, in which case it just keeps circulating, with the reserve dollars following these transactions around from bank to bank until they finally get sent home to the USG account.

There are two monetary circuits - reserve dollars & bank deposit liabilities

Josh R said...

Thanks DP. I will digest your post.

DP said...

… So what?

What is different about what I have just described above (which is what is happening today with QE) and the previous few decades, is that the central banks of the creditor nations of the world used to step up and buy all those lovely Tbonds/bills, which USG have to sell to someone or another in order to lay their hands on the dollars they want to spend.

The Fed cannot simply create more dollars with no offsetting asset on their balance sheet… which is why QE is not limited to simply issuing more dollars, but at the same time buying assets to back them. Specifically, Tbonds/bills… which creates not only huge artificial demand for those in the market, but also in the process of that creates an environment of suppressed government borrowing costs. Which is pretty handy. Because the government was going to spend anyway, but it will create less of a problem tomorrow if the interest rate due is artificially low today.

DP said...

Why does this create huge artificial demand in the market?

Because the Fed is not allowed to directly buy USG debt. This would compromise its independence!! ;D

So it buys them from the primary dealers with fresh cash. Yes, the very same primary dealers who must bid at auction and need cash to buy.

I'm so indie

jojo said...

Great post FOFOA and DP. I finally have a much better handle on the deficit dynamic now. Click, click, puzzle pieces locking in.
Luke, I hope that clears it up more for you.

I wanted to add to the recommendation to Franco last thread re: the deficit dynamics:
http://fofoa.blogspot.com/2013/08/my-candid-view-part-4.html

jojo said...

I forgot to say that if this is the year of the rains, I interpret the rain as inflation.
If support truly has ended, I expect this year we will see more and more stories about inflation and high(er) prices in everything start to creep in. If support is gone that means the rate of increase of dollars competing worldwide for goods and services keeps on climbing.
This would probably get inflation people flappin their gums at the MMT people, no?

DP said...

The wonder of wonders of "credit dollars" (widespread saving of currency; debt liability claims) is that it enables your commercial bank to keep your reserve dollars for its own use, loaning them out to others for income, over and over. Nice work if you can get it.

¿#FFFTW [if you happen to be a banker or a Liberal who enjoys borrowing and spending other peoples money for cheapz]!

DP said...

You can never truly hold 'a dollar'. It is not real wealth.

Get real!

Phil S. said...
This comment has been removed by the author.
Flore said...

Good to see Belgian is over here..Louve..;)

Flore said...

http://www.telegraph.co.uk/finance/financialcrisis/10548104/IMF-paper-warns-of-savings-tax-and-mass-write-offs-as-Wests-debt-hits-200-year-high.html 2015..year of the debt default

Roacheforque said...

Flore and Louve,
It is interesting to note in the TIC report which holders are actually decreasing YOY, not just (presumably) reducing the rate of accumulation like Japan and China (longer term).

athrone said...

Couple questions about the last year and last decade in Gold:

1. Which narrative best explains what has happened since 1999 (since Another's message) -- a) Gold has behaved like a commodity, and commodities have been in a bull market from 1999-2013 OR, b) the world is ruled by Giants and there is a secret two-tier Gold system which could be revealed at any second, revaluing Gold by 40x.

2. If there wasn't a bull market in commodities (or Gold) from 1999-2013, what would that have meant for the credibility of Another? Would we still be discussing his Thoughts?

Annual Return 1999-2013:
Gold: 9.34%
Commodities: 8.58%

By Year:
Year_____ Gold _____ Commodities
1999_____ 0% ______ 20%
2000_____ -6% _____ 36%
2001_____ 0% ______ -15%
2002_____ 25% _____ 40%
2003_____ 19% _____ 30%
2004_____ 4% ______ 16%
2005_____ 18% _____ 21%
2006_____ 22% _____ -3%
2007_____ 31% _____ 24%
2008_____ 5% ______ -43%
2009_____ 24% _____ 40%
2010_____ 29% _____ 24%
2011_____ 10% _____ -8%
2012_____ 7% ______ 5%
2013_____-30% _____ -15%

Gary (tEON) said...

@athrone
I'm not quite sure what you are looking for - maybe this will help...

a) Gold has behaved like a commodity, and commodities have been in a bull market from 1999-2013

a) PAPER Gold has been treated like a commodity, and commodities have been in a bull market from 1999-2011

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

The dollar-regime keeps gold "monetized", locked in price with the perceived value of the dollar. It does this in two ways. The dollar's own gold reserves are locked in at $42 per ounce. They are "monetized" at this price, recorded on the books at this price. It also tries to control the commodity price of gold through the paper gold market. An attempt to keep the (two-tiered) pricing of gold "monetized"...

GT

PaulB said...

Hi there FOFOA! I'm a great fan of your work and have been reading it for many years. Thanks for helping to shape my perception of the world economy (not to mention thanks to Another, FOA, and Aristotle!!!). I've been putting together videos for several months now trying to communicate my understanding of the gold world. Here's my latest. I'd very much welcome your comments! Happy New Year!

http://www.youtube.com/watch?v=C4X65TYo51U

Freegoldtube said...

http://youtu.be/au3wfKFIXVo

MatrixSentry said...

Thanks Freefoldtube.

poopyjim said...

I'm sure many of you recognized the clip from Blade Runner in the video, undoubtedly selected for its thematic relevance. If not, you should check out the movie, it's a classic.

BTW Blade Runner is based on the novel, Do Androids Dream of Electric Sheep? by Philip K. Dick, an excellent book IMO.

MatrixSentry said...

Two support modes in play. Support for the overvalued USD, support for undervalued gold. A crash in support for either brings on transition to Freegold and reality.

Both modes of support are under assault. We have been living in a world divorced from reality for a very long time. We have come to believe the most absurd. Blue skies have given way to ugly iron colored storm clouds and we persist in our belief in the most absurd, that it will never rain.

The rain is coming and it is crisis that will wake us from a perpetual dream state. Clarity comes from crisis.

The smart ones are moving to shelter themselves from the rain. When the rain comes, the rest will simply react to the deluge. They will run for cover, any cover, and will feel fortunate to find any place that offers a break against the driving rain.

The rains are crisis and the awareness that support for $IMFS is in collapse. Awareness begins with the pragmatic maneuvering of Giants and ends with Joe Sixpack running with wild abandon, dodging lightning bolts.

2014, game on.



byiamBYoung said...

Spent the day gathering maple leaves. Was that a rolling thunder I heard in the distance?

GIven the jump in POG, I expected a bit of a bump in GLD. Nope. down to 794.62.

Very strange times. It all makes perfect sense.

Cheers

Reality Show said...

Update to my GLD divergence
chart for 2013. The colours were getting a bit much so I've simplified things a little.

Thanks FOFOA for another great post, always enjoy all the thinking I do after reading your work.

Luke said...

Thanks FOFOA and others.

I assume you see excess reserves as water building up behind the dam? I don't know whether to view them as a a side show or the main event to the collapse. The fed COULD restrict the flow of dollars if it wanted to. The question is would it want to? And could the banks go rogue and start turning those dollars into real goods on their own? I doubt it.

/SleepingVillage/ said...

Happy 2014


The rain always brings new beginnings and life, even if it gets a little messy at times:-)

Good luck to everyone.

Forest Rain

Sam said...

I, for one, am thankful that my seeds are planted. What a blessing this blog is. I watch now comfortably waiting for the rains to come, for the ground to open, and for my crops to spring. I'm certainly not worried about a few pennies made or lost on fluctuating prices of seed. Only a fool would try and plant the day before the storm. Thanks to our guides I'm also not betting on a flood whilst living in a house on the stream bed. I'm not worried about how the governments of the world utilize the dams. How poetic it will be that the solution to our complicated world's problems will be as simple as nature itself.

Gary (tEON) said...

As well as wriggling out some failed past predictions Rickards states HERE "...the floating supply is disappearing... GLD has lost 500 tonnes..." - and "...when you want your gold, you're not going to be able to find it..." as well as his usual 10% caveat, gold is insurance etc.... he seems to have incorporated these FG-isms into his latest media-circuit spiel.

Aurora said...

Happy New Year to all. Thank you FOFOA for all your excellent work here. We truly appreciate your application of the Freegold lens and the clarity it provides us. Your messages are clear and intelligent. You do a great job!!

I plan to make a donation to your blog to support your efforts, as we did last year. Hopefully others here will contribute as well. Your work and insight are valuable, and should be recognized as such. The "Rains" of 2014 shall come and with it a golden season. Best regards........Aurora.

Roacheforque said...

It is a somewhat obvious tell, the goldbugs allegiance to the paper pricing mechanism, whether it be Rickards, Sinclair, Von Greyerz (et al). Almost as though their many years of experience count for nothing more than many years of conditioning.

As the knife falls on the paper gold pricing mechanism, will ALL supply uninamously and immediately reject it? Not if it falls ever so slowly, with the up and down volatility tracking the manic "thoughts of value" to a gradual downward trendline. We could see credibility below $1000/oz., but will local supply be available at that price?

I hope so!

But beware the first 100 dollar plus waterfall. That could stress credibility enough to constrict flow to a standstill.

The "experienced" speak of the 2 tier market (paper and physical, or physical at 2 prices) but they never quite factor it into their own suppositions about how the future will play out.

They always seem to quote a rebound in the paper price (like Von Greyerz in the Lars Schall interview) as the logical move in the near term.

Both of these guys should know better. How can you understand the papr market price setting system, and understand that the two (paper and physical) will diverge, only to insist that the paper price will follow the true physical supply/demand price to get gold flowing again?

Some old dogs never learn a new trick.

4a8543e0-7485-11e3-9acf-000bcdcb8a73 said...

I wonder if we all survive what lay ahead

Knotty Pine said...

One Rainy Wish

"FOA 10/3/01 - Our recent American economic expansion has, all along, actually been the result of a worldly political "will" that supported dollar use and dollar credit expansion so as to buy time for Another currency block to be formed. Without that international support, this decades-long dollar derivative expansion could not have taken place. Further, nor would our long term dollar currency expansion produce the incredible illusion of paper wealth that built up within our recent internal American landscape.

For years now, "politically", the dollar system has had no support! Once again, for effect,
"Politically NO", "Structurally Yes"!

For another currency block to be built, over years, the current world economy had to be kept functioning. To this end the dollar reserve system had to be structurally maintained… Truly, the recent years of dollar value was just an illusion. An illusion of currency function and value, maintaining the purpose of holding the world financial and economic system together for a definite timeline. Politically, the world does not hate America; rather they hate the free lifestyle our dollar's illusion value brought us yesterday and today.

FOA 10/5/01 - 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 dollars timeline as we are already stretched to the leverage limit. They know that Greenspan has but one policy to use and that will be super printing. He is doing it now, right on que! "

Sir Tagio said...

Thank you FoFoA for another great post!
The collapse of CB purchases of Treasuries in 2013 to around $24-25B is really shocking. If the MSM wasn't so heavily comprised of clueless Kool-Aid drinkers and hustlers, one would have thought that they would be ringing the alarm bells! Thank you for this very telling post!

Happy New Year to all! I look forward to coming here for your discusions and perspectives on all the crazy things that are going to happen this year.

Daniel Yu said...

I think "The Rains" have multiple references and meanings behind them.

*It denotes the "Shower of Blessings" that the readers of Another/FOA have received (by their understanding) of the knowledge of the forthcoming One-Time Reval, and their short window of opportunity to acquire and hold the physical.

*The Rains will cause the crops to grow. In nature, rain plays a very important role for the growth of plants/crops, like rice, corn, etc. The coming RAIN-STORM will wash away the currently abused financial system, to end all its insidious mal-effects on a properly functional world economy. The RAIN-STORM will also cause the growth of crops, which refer to "What happens after the reval event.".

Sure, a lot of people will suffer from the washing away of the current bad system, with their improperly allocated resources flushed down the toilet. BUT the few ones that have physical gold in their possession, will have an initial upsurge in their assets of Extra Money, which CAN BE properly used for uplifting their lives, a little bit, and provide showers of blessings to others in their circles (who are in need) or those that come into contact with (service or goods providers) .... since they will be the ones with True Money To Spend.

Louve said...

http://www.ingoldwetrust.ch/sun-zhaoxue-us-intends-to-suppress-gold-to-ensure-dollars-dominance

FOA in a nutshell !
Asians will REVALUE gold the metal by introducing and using goldcoins (gram/milliegram), next to currency, for trade settlement.
Sun Zhaoxue is in progress of winning the dollar-gold wars.

Phil_O_Dendron said...

Truth, like gold, is to be obtained not by its growth, but by washing away from it all that is not gold. ~Leo Tolstoy -

The coming rains will wash away all the lies, deceit, and obfuscations that hide the truth. The rains will wash away all derivatives and rehypothecation that has been built up over the last several decades leaving only gold.

J said...

What will happen to the gold mining companies (and their shares)? During the 30s they outperformed general stocks in general.

Sam said...

Gold mines will be controlled. This will be different than the recent past. Only physical gold will perform.

Indenture said...

http://www.youtube.com/watch?v=y86kDFaJ2h4

J said...

Thanks for the answers. Yeah, I mean it's easy to say "let it rain" but I think it's complex. The paper price is of course (more or less) controlled. Probably more today than before. Physical is of course the way to go, but there in-between lies the producing miners. I think they are extremely interesting, especially when they are low cost producers. After all: if we want physical: this is where it will come from.

Franco said...

I have a question: do all of the major petroleum exporters in the world price the stuff only in USD, or only some of them? What about Russia, Norway, Nigeria, and Venezuela? Thanks.

Franco said...

I take "rain" to mean dollar notes raining from the sky by the Fed helicopters.

Knotty Pine said...

Welcome PaulB, thanks for the link, looks like you are creating some excitement with your youtube channel!

jojo said...

"After all: if we want physical: this is where it will come from."

Not necessarily once FG arrives. Once FG is here, mining can take a back seat. It's reserves in the ground after all.
No, then, gold will flow from savers dishoarding around the world.

J, are you aware of Another saying all paper will burn?

Miners are paper.

Also, not sure if you are aware but the troll who is banned has all her posts removed so please ignore her, her name is "grumps labastard" .

J said...

"No, then, gold will flow from savers dishoarding around the world"

Savers in the world today is a pretty good oxymoron. :) Are there any? In any case they certainly don't save gold. The ones saving gold (people like us) wont dishoard it, so I still think new supply will be important, and financially interesting.

How to play it is another question, and sorry to say I don't think all paper will "burn".

Precious_Kettles said...

Someone is saving in gold. Got you some?

http://www.zerohedge.com/news/2014-01-03/physical-gold-demand-soared-gold-price-tumbled-2013

jojo said...

I watched that video and was confused. I hear quotes of Another. I hear FG ideas.
I see no mention of FO/FO/A.
I hear no mention of FO/FO/A

I do hear the name BrotherJohnF. I scuttled him to my mental dustbin of Loonie Silver Conspiracy Freaks a couple years ago so maybe that was too quick?

jojo said...

"Savers in the world today is a pretty good oxymoron. :) Are there any? In any case they certainly don't save gold. The ones saving gold (people like us) wont dishoard it, so I still think new supply will be important, and financially interesting. "

Dude, you got some reading ahead of you.

Are you really proclaiming the Indians, Chinese, ME are not saving in gold? Come on...

Also, you expose your shrimpness with this:
" The ones saving gold (people like us)"
That's not an insult either. We are all shrimps and it is that shrimp viewpoint you want to try to substitute with a point of view closer to a Giant like the aforementioned savers who save in Gold right now.

BTW, we (or at least I have been,) talking about after FG arrives.
When FG gets here, you only need to mine gold if you need to pay for stuff- ie a nation trying to continue a trade deficit.
There will be a big incentive to keep gold in the ground- what better safe is there?

jojo said...

LOL...
I looked at Precious Kettles link. Before my FG lense a story like this would have been boring, now not so much:

"Because these investors intend to hold onto their gold for years or decades, many see the recent drop as an opportunity to buy more at a cheaper price, notes on strategist, "they're not under any pressure to get a yield or a return in a year.""

Oh, lookey here, you mean some people "invest" for years or decades and don't care about yield?

Huh, could be good. Could be gold positive. Let's read on:

"Still, the importance of gold coins has been eclipsed in recent years by the rapid growth of exchange-traded funds, some analysts say, "hedge funds tend to overpower the impact of physical gold purchases... relatively little money gets them an awful lot of market power." Unlike hedge funds, who may leave when prices fall, it is clear that coin buyers are in for the long haul."
Ruh Roh. Better call my broker.

Daniel Yu said...

To those who are questioning the premise - Mining will be either nationalized or taxed, so mining shares (paper) will burn - and think / believe / argue that this cannot/should-not happen .... and disagree that the gold in the ground DO NOT belong to The People:

The mining companies mine on Public Lands. All the minerals in the public lands belong to Us, The People. Mining companies just have a license to perform mining operations. This license can be taken away any time by The Authorities. Analyze the mining laws in several countries in Southeast Asia, and you can see the differences between them and the USA.

Still want to own mining shares? Why? Because of greed? Because you think it will go up in currency by 100+ times, whereas gold will only be repriced once (at XXX times)? This is not wealth preservation or prudence, but speculation and greed. By all means, do so. It is your money, after all.

After FG is established, the government of all countries will consider all the gold in the ground as National Property. All licensed mining companies will be taxed accordingly, or paid a guaranteed profit, most likely an fixed amount (in currency) with a maximum ceiling, for each ounce of gold that is mined, or the whole mined gold output will be bought by each government for a specified amount (e.g. $2500 today, for each oz of Au). That is what I would impose, if I was a ruler of a country.

If you are lucky to own land that has gold in it, you own it. BUT, the government might not allow you to mine it because it is a very environmentally destructive process. Cyanide is used for gold mining, and pollution of your environment is a by-product of gold mining.

Many still think of the current paradigm - Throw away all the current state of affairs. New rules will be established.

Under the FG paradigm, gold can and will float, to represent a stable foundation and reference point - in order to establish currency prices (and value) for Trade.

Just for discussion. Today, all the gold ever mined is 170,000 metric tons. No more is mined. The value of all the assets in the world today (real estate, land, plants, animals, human labor, etc.) is 170 quadrillion US$.

10 years down the road. The world population is 10 billion, up from the 7 billion today. More goods, buildings, machinery, and people are in the world. The total value of the world's asset is 340 quadrillion US$. Due to some personal consumption of gold (by people who eat fine gold leaves and excreted them, therefore, unrecoverable), the total gold supply is 169,999 tons.

Can this new lesser tonnage of gold, be priced (float) upwards in currency terms, to represent the whole value of the world's assets? No reason not, under FG, right? So why worry about all mines being shut down and no more gold to be mined? It should not adversely affect the gold held in strong hands.

jojo said...

And...BOOM goes the dynamite!

Thanks Daniel.

Daniel Yu said...

Jojo, LOL.

As for gold, here is what we (easterners) think it is - Worth (a lot of) Money, meaning, Valuable.

Daniel Yu said...

This might be off topic, but I have been meaning to write about it, for a long time now. I have read many times (in both electronic and print) that refer to China as the "Middle Kingdom".

They use a literal translation of the 2 Chinese words, Chung Kuo, but by not understanding the Chinese language (or other reasons) they miss a very important thing.

The true meaning of the words for China (Chung Kuo) is not the Middle Kingdom. I ascribe it to be - the Central Kingdom. This is what I think many westerners miss. The word Chung can mean middle, but the correct meaning should be Center. Think about the EGO that goes with calling your country - The Central Kingdom/Empire. It is a basic reflection of how important, the persons who first used these 2 words to refer to China, think about themselves and their nation.

Another point is - there is no Chinese word for MIDDLE. When we speak and refer to something's location, the english words that denote the meaning perfectly is CENTER or Centrally Located.

As in any language, words have literal and idiomatic differences in their usage and meanings. Just like old English, British English, American English, etc.

Roacheforque said...

Think about the EGO that defines the world's monetary system and being CENTRALLY planned by a single CENTRAL bank, or by the BIS CENTRAL banking system.

The desire to rule the world from a single center of influence has a long history, of which China is one part.

Roacheforque said...

And further, do you want the value of your assets to rise or fall when a central planner speaks? Or do you want the basis of your wealth to be "more solid" than that?

Sometimes, you have to "hold (to) what you believe in" in a world where value rides the ups and downs of "thoughts blowing in the wind".

Blake said...

FOFOA

How do you reconcile waning foreign support of the dollar and the Fed's announcement to also trim QE by 10B/mo. if QE is really USG debt monetization (which it clearly is)? Is the Fed absorbing the additional USG debt flow and simply classifying the same something other than "QE"?

Thanks for all that you do and another great post!

DP said...

Fiat has no yield.

DP said...

Lending of fiat at risk for a yield, and a gold bar kept at the back of your mom's underwear drawer, is not a like for like comparison.

Sell the gold and buy a forward, cross your fingers you get your gold back later… much closer.

Dante_Eu said...

Why do Indians dance when it rains?

- Because they know, after the rain, comes the sun. The yellow sun. Always does.

Regarding The Prestige, ANOTHER/FOA/FOFOAs understanding of economics is equivalent of Teslas understanding of electromagnetism.

So, Freegold or no Freegold, in either case:

"The present is theirs; the future, for which I really worked, is mine."

:-)

DP said...

The truth is lending anything for a yield is not storing value. Its taking a [mis?]calculated risk on an investment in the debt of some counterparty. If they come good, you get your interesting reward. If they don't you lose what you put at risk.

Investing in debt for a yield, is not saving.

InowB4 said...

@Grumps
Paper does not earn interest. Leasing paper/currency does!
Gold does not earn interest. Leasing gold does!
Compare apples to apples please.
With your own words:
"..the interest accrued on a gold deposit also has to be accounted" (at least for giants)
http://www.youtube.com/watch?v=YbKEwAXuiYM
The blind spot is yours...
.

Marco Polo said...

As previously posted, have about 1 kg of gold at Bullion Vault. The plan was to ask BV for physical delivery but costs are quite steep (7.5%) and then have the problem of storage, being outside the 'custody chain'. If I had 400 ounces or just over 12 kg, I.e. a London Good Delivery bar, the withdrawal premium would be only 2.5%. Do not have the cash for this size of additional purchase ! To my mind, gold outside the custody chain means coins are better than bars, as less need to 'prove' composition. BV assures that the gold stored is allocated and identifiably mine. Should I leave it there? Or do the panel recommend sell the gold in BV and buy coins/bars elsewhere? If gold is revalued, why should any in BV be treated differently? Fear of confiscation? Unlikely?

burningfiat said...

Marco P, How many grams of gold do you own outside any custodianship (in your hands)?

I think my advice would depend on that information.

/BF

MatrixSentry said...

Responses to the Grumps troll will appear to hover in space, disconnected from his deleted posts. It is a waste of time to respond to this deranged person. Responding to the troll feeds its ego and it will therefore not leave.

FOFOA is a night owl and when he gets to the blog later in the day, the troll's remarks will disappear.

DP said...

Responses to who did he say?? I just like to talk to myself.

No you don't.

Oh yes I do.

Who said that?

burningfiat said...

That's true Matrix!
However non-troll-answerering statements of truth like DP's above will be here for posterity. That is the right response to trolls! Twitter-length reminders of simple FG-facts, coincidentally on the same topic as the one the troll brought up!

spaul67 said...

@Grumps and DP

I think you are missing a key ingredient; taxes.

At present all ‘gains’ in income or capital, as measured by an ever expanding pile of fiat, are taxed regardless of whichever SoV you prefer, including gold. Thus the printing press is like wine press and squeezes the juice from net producers.

Parasitic consumption must always be equal to net production theft.

The only way out of this is to either change or break the law.

Now those in the 0.01% have changed the laws for themselves alone and thus avoid most of the taxes we mere shrimp must pay. They just accumulate wealth generation after generation in various tax havens throughout the world. The true net producers (9.99%) on the other hand are fleeced on a daily basis to feed the 90%. Enough of these 90% vote to keep the tax dodging deal for the 0.01% and this little cycle of theft of 9.99% in place due to varying degrees of ignorance and immediate self-interest. This is why wealth continues to accumulate at the top of pyramid. Sorry FOFOA these aren’t ‘super’ producers they are ‘super’ parasites kept in power by the shrimp parasites.

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

The hope is that a collapse of the existing order (insufficient net production as described by Chris Martenson and Daniel Amerman) will force (for a time) the need to reestablish world trade flows using ‘physical’ gold. Thus all the existing laws/rules/trends you base your assessments on regarding Freegold go out the window.

That appears to be your blind spot.

The three primary blind spots on this board;

That this transition is inevitable;
(ie the prospects of a bail-in using the wealth of the 9.99%)

That this transition will be quick;
(measured in years more likely vs. days)

That this transition will be permanent;
(parasites will always exist, increase over time until the next collapse and must be feed, the existing order is the best way to do that)

The best hope I can come up with is that a black swan event will over take the existing order. This will force the world into using physical gold at a locally floating market price as the primary means of reconciling trade imbalances rapidly. Thus all taxes will need to be removed in order to facilitate its immediate flow. Thus a once in lifetime window of opportunity will be in place for a few net producers (think Noah’s Ark) to actually keep their net production.

The next cycle of theft will then gradually build upon this monetary foundation and go through the various phases we experience in the 20th century until it too collapses.

DP said...

Investing in debt for a yield, is not saving. Its the desperate act of savers who know they are otherwise heading for death by a thousand cuts. Eventually one can become accustomed to doing pretty much anything and truly believe it is normal and natural. Everybody's doing it.

Indenture said...

InowB4: Right On! "Paper does not earn interest. Leasing paper/currency does! Gold does not earn interest. Leasing gold does!"

Marco: How will you feel about that 7.5% cost if Bullion Vault doesn't return your gold? Are you willing to risk this math?

KnallGold said...

Bear markets on "Mondays" are bought with renewed optimism, only to be squelched again...

Black magic goes back to da trollz.

DP said...

I have no expectation of a need to pay any tax on the gold I own. Certainly there is no form of tax applicable to it today at the time of purchase or sale, or at any time between.

#WhenLegalTenderLawsAreYourFriend

Jesse McL said...

Grumps,

If I save in fiat, and then with my savings purchase an annuity, I've effectively hoarded and then dis-hoarded my fiat. I have thereby maintained a given standard of living both during my productive years, and during my less productive years that follow. Mission accomplished, no critical mass required.

The same is possible with gold. Just hoard it while you're net-productive, and dis-hoard it when you no longer are.

Cheers,
Jess.


t au said...
This comment has been removed by the author.
Marco Polo said...

@burningfiat:

None. Have to decide between putting more into BV, or buying coins.

jojo said...

Just hand over the 7.5 with a please and thank you and take your gold. KISS.

Jeff said...

'An annuity requires huge counterparty risk...'

Amen. And currency risk for the yield chasing suckers, er, investors. I mean savers. Won't it be nice not to be forced into chasing yield?

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

burningfiat said...

Marco P,

Alrighty!
Per previous experience, one of the biggest risk by letting BV handle your wealth, is that you need to get through the (international) banking system before you can actually access your wealth.
It can lock up in a number of places, BV's bank (where your funds are kept the instance you sell your gold), the bank transfer system (SWIFT, SEPA or whatever) and then your own bank, which could go bankrupt also.
My suggestion is therefore to sell and withdraw from BV in steps. Start by selling for instance 33%. Withdraw that and buy physical gold. Then sell another 33% next month and so forth...
Whether you want to rebalance everything or just a percentage into "physical in your hand" is up to you. Whatever makes you comfortable! From my experience though, you'll sleep better when you're full possession of your wealth!
Good luck!

/BF

ein anderer said...

Grumps,
Fiat ca earn interest, you’re right. Yet there are rumors that sometimes it does the opposite: losing it’s value completely! Yes, Gold can dissapear too—but only far beyond its boiling temperatur of 3129 K ;)
So a saver like me is happy with the fact that he does not earn interest from physical gold: That’s a fair price for the guarantee that the metal can’t dissapear—like every fiat currency so far in history ;)
And FG will ensure that the value of Gold will always grow a bit faster than the inflation—if FOFOA is right. And until now he was quite right in his predictions and interpretations of Another and FOA!

Sam said...

great comments DP.

Interest rates are something that are paid to an investor in exchange for the risk of giving up an asset today in exchange for a promise to get it back later. It's just a different way of calculating a fee. Nominal rates can and do fluctuate from near 0% all the way up to 1000's% depending on the investment. In theory these varying rates should track each different investment's risk but with so many other factors (like supply and demand) the market is not perfect. A good investor can always finds low risks and high rates and earns a profit. I always laugh at investors that complain about low rates. I guess they don't realize they aren't the investor. They are the fools giving their cheap pool of money to the real investors of the world.

Barsky Summers found a mild correlation between real rates and gold but it is absurd to think that they found causation with just two variables. First of all calculating real rates means you have to establish a base nominal rate for the majority of people when in fact the majority of "savers" and investors place their money in lots of different investments with variable rates. Secondly you have believe CPI or any other inflation tracker data is accurate. That's just the first step to calculating your "real rate" Then there is gold. A metal that has had its price politically suppressed, monetized, leased, and made into a futures market like a consumable commodity.

There's is just no nice way to say it but Barsky Summers is BS.

By the way gold is down 30% in 2013. Were real rates MASSIVELY positive in 2013? Learn to hate correlations. They look great looking back at them but they only predict the future until they don't and you realize the market is a much more complicated beast.

Marco Polo said...

I liked this. Pornographic.

http://www.celebritynetworth.com/articles/entertainment-articles/wondered-315-billion-worth-gold/

Apologies if someone already posted this elsewhere. That sure is a lot of potential 'flow'.......

DP said...

"The United States has the largest gold reserves of any country in the world with 8.133 tonnes, followed by Germany which has 3.4 tonnes, the IMF 2.8 tonnes, Italy 2.4 tonnes, France 2.4 tonnes, China 1 ton and Switzerland 1 ton."

XD

spaul67 said...

@ Grumps

“Taxes might be the reason why Barsky-Summers effect demarcates the 2% positive real rate as the line in the sand rather than zero%”

As measured to what? I can’t think anything on this earth that isn’t manipulated in terms of price relative to paper right now. When it is manipulated down you lose purchasing power; when manipulated up your gains are taxed away and what remains has less purchasing power than what you started with.

Only those that use leverage can get above this. Unfortunately leverage carriers the real risk for shrimps of a complete wipeout of purchasing power. The 0.01% are tipped off in advance or are too big to fail and get a bail out from the 9.99%. (i.e. 2008). Net time Dodd-Frank will make it a bail in. Same marks different means.

I really think Freegold will come about only after net producers stop saving in the kelptocracies paper. Rather net producers move in mass towards a SoV that they can exchange among themselves, leaving parasites to their own ends. Then again if it gets out of hand you can fully expect ‘wealth’ taxes too which the 0.01% will exempt themselves.

spaul67 said...

DP said...

“I have no expectation of a need to pay any tax on the gold I own. Certainly there is no form of tax applicable to it today at the time of purchase or sale, or at any time between.”

So where is this legal tax haven located?

Jeff said...

FOFOA: The Gold Must Flow

The bottom line is that private gold needs to flow as a fertile member of the balance of trade. There will be no advantage for the USG to confiscate or tax above-ground gold this time.

So if the gold in private hands in the US doesn't flow in sufficient amounts, given that US debt has been discredited through the Freegold phase transition, the government will have no choice but to continue printing money in its vain attempt to support the US trade deficit and its own status quo as Uncle Sugar to the people. And in a last-ditch effort to support its own failing currency, it will have to ship Fort Knox gold overseas. FOA mentioned something about this: "…the US will find itself shipping ever higher priced gold to defend an ever lower valuation of dollar exchange rates."

In this scenario, the need to continue printing in the face of an ongoing currency collapse will obliterate any miniscule gain that comes from the few shrimps who actually decide to sell their gold in an untimely way and pay the tax. The US has precious little gold in private hands as it is. And it will need that private gold to flow. It needs you to sell your gold to your dealer so your dealer can export it to our trading partners. That's how trade flows will resume under the new paradigm, with savers choosing to let their gold flow because of the amazing purchasing power it delivers.

And with international trade flowing again, the government will have much more economic activity to tax than it did when it tried to tax real capital in its purest form based on the silly notion that the hungry collective deserves a windfall nine times greater than the gold investors who kept gold inside the zone through a turbulent transition. The bottom line here is that I do not know if the USG will try to tax the windfall profit that comes from Freegold. What I do know is that, if they do, it won't last very long.

John said...

@ DP official gold reserve amounts.

I know you are lifting these figures from latest official sources.... but the notion that China now only has 1,000 metric tons is surely laughable when there is now at least twice that flowing into the country via Shanghai and via Hong Kong on an annual basis. A figure closer to the 5,000 to 10,000 ton range seems far more plausible.

burningfiat said...

John, I just think DP quoted these silly numbers (Switzerland 1 ton?) from Marco's link for the lulz... :D

Josh R said...

Trail Guide-

"Our dollar has already entered a massive hyperinflation. It's timeline is ending and there will be no
deflation to save it. The currency and all the multitude of derivative instruments that make up our
money system have expanded rapidly over the last 20 years. Even at a super hyper rate for the
last five years or so. We cannot read it because much of what we "Western" savers call paper
wealth has really become money substitutes that's value is supported by the government. This
paper wealth creation cannot reverse and is beginning to enter the "natural world" of real things.
The best sign that the currency has entered it's last, final inflation is seen in the manipulated price
gauges. Truly, this is only the beginning. Eventually we will see roaring price increases in
everything, even as our government indicates level prices or perhaps a deflation in our price
structure. This has to happen, because there is no saving a society's currency that has debted itself
beyond any known example in man's past."

Dollar denominated US assets Hyper-inflated-Check
TBTF-Check
Manipulated CPI (threat of deflation claimed by FED)-Check

Structural Support No Longer There -Check

Let it rain!!



Sam said...

Franco said:

"I have a question: do all of the major petroleum exporters in the world price the stuff only in USD, or only some of them? What about Russia, Norway, Nigeria, and Venezuela? Thanks."

Yes oil is priced in dollars. However we live in a world with a forex market. Dollars used to be backed with gold and from that got their value. When the backing was removed dollars were losing their value fast and oil dried up. Then "something" happened. Oil started excepting dollars again at very reasonable prices. Though it is significant that oil gives value to dollars, and dollars in turn give value to other currencies, you do not have to have dollars to buy oil. You simply need any currency that can be converted into dollars.

Indenture said...

Sam: "something" happened? Do tell.....
(I ask because I have enjoyed your voice and would like to hear your perspective:) (also, there could be lurkers who don't know what you're talking about)

Josh R said...

A Tribute to Another/FOA/FOFOA

They Were Ahead of Their Time

They were ahead of their time
No one would listen
They were ahead of their time
They could not make a dime

They were fringe, they were a bit off
No one could comprehend
They were incoherent, they were strange but tolerated
Until their voice was cut off

As time passed on their myth became legend
It was only a matter of time until they caught up
They were made rich by their truth, their foresight
Yet they were not around to reap the reward

Listen to those who sound different
Understand those who seem abnormal
Watch as the seasons change, as the leaves turn
And you too will become ahead of your time

Nickelsaver said...

Let It Rain

Nickelsaver said...

Let it Rain

Nickelsaver said...

Let It rain

Nickelsaver said...

let it rain?

Nickelsaver said...

Let It Rain!

Sam said...

@Indenture

Currency has value as long as it functions. In order for a reserve currency to function it must be possible to convert it to gold. In 1980, because of the default less than a decade earlier, dollars were losing their ability to be converted into gold at an exponential rate. Then suddenly, in 1981, they weren't. So what stopped the free fall? Some very smart men and a shared understanding. The result was that oil got a way to continue converting some of their dollar profits into gold and the US found a way to keep gold and oil cheap and dollars strong. All the outside world saw was that oil was accepting dollars again. This "backing" gave dollars strength.

When people hear the term "petrodollar" I think they forget that oil didn't back the dollar out of the kindness of their heart. They did it to continue getting gold and selling oil. With no alternative currency to replace the dollar these actions saved the global economy. There may be an extra step in the process but it has always been about gold. I think it is also safe to say that they are ok with getting a small amount of gold and a large amount of dollars year after year for their oil. This is because they know that the dollars they get can eventually be tossed into a fire and the future value of their gold will more than compensate for their loss.

Lord Sidcup said...

"So where is this legal tax haven located?"

Germany.

puzzlinevidence said...

The rain is Helicopter Bernanke's Trillions and the washing away is the dam breaking from the hyperinflation due to the increase velocity of money. The two tier system of gold is the paper and the physical. If you pay a 10% premium for gold then the price difference is 10%. When gold is scarce and unavailable (due to transfer of wealth from lack of faith for FRNs) then the paper price is much lower from the physical price.

DP said...

"So where is this legal tax haven located?"

Germany.


UK.

Roacheforque said...

The petrodollar is not the only means to acquire oil, and certainly not the only means to acquire natural gas. This will become increasingly the trend as gold and yuan and ruble bid direct.
But yes, any currency can be converted to petrodollar through (end result) forex, though that does not negate the value of the petrodollar at all as you still end up needing "dollars for oil" from oil that only accepts dollars.

As a reminder, these statement about gold "going up" or "going down" in value all refer to paper gold, not physical.
True, today we accept the lie that debt denominates gold in a currency which is a lie (this paper has enduring value).
So today, if the lie benefits you, use it. If not, do not.

The worth of any lie, deceit or scam / Ponzi lies in the value of acceptance. When people accept the lie, there is imputed value, when they reject it, it collapses, as in any Ponzi scheme, when people see the lie they exit the scheme and it collapses.
Witness the typical lie a cheating man tells his wife or girlfriend for example. If the lie is accepted it has value.
If it is rejected, you're cut off.

A simple analogy for the simple mind.

Gary (tEON) said...

Rain. The meaning of the symbol changes depending on your needs. Lack of rain can be a scarcity = (deflation) and a heavy downpour - on the biblical level - can produce an extreme over-abundance... a flood = (HI).

"Don't rain on my parade" - the sorrow and reluctance associated with end of exceptionalism?
"Save for a rainy day" - promoting the importance of 'preparation'?
"The game was rained-out" - a halt/delay in the markets? specifically Gold?
"I'll take a rain-check" hmmm.... rain-check; a promise for remittance at a later date, usually because product or time ran out? USD?

Rain is a symbol for tears, sorrow, anger, cleansing, renewal, forgiveness....

Water can be both friend (nourish the crops) and enemy (cause damage) - depending on your perspective. The financial system is currently fraught with ambiguities, injustices and unsustain-abilities. The paradigm shift in accordance with Freegold can be seen as positive for the entire system where there is a redistribution of wealth from extreme credit abusers to diligent, intelligent, savers. Cleansing... Renewal... I guess I'll go with that - it seems like the most positive. The sun will eventually come out again. :)

DP said...

Any govt choosing to erect barriers to the sale of private Gold, will only find themselves with a bigger problem than the one they tried to address.

DP said...

Yes, it seems far more likely they might eventually get to scrapping Capital Gains Tax on the sale of all gold, than they might instate it on currently-exempt-due-to-legal-tender-status coinage.

Phil_O_Dendron said...

Capital gains laws main change. Gov may try to confiscate gold. However, if you have control of your assets there is ALWAYS a backdoor out of the system. The key is to be in control of your assets and to always have a plan B just in case what you expect does not turn out to be the case. Oh and one other thing you never discuss plan B on a forum.

Gary (tEON) said...

With the fragile system edifice now wholly unsupported, the window open, and all forms of "gold" despised by Western investors even as the East is importing record amounts of physical

From ZH
Gold "Speculation" Drops To Record Low
While the last two days of relative excitement in the precious metals are noteworthy in their bucking-the-trend of recent months, there is perhaps a much more critical 'trend' that may finally allow the demand for physical gold to peer through the veneer of synthetic paper pricing. As JPMorgan notes, speculative positions (defined CFTC net longs minus shorts) have dropped to record lows in the last few weeks. With ETF gold holdings back below 'Lehman' levels ...

Max De Niro said...

First post here for a while - a look back:

From the comments under "Tweet this"

Gary said...
I finally took delivery of my first physical gold on Wednesday, an exciting day. Do/did any of you guys have your gold tested for authenticity?

Mine was from a reputable dealer that only uses LBMA supply. The weight (1 ounce ingots) felt right. I wasn't planning to get it tested.

October 28, 2011 at 12:29 PM



Max De Niro said...
Gary,

You're in the UK right? How come you didn't go for sovereigns or Brittanias as they are free from capital gains tax?
October 28, 2011 at 1:30 PM

Gary said...
Max, I did not know that.

That's ruined my weekend then!
October 28, 2011 at 3:06 PM

You're so full of fucking shit, Gary. You twat.

Aquilus said...

Hi Blake,

Regarding this question:

"How do you reconcile waning foreign support of the dollar and the Fed's announcement to also trim QE by 10B/mo."

I'll post some answers from a private conversation I had with a friend about the topic. Hopefully it will be of some help to you.

Aquilus said...

Q1:"I also struggle with why a decreasing budget deficit is not necessarily a good thing." and "And, why isn't a lower US budget deficit necessarily a good thing? If e have a smaller deficit, there should be less need to print."

I think the best way to illustrate the answer to this question is to take the scenario from the question and see what happens when it becomes true.

The scenario is "What happens if the US has a smaller deficit?" How about just no deficit at all? How about a surplus?

Let's start with what supports the dollar in its reserve role. It is not the pricing goods that supports the dollar's value, it is the hoarding of those dollars. Things sell for dollars and then those dollars are spent. The extent to which any dollar transactions support the dollar is really only the extent to which producers hoard dollars. Sure, having things priced in dollars creates a larger pool of (external) dollars, but the real support comes from the systemic hoarding of those dollars.

Bottom line, exorbitant privilege comes from the hoarding of dollars, not the spending of or pricing in dollars.

So far so good? Ok, we move on.

When we talk about the hoarding of dollars, especially by foreign CBs who are really the make or break supporters of the dollar, what dollars are we talking about? They are of course not holding physical dollars stacked to the ceiling in vaults. Holding and hoarding dollars means buying dollar denominated debt - so the dollar as the denominator of that debt. That can be US Treasuries, but can also be MBS (Mortgage Backed Securities), etc.

On 5/5/98 ANOTHER explained how this came about:

"The worldwide currency system is truly a reflection of an economy built from war, using the American Experience, the US$ and the debt that it represents. But, for the American dollar to continue as the representative of the global financial system, in the form of being the reserve currency, maturing generations of all countries must accept it, and the tax on real production it clearly imposes!"

So he's telling us that all the CBs involved choose to accept this dollar support. Now, truth be told, if you are the Central Bank of Albania or of Ecuador, you don't really have a choice in the matter. But the developed economies along with the oil producers and other key surplus producers like China do.

Ok, hold on to that concept; we will put it to use later.

Aquilus said...

(cont)

Now what would happen if we actually reduce providing dollar debt (by reducing our deficit)? Let's see what FOA has to say:


FOA (Gold Trail):"Truly the economic structure of the US cannot now, nor ever can in the future pay the costs of supplying real goods as payment for its debt. We, as a financial nation, have gone that far over the cliff. "

Basically, he tells us that attempting to work off the previously issued dollars is an impossibility. Ok, makes sense. Reducing our deficit in real terms would mean a reduction of the expenses of the US Government. In other words, austerity to some degree.

Austerity implies less dollar flow, and less dollar flow means that dollars become harder to find when people need to sell assets - so an increase in interest rates as dollars become a little scarcer. Asset prices fall in dollars. Deflation in other words . Austerity finally. Sounds good, right? Why not?

Let's see what FOA has to say in the very next paragraphs:

FOA (Gold Trail): "Even the most unsophisticated player on the world financial scene will agree that their wealth would be subjugated to a lower par of matching the US's output ability. Today's paper wealth, if held during any pay down period of deflation or the further debt expansion a "little more inflation" would require, will be substantially destroyed. I allowed to happen, the dollar would be dumped in an accelerated fashion as a world trading medium. Indeed, the world today may float in the same economic trading ocean and our goods exchanges may depend on a somewhat level sea for movement; but we no longer all float in the same "medium of exchange" boat.

Yes, it's to everyone's advantage to see the dollar transitioned with the least disruption, but to think that our international governing power structures are all in bed together begs the rhetorical question; governments only represent a following when their private constituency's debts can be settled? I submit that the power structure that offers the best dollar debt transition settlement will receive the most support and use of it's currency bed. "


Any kind or reduction in the FLOW of dollars means that dollars become harder to come about. That means that conversely, the value of debt based assets goes down as dollars become more "expensive". If you are any investor/speculator/saver and have dollar holdings, would you not be better served by not holding an asset that declines in value?

At the beginning of the 80s, Volker was able to reduce the value of dollar debt, raise interest rates and still keep the world using the dollar because there was not alternative fiat currency that could take the load. If there had been, everyone would have already defected to it.

Want to hear that from a different source? Here it is:

ANOTHER: "In the very same mindset that people buy the best value for the lowest price (Japanese cars in the late 70s), and leave an established producer to die, so will they escape the American currency and accept any competitor that offers a better deal."

So now let's return to the major central banks above. We have seen that the small ones don't matter. How about the big ones? Would they follow us and support the deflation brought about by a decreased flow of dollars? Not this time because it's not in their interest any longer. They have the choice to not follow the US in deflation this time because there is and alternative. Some CBs probably would follow the US no matter what (Japan, Canada, Australia, maybe UK), but for most that path is closed. They have a better alternative.

So in a nutshell, the answer to the question is: less deficit (the USG consuming less) means austerity and deflation and that is not a viable path any longer today

Aquilus said...

Q2: Or is the main point that the Fed is pumping much more than needed to cover the deficit? If all they need to cover is 499B, where is the other 521B going?


Remember all the dollar debt we talked about? All the dollar denominated assets out there? And not just the debt, but all the dollar denominated financial instruments out there in the world? And remember that most of them are leveraged?

What does that really mean? Well, simply put is: one can put a fraction of cash down (margin) to hold a financial asset worth 5, 10,100 times more than that fraction. And the full value of the financial asset held by the small margin can now be used as collateral since it is "owned" (even though it has not been fully paid for)? Does this create a leverage spiral? Yup.

So, while financial asset prices are going up, there's no problem. What happens if that growth stalls or is just threatened to reverse? Margins increase, more cash needs to be put up, and a general process of deleveraging occurs, right?

Since the crisis, we actually experience general deleveraging (especially in the shadow banking system). That means that either there is need for more cash in the accounts of the holders of financial assets (to lower the ratio) in order to hold the same amount of financial assets or that financial assets are sold to bring the existing cash in line with the desired ratio.

This deleveraging is not just margin calls but also new requirements like Basel III or bank regulation, in addition to more attention being paid to overstretched leverage ratios.

Ok, so what, you say?

Well, if you remember from FOFOA's "Think like a Giant", there is no cash in financial assets. When someone sells an asset, someone else needs to come up with that cash. So deleveraging directly competes as cash needs with the funding requirements of the Treasury. Which means that if the Fed does not want to see a liquidity crunch and asset prices falling it better produce and inject enough dollars to cover both debt issuance and deleveraging cash needs.

Now, of course that cash is simply added to bank reserves and then moves like a hot potato from the reserves of one bank to the reserves of another, but a lower leverage ratio demands that that cash exist.

This cash also ensures that nominally, the value of financial assets does not decline. Does understanding this give FOA's famous quote a new and deeper meaning?

FOA: "My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

Hope I answered your questions,
Aquilus

Aquilus said...

I have FOA also describing the process above also in his own words. From the Gold Trail:

------------------------------
The US has had the rest of the world in somewhat of a trap also. For a long, long time. Perhaps from when we told them that the world gold exchange standard bearer would no longer ship gold for dollars. From that point on we (USA, my country) could inflate our money without consequences.

In fact, we had to inflate in this "Darwin" fashion over all these years! Truly, if we did not inflate long term and ship liquidity (created dollars) outside the US, our dollar's value would always soar above other strong currencies. This is because of it's world settlement function. Notice I said soar over their value instead of they would fall away from our value. There is a difference. As in our recent hikes, we saw that the internal basket of goods prices for both dollars and Euros dictated that these currencies are at opposite extremes in value and should reverse. Further; I use Darwin because everyone came to think that our sending money overseas was part of the "natural order of things" (chimps (smile)). They thought and still do think that the world just craves our money! They will have a different opinion later.

We must reconcile with the truth of this process by looking at the dollar world from 1971; the one time the dollar soared too high for too long it began killing off our economy. Forcing us into the same printing policy other lesser nations must employ to keep their exchange rate level. Yes, even the USA must sell overseas to create jobs and profits at home. A huge trade deficit in a reserve currency nation, induced by an overvalued currency like we are seeing now, raises the currency's value even further above other strong fiats. This is the way such a reserve system naturally reacts when there is no local reduction in liquidity to check it.

Aquilus said...

(cont)

A regular (non reserve currency) nation's money would suffer a different fate if they inflated the native currency the way we do. It's non trade settlement function begets a falling exchange rate. That in turn drives then into the same policy of hyper inflation but it's effects are felt in higher prices, immediately.

Again, conversely, a reserve currency always rises in exchange function from this forced "liquidity draining" trade settlement. Once on this trend, over time, the higher it's value goes the more people finance in other mediums (yen carry, gold carry, Euro carry, oil carry) This further dries up the fractional reserve created dollar reserves as the demand for dollars grows ever stronger from it's ever higher cost trade settlements. Settlements dictated because IMF / dollar protocols demand dollar use as settlement.

In the past if the system began driving the dollar too high and forcing US trade deficits, the Fed would raise rates to throw us (USA) into an economic recession that broke the vicious deficit trade cycle. Knowing full well that it would be a short recession policy because "noone" would jump the dollar ship before the medicine could work. Looking around back then and we see there was no other reserve currency ship to jump to. We either lose jobs and profits from an "overvalued currency" or from an induced recession. The first can lead to a financial breakdown, the lasts corrects things after only a short while. Naturally, we embark on the quick fix of a fast recession.

Aquilus said...

(cont)

This is why our times are so very different now. What the "chimps" came to know over this 20+ year period as a strong America in a high dollar, was always something our money creators were striving to fight against. We truly have always been inflating our currency for these many years in a attempt to keep the natural effects of the IMF reserve system from spiking the currency too high up. Again, if we had a regular currency, our policies would have been reflected in sky high prices for everything. What most of us "smart chimps" know as price inflation reflecting money supply inflation.

OK, let me sip some starbuck's:

Ever since the Euro was seen in by US policy makers as an eventual success, our treasury has tried to put it's best "New York Spin" on the ongoing process. Simply stated; from the early to mid 90s we are in favor of a strong dollar policy. In reality, with the advent of the Euro and the evolving stance of the BIS, this has made our "economy killing" strong dollar unavoidable.

There is no way the Fed can create a new recession now without everyone jumping ship for another currency reserve. There is no possible way the Euro Zone will suffer as big a downfall as the US in another policy induced recession. Just looking at their closed economy and debt structure tells that story by itself. Any US slowdown means a run for the Euro, yet weakness in the Euro means the US must inflate at a torrid rate. We now stand toe to toe and wait to see who will fall first. All the while our world dollar gold markets are caught in the cross fire!

This is where we have been for the last decade. This explains why the DOW and all it's paper cousins have enjoyed the effects of a massive, ongoing dollar expansion worldwide without any official policy interference. Right when we were to the point of changing policy to slow things down, the Euro was to be introduced in a year or two and risked taking away or sharing the dollar's standard.

Aquilus said...

(cont)
The "lesser chimps", lost in Western thought keep waiting for the fed to induce their deflationary policy. (I was monkey - ing around in this area for a while myself) (grin) It is not coming. To do so now would commit the dollar to non reserve status in a hurry and produce a massive price inflation at home (right now) as all these unneeded dollar reserves come racing home. Remember, the ECB does not need dollar reserves! The Euro is a stand alone currency representing an in house trading block. They may have to buy dollars for oil, but others must also buy Euros for European produced goods. If the Euro went to .10 to the dollar the EuroZone economy would not stop. But all international dollar trade would grind to a halt. The USA could not sell anything internationally, at all! Every other nation would simply abandon the IMF protocols and use their native currencies to trade directly with Europe. Even Arabia would break their SDR basket peg and trade oil for Euro goods, either using their currency or directly if needed.

Our outdoor fireplace is getting hot, lets step away.

The lesser of the two evils today (and this is the one the ECB / BIS enjoys watching) is our current frozen policy. We can no longer cut off the strong dollar / growing deficit circle by raising rates and invoking a recession as in the past. This time we must continue to pump the reserves at all costs in a process that only floods the world with more dollars. It's called a currency hyperinflation and is one we (as US people) have never witnessed in modern times. The pressure has built up full volume now as all escape valves are being closed. We are well on the way to a derivatives exploding event that will break into the open with a cascading dollar and full force US price inflation.

(End quote)

P.S. There are actually closer quotes to the topic but I don't have the time to search right now. Hope this is a good start.

Sam said...

I'll play along with the windfall tax crowd just to illustrate a point. Lets say the US government wants to tax "gains" in the value of gold coins after revaluation. These taxes can only be levied upon sale. That's a great incentive to not sell. It's also a great incentive not to buy. I wouldn't want to spend $50,000 on an ounce of gold only to be accused later upon it's future sale that I bought it for $1200 and need to pay the tax. I'd hate to lose those records in a fire….Nevermind the fact that coins don't carry a title and their original purchase price cannot be determined. I'm assuming I need to show bank statement or something? What if I paid cash or traded some silver. So confusing…but lets just imagine.

What do the wealthy do when they are short on cash? Do they sell their fully depreciated apartment buildings and pay the huge tax bill? No. That apartment building will be held indefinitely because that is how you play the tax game. A game they set up for themselves. A smart man of wealth, or at least one with a decent accountant, would only borrow against it. So with windfall taxes in place what price would gold need to achieve to start up the flow again? The answer is there isn't one. The gold would never move at any price.

Jeff said...

How does gold flow if the government attempts to impede it? You should ask an indian.

http://www.thestar.com/business/economy/2013/12/27/insatiable_appetite_for_gold_fuels_indias_smuggling_industry.html

t au said...

Great post Aquilus - very helpful and illuminating for me.

Max De Niro said...

Gary, you're a psychopath.

tEON said...

Yes, that name has a horrible rep here... I am now going by tEON

Max De Niro said...

"I feel for you Max". Liar. You are not capable of empathy. You've built a construct in which to live, so that anything that threatens your egoic defences can be dealt with by spewing forth your in(s)ane rhetoric. You yourself believe this (as you are a psychopath) and so you live in perpetual dissonance from all angles. What a life! I know fuck all about freegold really. I gave it a go, but failed. I used to own gold (before I got robbed), but my decisions were made by a process of elimination and a fair bit of laziness. I don't give a shit about your or others' theories or their successes or failures. My life is great either way as I get riches from many other sources (such as feelings of empathy with other humans). I do give a shit about calling out psychopaths when I see them, and you are a total psychopath.

Nickelsaver said...

Max, did you not see the sign?

Max De Niro said...

You're not fooling anyone, you freak. LOL

Polly Metallic said...

Another great post! I had tried to imagine what name FOFOA would apply to 2014. I would not have thought of Year of the Rains but it seems fitting that he expanded on the open window theme. He now shows us a clearer view through that window.

Of all the archived quotes provided above, this one most spoke to me:

Trail Guide (02/11/00; 17:21:28MDT - Msg ID:25055)
"Our use of digital currencies for trade always flows like a river that's strong and wide,,,,, and it always flows to its end in the sea. The water takes it into the air and rains it again upon the headwaters for another trip,,,,,a new currency starts again."

I think what we have experienced since the financial crisis of 2008 has been the process of our present financial system flowing out to sea and the moisture being drawn into the atmosphere before the rains fall again. The rains will be the birth of the new financial architecture. When the rains fall it will usher in Freegold, but at first the rain will be preceived by most to be a destructive storm. After the heavy rains fall and the storms subside the ground will open and the seeds that were planted years ago, the seeds that are the Euro zone system and a "new gold market" will begin to grow and the storm will be forgotten. As the crops grow it will soon be apparent that the new global architecture bears good fruit and is a solution to the escalation of global financial crises we have suffered through for decades.

byiamBYoung said...

So, suppose I buy gold now at $1200/oz. and three years from now, after a revaluation, it's worth the equivalent of $50,000/oz.

How does the government determine what I bought it for?

What if I had all my gold melted and recast, mixing some new with some old. What was my purchase price?

What is the purchase price I paid for gold that someone gave me... a ring, perhaps?

Unless we accept a completely arbitrary rule for conjuring up a net profit amount out of thin air, I don't see how windfall gains can be taxed. And if government tried to enact such a crazy law, I agree, no gold would flow, but there would be lots of gold collateral lying still.

Cheers

matrixsentry said...

There is beauty in the fact that the psychopath's noxious spewage will we wiped clean tonight when FOFOA reads his blog. Notice that all the Grump droppings have been shoveled up and shitcanned.

Archer said...

Yes, indeed, Max, a certain someone, who expresses faux pity (where, instead, vile soot colored bile doth flow) fools no one save himself. In the meantime, one wonders if one is meant to construe that thinking for oneself involves invoking the less than impeccable lens of one Oliver Stone. Those inclined toward independent thinking want to know.

Franco said...

As per current tax law in the USA, a profit on the sale of gold would be taxed at a maximum of 28%, but it can lower if your income is on a lower tax bracket. So my question would be: why do you think that the current law would have to be repealed post-revaluation in order for gold to flow? Even if the gov takes 28% of (50,000 - 1000), you still get to keep quite a bit.

byiamBYoung said...

Franco,

I sell an ounce in 2017. How much did I pay for it?

Case closed.

Cheers

byiamBYoung said...

@Franco,

... because that ounce of gold... it was the one my father gave me on that hunting trip several years ago. So, how much capital gain?

Cheers

byiamBYoung said...

And that other 5 ounces, well...

That was cast into a statue of Abraham lincoln long ago, and the sculpture has been passed down through our family for generations.

What's my profit on that?

Cheers

Roacheforque said...

In a debt-based system, it is not so much a matter of "having to (hyper)inflate" as much as having debt exponentiate by virtue of the circular nature of debt "settlement" (a contradiction in terms made to seem "normal" through systematic conditioning).

Since 1971, there was really nothing "settling" debt (even indirectly) but more debt. So of course it is hyperinflating. It is not being "setttled" or "cancelled" with anything but more of itself.

And of course, gold is flowing to the net producer (surplus) nation(s).

This ... according to the flower of understanding ... is a synchronous reflection of the Aquilus corollary.

Lisa said...

Aquilus - thanks for that detailed response to Blake.

The comments of FOFOA on 1/1 to Luke, DPs comments on 1/2 and your comments today fit together nicely.

FOFOA describes " the mechanism that will escalate a simple dollar devaluation into a full-blown hyperinflation."

DP provides extra detail on the way the system works, including helpful diagrams (click on his links).

And Aquilus approaches things from a different angle, using easy to understand interpretations of FOAs comments.

Blake asked how to reconcile the waning support from surplus nations and the Fed's promise to taper. I think the answer is that you can't reconcile those two things. The promise of a taper is a farce, and any taper will be short lived. The US is backed in a corner. The only real option the Fed has is to keep printing.







FirstWorldNobody said...

Another point on taxing gold... Fiat values are not going to remain constant, all paper will burn. So an ounce of gold in todays dollars might be $12xx, post FG might be $xx,xxx in constant dollars but in the nominal space will be exponentially higher, meaning that the nominal profit might be 99.9x% or 99.8x% instead (or maybe more marginal). So measuring the level of buyin will be basically irrelevant in the nominal (how the governent taxes) space.

I am sure some government somewhere will try and tax the gain, but this will be a case study for the rest of the world to see how pointless it is :)

Franco said...

byiam:

"I sell an ounce in 2017. How much did I pay for it?"

If you don't have a receipt, then what you would need to do is take the item to a professional appraiser (e.g. a coin dealer) and get an appraised value corresponding to the approximate time when you acquired the item. That's your basis. The ounce of gold that your father gave you several years ago on the hunting trip, what year was that? You're gonna have to come up with a best guess for the appraiser. The statue of Lincoln, you take it to the appraiser and you ask "what was the market value of this statue in 1962?". From your answers it seems that you have never had to deal with the IRS. When they want, they can be very thorough. And unlike criminal law where the burden of proof is on the state, in tax law the burden of proof often seems to be on the individual.

KnallGold said...

Having luck once, and you want to taking it away again from us Proletarians??? *raising fist*

Taking away the necklace of women?

byiamBYoung said...

Franco,

I'll keep my Abe Lincoln, and borrow against it.

Cheers

ein anderer said...
This comment has been removed by the author.
ein anderer said...

»Support this blog … 2008-2014!«

There could be a subtle prophecy in this claim, here on the right bar: It could sound as if FOFOA does not see any need for prolonging his marvelllous work any longer than 2014.

»The rains« is not ONE rain: MANY floe avalanches will start to move—Dollars coming back from oversea will rain DOWN all over the USA, still more Dollars from the FED will rain DOWN all over the USA, the value of the Dollar will go DOWN, the price of (paper) Gold will go DOWN, many beliefs will brake DOWN, the value of bonds and stocks will go DOWN …

When the rain is melting the floe avalanche of ice and hard frozen snow, the WHOLE thing will start to move—irresistable.

Lord Sidcup said...

Anyone got ideas/sources on which German banks are likely to do best (for depositors) during bail-ins/transition?

ein anderer said...

@Lord Sidcup,

prefer Volks- and Raiffeisenbanken and Stadtsparkassen. Avoid the big ones (Deutsche Bank, Commerzbank, Postbank).
Very interesting: EthikBank. »Disadvantage«: no local agencies. But (1) you can administer your account online. And if you want to pay in cash you can (2) open a local Volksbank account, pay in there and transfer the money from there to the EthikBank.

Drawing out money: via every Volksbank mney machine (without any costs; EthikBank belongs to the Volksbank group).

Advantage compared to other »ethic oriented« banks: no support of religious, ideological or belief systems (like Christian or Anthroposphic projects).

Marco Polo said...

@Lord Sidcup

I found this interesting. They are probably in Germany.

http://www.bbc.co.uk/news/business-25336448

jojo said...

Franco- you realize that would expose the fact that no one bought gold during the 2000's? You would come to find everyone bought their gold when it was 42 an ounce. Imagine that.

Marco Polo said...

Anybody know how the figure of 85 billion quantitative easing in the US was arrived at?

Science or guesswork?

Marco Polo said...

OK, own up: who is the tiny blinking light off the coast of West Africa? São Tomé & Principe?

Reality Show said...

Hi Marco, I have learnt many, many things from this blog but for me the most important understanding that I was helped to come to was: Wealth IS Possession.
How will the business Bullion Vault deal with gold prices that move from $1,200 to nearly nothing to $84,000? Is there even the slightest risk that they may cash you out under extreme market conditions? But most importantly, do you really want to put other people's promises between you and your wealth?

Why bother when the UK government offers you a completely tax free way to possess your wealth in the form of Sovereigns and Britannias?

Lord Sidcup said...

Thanks EA and MP

I will further investigate Volks- & Raiffeisenbanken, Stadtsparkassen and Svenska Handelsbanken Deutschland.

Indenture said...

BYoung: you bring up an interesting question. When you borrow against your gold statue, since physical gold will not be used as collateral for a loan, are you borrowing against the artistic value others also see in your art? How would the gold composition of the art affect it’s ability to be used as collateral?

DP said...

Maybe it depends how ugly you made it(?). :D

… actually…

#Hmm…

DP said...

Yes, RJ, I know I know… and they say you can't eat it!

DP said...

Whaddya mean "I can only lend you 10% below melt"??

We're talkin about fackin Kate Moss mate!!

Blake said...

@ Lisa --

Agreed :)

Sam said...

Physical gold can be used as collateral for a loan. What won't happen post revaluation is ounce denominated loans like the ones made by bullion banks today. There is a difference. In an ounce denominated loan you get cash upfront and have to later provide gold. In other words you don't have the gold yet and there is a risk that you won't ever be able to get it. Ounce denominated debt leads to multiples of paper chasing a finite hard asset. Collateral based lending does not.

Gold will be incredibly stable post revaluation. If you had $1,000,000 worth of gold and capital gains taxes were still in place you could only get $720,000 free and clear of taxes by selling. However I'd expect a gold collateral loan to have rates similar to treasuries today. The gold must flow and most of it is held by people that don't have to sell so stop thinking like a shrimp. Assuming they aren't already international players they aren't going to take an unnecessary 28% tax hit. Even if they needed a little short term cash they would put a ton or two up as collateral at very low rates. In fact without going into boring detail there are several ways to LEGALLY defer taxes on gold indefinitely. Giants have good accountants.

I think we will all find out how much more important the flow of gold is to our global economies than a few tax dollars

t au said...
This comment has been removed by the author.
DP said...

OMG currency savers, wherez teh yield?

Archer said...

Some 'tard wrote the following:

Plus the bulk of the 2013 down move occured over a handful of trading days

Yeah, um, crashes (up or down) tend to be like that, in any market, whether, it's stocks, commodities, gold, or Bitcoin. The bulk of the move, happens over a handful of sessions. Nothing to see here except for 'tards.

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