Death and Taxes

After operating on a fiat system for 20+ years people are starting to realize that the only thing that backs a currency is the real productive efforts of their people. Yes, over time we always borrow more than our productive efforts can pay back and proceed to crash the money system.
But what else is new? (smile)

We call this a money's "timeline" and it's as new an idea as life, death and taxes! Time and debt age any money system until it dies. The world moves on. Only this time gold is going to play a different part in the drama. We will all watch it unfold.
-FOA "Foundation" (2/26/00)

In 1789, Benjamin Franklin wrote, "In this world nothing can be said to be certain, except death and taxes." But while death and taxes may be certain, the combination of the two certainly isn't.

Last Thursday, the day after Tax Day in the US, the Republican-led House of Representatives voted to repeal the estate tax or "death tax" with a bill that President Obama promises to veto. This is a hot-button issue (and it should be IMO) even though it only affects 0.18% of deaths that occur in the US at its current limit of estates valued at over $5.3M.

Why is it such a hot-button issue? Well, for the Democrats, it shows that the Republicans are working hard for the 1%, or even the top 0.1%, the very wealthiest of the elite. But for the Republicans and for the majority of average Americans (68% in one poll), it's about the instinctive feeling that one's accumulated (after-tax) wealth should be able to be passed on in total to whoever you want it to go to, regardless of size.

As you probably guessed, I have a rather nuanced view of this issue. The top argument from the Democrats is that this is a rational point of taxation, in support of the greater social good, with major benefits compared to other types of taxes such as income and consumption taxes in that it only comes from the very rich. For the other side, the argument is a little more difficult to make in today's $IMFS world of paper wealth.

In my opinion, the problem with the top argument against the "death tax" boils down to the difference between real physical wealth and not-so-real-but-highly-liquid paper wealth as wealth is currently defined by the $IMFS. In order to make this problematic argument, Republicans are forced to think of extremely uncommon examples whereby physical wealth that is passed on must be sold, or borrowed against, to pay the tax burden.

The best example they could come up with (that would at least draw a little sympathy) was the small family farm. And while it's actually a good example of the principle, it's quite weak as presented, as an empirical foundation for the need for a congressional vote changing the national tax law, a weakness that is easily exploited:

"And what about those family farms Republicans are always talking about, the ones that are constantly being sold off to pay the estate taxes? They’re a myth. When The Post’s fact-checker Glenn Kessler was doing his estate tax fact check, he asked the office of John Thune, the sponsor of the Senate version of repeal, about the farms we keep hearing about. “Thune’s staff conceded that they could not identify a single farm that had been sold because of the estate tax, but they said some farms had to sell acreage in order to pay the tax.” Nobody else seems to be able to find one, either. You’ll notice that when Republicans talk about this, they always posit a hypothetical family farm being sold off and not “My constituents the Millers had to sell off their farm,” because the Millers are the equivalent of a unicorn." -Washington Post 4/17/15

Speaking of unicorns, imagine one, perhaps yourself as a unicorn, who put all of his wealth—his foregone consumption during his productive life—into physical wealth items like a nice home with a little land, fine furnishings, a few antiques and works of art, and a prized classic car or three. Should such a basket of wealth accumulated over a lifetime of overproduction/underconsumption be halved for the greater good, just because you died and your son or nephew or whomever took over ownership?

How do you figure the value of such an estate anyway? It's full of unique physical items, from the home to the artworks, so all you can really do is estimate a price it would presumably bring if it all went to auction, and then force some of it into auction in order to obtain—for the federal government who can print its own currency—remuneration for public services that was already paid when the money that bought the items was earned in the first place.

I have often said that savers pay inordinately through the "inflation tax" and currency devaluations when they save in currency-denominated paper assets, but does it really make sense to make them pay more for the greater good than anyone else regardless of what they're saving? I say absolutely not!

The Paris Hilton effect is certainly a factor. People are envious of people like her. Why should she live such a lavish lifestyle and not pay any taxes like the rest of us? Well, it's just a matter of scale. If you'd like to be able to leave your own children some wealth that will hopefully give them a head start on life, why does that principle stop at some point where envy kicks in?

The way I look at it is pragmatically. If she's earning income, she should pay income taxes just like everyone else, and she does! If she inherited an income-producing business, then she should pay taxes based on the income she earns. If she chooses not to work and to only consume conspicuously, she will surely run down her inheritance.

If we want to tax conspicuous consumption, we can easily tax all consumption and the conspicuous consumers will obviously pay the most. But we don't, because in reality that taxes the poor inordinately. So, instead, we tax income on a progressive scale where the more you earn, the higher the percentage you pay. Then, of course, there's the issue of investment income.

For that, we tax in a more favorable way because we want to encourage investment based on the notion that it leads to more jobs. And in some cases it does, but in the $IMFS paper world of stocks and bonds, this whole principle has become immeasurably distorted.

In the investment world, there is income and there's capital gains. Income is near zero today with ZIRP and global unprofitability due to asset overvaluation and lots of debt, so all that's really left is capital gains. And where I think we fail is in not distinguishing between capital gains in the paper and physical worlds.

Capital gains are generally only taxed when the item that gained value is sold. A capital gain is figured by subtracting a basis or starting value from the sales price, but the estate tax aims to take a slice based on a zero cost basis and an estimated selling price. It really is a wealth tax. It views the death as a transfer or transaction and the heir as receiving a gain or an income that can be taxed. But this obviously necessitates that slice being sold into the marketplace because the government has no use for physical wealth items like fine furnishings, antiques, works of art or classic cars.

In essence, the idea is that the value of those wealth items be transferred and redistributed to needy consumers. But let's think about that concept for a moment.

For the super wealthy, if you cut their wealth in half, it's not going to have an impact on the amount of basic necessities they consume over their (and even their heirs') lifetime. If anything, it may affect the quantity or quality of luxury items (wants) that they consume. An example the Washington Post article used is an heir buying a Porsche rather than a Ferrari. But here's the issue. How does that reduction from a Ferrari down to a Porsche free up (or create) more basic necessities for the needy consumers to consume. The answer is it doesn't.

Say Bill Gates decides to give away $10B to feed the poor in Africa. Does that create $10B worth of new basic necessities for them to consume? No, but it does redistribute the existing necessities to where he wants them to go. In fact, it does so by raising the price of necessities as the poor in Africa are able to bid some away from the rest of the world.

It's the same concept when we tax wealthy estates in an attempt to convert wealth into consumable necessities. In the arena of necessity consumption, it doesn't take any away from the rich and give it to the poor. What it does is eliminate the marginal saver, turning him into a net-consumer, to the benefit of the poor. This may not be a bad thing, but I think it's a concept worth understanding because it also has a few knock-on effects and unintended consequences.

As I said above, we could certainly tax consumption instead of the complicated system we have today. In fact, the "Fair Tax" proposal is basically a 30% sales tax that would replace all income, payroll and capital gains taxes. This may even be a good idea as it would certainly simplify the tax system, but it would have the same effect as above, that effect being that it would eliminate the marginal saver, turning him into a net-consumer, to the benefit of the poor.

A consumption tax like the "Fair Tax" is progressive on consumption (the more you consume, the more you shoulder the tax burden), but regressive on income and wealth (the more you earn or have, the lower consumption falls as a percentage of your income or wealth). A 30% sales tax would simply raise the price of everything, which will only turn the marginal saver into the marginal net-consumer, increasing the total number of net-consumers.

We certainly want to make sure that the poorest of the poor have the basic necessities and that our government has the income it needs to provide necessary services, but beyond that point we are only (and unnecessarily, IMO) increasing the total number of net-consumers while also increasing the total number of poor living on public aid by disincentivizing both work and saving. And this is true with any tax system, but especially true for something like the estate tax which pretends to transfer necessities from the rich to the poor, but only really transfers them from the marginal net-producer to the new marginal poor.

It feels good to the green envy monster in those who have one to take wealth items away from the super-rich, but let's take a quick look at some of the knock-on effects and unintended consequences.

The most obvious one is that the forced sale of wealth items will put downward pressure on the value of all such items. This only affects the rich, and has no benefit to the poor. The buyer of such items that were forced into the marketplace will get them at a lower price, but he too is rich. The forced seller of the items may have to reconsider his conspicuous consumption and downsize from a Ferrari to a Porsche, but that only affects the bottom line of Ferrari and Porsche, and they too are rich.

The wealthy man is taking nothing away from the poor by holding wealth. If that wasn't so, then it could be said that the more wealth any person has, the more he is withholding from the poor. This would make any savings immoral, which is simply not the case. The wealthy will always consume the same amount of basic necessity consumables, and only their consumption of luxury items (wants) will vary.

Some people truly believe that if only the super-duper-rich weren't allowed to be so rich, then the poorest of the poor starving in Africa would have food on their plates. But this is simply not the case. The super-duper-rich are not withholding food from Africa. If anything, they produced real value at some time and traded it for rather useless but expensive things (like Balloon Dogs and such). There is a problem if we have poor people starving in Africa, but the problem is not that the price of fine art at Christie’s is too high.

Like I said with the Bill Gates example above, the rich can choose to help the poor in one area or another, but all that does is force a redistribution of available necessities by adding money to bid on them in one locale over another, driving up the price of necessities just a little bit everywhere. I'm not saying that's a bad thing, but I am saying that if we try to do that systemically, and not by individual choice, it is a bad thing that will have unintended consequences.

Where those unintended consequences play out is at the margin of any group you choose to observe. The marginal net-producer will become the new marginal net-consumer. The marginal Ferrari driver will become the new marginal Porsche driver and so on. Overall, you will end up systemically increasing the number of people dependent upon the system, reducing the number of people who would otherwise be self-sufficient for their entire lives, and increasing the number of net-consumers and therefore elevating the debt level which has its own knock-on effects, like choking the global economy.

Now before you start railing against trickle-down economics, I'm not suggesting a trickle-down theory here. I'm not arguing for reducing the income tax or any other tax (other than eliminating the estate tax) on the rich. In fact, if the rich are deriving an income from their investments, then that should be taxed like any other income. And if they are trading in and out of liquid paper investments in order to churn an income through short term capital gains, those should be taxed as income as well, and today they are for the most part.

But if you followed my reasoning above on unintended consequences playing out at the margins, then I think it follows that if we systemically encourage and incentivize saving in real wealth items, the opposite will occur. The marginal net-consumer will become the marginal saver. Overall you will end up decreasing the number of people dependent upon the social safety net, increasing the number of people who will be self-sufficient over their entire lifetimes, increasing both the number of productive individuals and total productivity which will expand the arena of necessary consumables, and reduce both the total number of debtors as well as the total level of debt, which will be good for the global economy. And, of course, the marginal Porsche driver will become the marginal Ferrari driver (but who cares, other than that green envy monster?).

Again, tax income all you want, or at least all you can politically get away with, and feed the poor and make sure the government meets its budget, but beyond that, you are only creating more dependence on the social safety net and more dependence on government, less self-sufficiency and more debt. And within this concept, the estate tax makes a quantum leap to the far end of the bad side of the spectrum in going directly after wealth items at the very top in an attempt to convert them into consumables at the very bottom, which simply doesn't work and has knock-on effects that trickle—negatively—all the way down.

This is not supply side or trickle-down theory and there's no Laffer curve here, just a simple concept. But if you can't see the difference, you may want to check that green monster inside. The huge paper fortunes of today which will go poof one day soon would not even happen in the first place. I am on the same side as the critics of wealth disparity who point at investment bankers and Wall Street. That's all a gross aberration, not real capitalism, and an artifact of the end of the timeline of the $IMFS. Like I said at the top, where I think we fail is in not distinguishing between capital gains in the paper and physical worlds. Let's encourage saving in physical wealth items and tax the heck out of the jerks who save in paper choking the economy into global stagnation! :D And eliminating the estate tax is as good of a start as any, as far as I'm concerned!

Sincerely,
FOFOA

Metamorphosis Revisited

The very changes needed in our money universe, today,
would kill dollar demand by devaluing all dollar assets
in super higher gold prices. The debts and the dollars
would remain; only 90% of their current illusion of value
would vanish. Hyperinflation in prices of all wealth objects
will be the workout result of this process. As such,
opposing dollar political motive will force the US
to give the markets what is needed; both gold
and gold prices beyond imagination.
-FOA (7/27/01)

This past Monday, the IMF released a report on Islamic Finance. Along with the report, it also released a short video titled Four Things You Need to Know about Islamic Finance. After five days up, it has a whopping 388 views.

I tend to think of "Islamic Finance" as kind of like a good movie with a terrible name. Other names it goes by in official circles are "Islamic Banking" or "Sharia compliant whatever", which, as far as names go, don't do it any favors in the West.

The basis of "Islamic Finance" is that usury is forbidden in the Koran. I had a few discussions about this in the comments back in 2009. Among the points I made was that the three major religions all share similar doctrines. In Islam, usury is called Riba, however there is a caveat in Islam that you may lend usuriously to your enemies, just not to other Muslims.

I also linked this History of Usury Prohibition which explains that such sentiments of contempt for usury date back to the Old Testament in Judaism, and go back equally far in Hinduism and Buddhism, many hundreds if not thousands of years before Islam even existed.

And I noted that the meaning of the term "usury" has evolved, especially in the West:

Consider this, the term "usury" changed its meaning in the last 100 years. It used to mean "interest". Now it means "excessive interest". All usury laws today have to do with an upper limit on interest rates. Age-old usury laws prohibited interest entirely.

When usury laws were repealed in 1981, they were simply making way for Volcker's 18% official interest rate, which ran credit card rates up to 40% and higher. These rates were previously called "loan sharking" and were completely illegal.

For example, look at different versions of the Bible. The NIV (New International Version) was begun in 1973 and not completed until 1983. Compare passages from the King James version and the NIV (random example):

Luke 19:23 (King James Version): "23Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?"

Luke 19:23 (New International Version): "23Why then didn't you put my money on deposit, so that when I came back, I could have collected it with interest?'"

So in 1983 they could no longer use the term "usury" in its original meaning. In 1983 usury meant "excessive interest", and that wouldn't make sense. So they had to change the word to "interest".

This is a deep subject. Think about it. We know that money is essentially credit, which is also debt, and it circulates, so shouldn't there be a time value to money? Is interest intrinsically good or bad or neither? Is it a relative thing, with many shades of gray? Or is it a simple black and white matter? I know what I think, and I'll tell you in a moment.

In December of 2009, I wrote a post titled Metamorphosis that was essentially about the concepts in Islamic Finance without mentioning Islamic Finance or the other names it goes by even once. The post did, however, contain three pictures of Dubai real estate that were financed in a Sharia compliant way. And the word "Islamic" did appear once in the post, in an article I included about Sukuk, which are the Islamic equivalent of bonds.

In "Islamic Finance", the way they get around charging interest is by calling it "rent". Say you want to buy a house under Islamic Finance rules. What would happen is you would get the money from the bank, and then you would pay it back in monthly installments of the principle plus an additional rent (instead of interest) for your use of the property. So whereas we pay principle and interest, they pay principle and rent.

It's really quite simple, but the implications run deep. Probably the biggest implication is that the lender shares with the borrower both the risks and rewards of the underlying asset. This is basically what my post was explaining. Here's a tweet from the IMF on Monday followed by a short paragraph from Metamorphosis:

IMF @IMFNews Apr 6
Given lenders share in both risks & rewards, should #IslamicFinance be made more mainstream? Read Blog http://ow.ly/LfGfd

A system that is built upon equity positions is much more stable as equity agreements are entered into with much more gravity. If both parties share in the risks and rewards of future performance they will take everything more seriously. Also, equity agreements are based on the flexible assumption of variable future performance! A much more realistic assumption.

Don't worry, we are not going to all be Sharia compliant in Freegold. We are not moving toward a world of Islamic Finance. That is not what this discussion is about.

If you read my Metamorphosis post, you'll notice reflections of FOA in it. In particular, you'll notice similarities with his The Wind Will Blow post.

In FOA's post, you'll read about a tractor:

The unnatural convoluted drive, of many, is to use this same "money value concept" to borrow real wealth "use"; instead of borrowing the actual wealth itself to gain said "use".

This second item comes under the heading of trying to get something for nothing and is everywhere in Western Thought!

If we lend an item of real wealth, say a tractor or chair, its future value is unimportant to the lender as long as the real item is returned. It is the "use" that is lent, not the money concept in the form of a trading value. In this process we recognize that, because the value of things change, the debt to be repaid is the item of wealth, regardless of its higher or lower value. Only its "use" changed hands during the lending and repayment of debt. All is well.

And in mine, you'll read about a crane:

Now some items that we find in our planetary inventory are productive equipment items. These are things that if used properly can increase the amount of wealth in the world. A giant crane, for example, can be used to build new structures that can then be valued and traded relative to everything else in the world.

With nearly 7 billion people in the world today, the various tasks of production have been divided to the extreme. For example, you will be hard pressed to find a man operating a crane, who also owns that crane, and also owns the project he is working on as well as the land underneath it. If such a man exists, then it is surely a very small project in his own backyard.

So cranes are generally loaned, leased or financed to those who want to build, by those who want to own (productive capital). And the return to the owner of the crane is a function of the value of the use of the crane. Not the appreciation in the tradable value of the crane itself. Can you see the difference? If someone owns a full equity position in a piece of productive capital, he does so in order to earn a return, a yield based on the value of the USE of that capital. He does not count on the value of the crane increasing in the future so that he can sell it for a profit. There is a big difference! Think about this.

The point of both FOA's post and mine was not what's wrong with banks, fiat money, lending or interest. It was about understanding concepts and principles so that you can see what is inevitably unfolding. The way conventional banks lend for interest is neither good nor bad, it simply is. Same with Islamic banking. Islamic Finance is not the cure for what ails Western finance, but understanding the difference between the two may help you see how the $IMFS will resolve.

The point of both posts was that the resolution of the $IMFS, the cutting of the Gordian Knot, will be dollar hyperinflation and "gold prices beyond imagination," not deflation. Here's a bit from the conclusion of Metamorphosis:

Deflation?

If today's deflationists are correct then the numéraire will remain strong or even grow stronger while the world runs from equity ownership of the physical world into the warm embrace of casual debt creation stabilized by its own Ponzi-like exponential growth pattern.

Think it through. We don't just muddle through from here. We either shift toward equity or debt. We are currently not in stasis.

[…]

What about Gold?

Gold is a little different. Yes, it is the ultimate equity position with assured future global liquidity. Yes it is the ultimate wealth reserve as a known timeless claim on anything you may need in the physical world of your future.

[…]

I will leave you to do your own math on where the real value of physical gold will come to rest on the other side of morphosis. I have already presented my calculation in other posts.

And here's a bit from the conclusion of The Wind Will Blow:

The tables are turned; deflationary policy will not defend the dollar. Only inflationary policy will. Make no mistake, we are not calling for price inflation to end the dollar's reserve reign! We are calling for "inflationary policy" to dethrone it while said hyperinflation follows.

[…]

The very changes needed in our money universe, today, would kill dollar demand by devaluing all dollar assets in super higher gold prices. The debts and the dollars would remain; only 90% of their current illusion of value would vanish. Hyperinflation in prices of all wealth objects will be the workout result of this process. As such, opposing dollar political motive will force the US to give the markets what is needed; both gold and gold prices beyond imagination.

Above, I asked if interest is intrinsically good, bad or neither. I think it is neither good nor bad, it just is. I think there is definitely a time value to money, but to use that time value on a system-wide basis as a form of risk-free savings or as a wealth reserve is what leads to problems. Think about the difference between conventional and Islamic banking in terms of buying a house. In conventional banking, the buyer alone is exposed to the risk and reward of changes in the value of the home during the life of the loan, so presumably the lender is not.

As we now know, this works well as long as home values are rising, but if they decline, homeowners can be quickly wiped out and go bankrupt or default on the loan. So there is risk exposure to the value of the underlying asset. And in Islamic banking, the lender shares that property value risk proportionally with the buyer throughout the life of the loan, so there is risk there too.

There is always risk involved in lending, yet with fiat currencies we have the ability to eliminate the nominal risk by printing more money (e.g., FDIC deposit insurance, QE, etc…). All this does is transfer the risk to the value of the currency itself, which is exactly where we find ourselves today.

The IMF has two stated reasons for studying Islamic Finance. The two reasons in one word each are stability and inclusion. Inclusion means bringing the Islamic financial world into the warm embrace of the international monetary and financial system, and stability means finding new ways (perhaps by studying the principles of Islamic finance) to avoid another global financial crisis. In addition to banning interest, Sharia law also bans speculation, gambling and short-sales.

Back in 2012 when I first met Aristotle in person, he brought with him the latest edition of the Central Banking Journal, which I found him quietly reading on my sofa one morning with a cup of coffee. That sparked a conversation about what he had told me by email a year or two earlier, about the "many international policy stirrings" he'd been following in the journal which he felt pointed to preparations "for assertively rolling forth the freegold paradigm."

What surprised me the most was that, aside from mentions of gold in the journal, one thing he paid particular attention to was the repeated and frequent mentions of Sharia compliance and Islamic banking rules in the Central Banking Journal. Western central bankers have apparently been studying and discussing this stuff for nearly a decade now, and for good reason. According to the IMF paper, "Islamic financial assets have grown at double-digit rates over the past decade, from about $200 billion in 2003 to an estimated $1.8 trillion at end of 2013. (A large part of Islamic finance—around 80 percent—is composed of Islamic banking assets; the remainder is composed of Sukuk (15 percent, asset-backed or asset-based instruments), Islamic funds (4 percent), and Takaful (Islamic insurance)."

More from the IMF research paper:

WHAT IS ISLAMIC FINANCE?

Islamic finance refers to the provision of financial services in accordance with Islamic jurisprudence (Shari’ah). Shari’ah bans interest (Riba), products with excessive uncertainty (Gharar), gambling (Maysir), short sales, as well as financing of prohibited activities that it considers harmful to society. It also requires parties to honor principles of fair treatment and the sanctity of contracts. Transactions must be underpinned by real economic activities, and there must also be a sharing of risks in economic transactions.

Islamic finance products are contract-based and may be classified into three broad categories:

* Debt-like financing structured as sales, which could be sales with mark up and deferred payments (Murabahah) or purchases with deferred delivery of the products (Salam for basic products and Istisna’ for manufactured products), and lease (Ijārah) with different options to buy. Pure lending is allowed only when benevolent (Qard, which is often used for current deposits);

* Profit-and-loss-sharing (PLS)-like financing with two modalities: (i) profit-sharing and loss-bearing (Mudarabah) whereby the financier (investor, bank) provides capital and the beneficiary provides labor and skills (profits are shared, but losses would be borne by the financier who does not have the right to interfere in the management of the financed operation, unless negligence, misconduct, or breach of contract can be proven); and (ii) pure profit-and loss- sharing (Musharakah) where the two parties have equity-like financing of the project and would share profits and losses; and

* Services, such as safe-keeping contracts (Wadi’ah) as for current deposits, or agency contracts (Wakalah), which are also increasingly used for money market transactions.

The principles are rather sound, as you can see, although their Arabic names are a bit off-putting. And as I have stated, I don't really consider these principles to be particularly Islamic, but Islamic finance does provide an existing structure of sorts that can be studied.

It is my personal feeling that these principles reflect changes that will emerge naturally as the $IMFS collapses and Freegold rises like a phoenix from the ashes. That was kind of the whole point of my post, why I called it Metamorphosis, and why I included the illustration of a caterpillar turning into a butterfly.

That's also why I hesitate to even use the term Islamic finance. But don't you find it interesting at least that Western central bankers have been studying these principles for years now, perhaps as Ari views it in preparation for dealing with a new reality?

Here are the documents and tweets released on Monday by the IMF for your perusal:

Publication summary

Short blog post on the IMF-Direct blog

38 page research paper (PDF)

IMF #IslamicFinance research just released. Read about main findings: http://t.co/9IHa8ubPpk
— IMF (@IMFNews) April 6, 2015

#IslamicFinance needs consistent application of Islamic financial standards to enable its safe and sound growth http://t.co/UmmnapvBZH
— IMF (@IMFNews) April 6, 2015

Given lenders share in both risks & rewards, should #IslamicFinance be made more mainstream? Read Blog http://t.co/gns67btZQF
— IMF (@IMFNews) April 6, 2015

#IslamicFinance can improve access to finance, support inclusive growth. Read how. http://t.co/gmhKT9HhEb
— IMF (@IMFNews) April 6, 2015

Why #IslamicFinance matters? IMF research suggests it holds the promise of fostering financial inclusion & stability http://t.co/yVISu8h86i
— IMF (@IMFNews) April 7, 2015

Sincerely,
FOFOA

The Golden Phoenix

This work started back in 1988, not long after the 87 crash.
Important people were asking some very serious questions
about the timeline of the world monetary system.
They expected a long term evolving report that would expand
ongoing events into a format of true life context.

I cannot offer the full report or its complete ongoing
analysis. But, the effort you have seen to date is one
of sharing somewhat for the common good of all.

To the best of my knowledge, the ones that initiated this
were major oil producers. Strange as it may seem,
the very first questions came from a US natural gas producer
in 1985+/-. Later the initiative came from outside the US.

The above is from a post that FOA wrote back in 1999, prior to the Gold Trail. In it he apparently explained how, when and why what we know today as "Another's message" began. In the post, he talked about an ongoing and evolving "report" that began sometime around the global stock market crash of 1987, when some "important people" started asking serious questions about the end of the dollar reserve system's timeline, and how best to transport wealth through such a transition.

In a later comment, he referred to it as a "study" and confirmed that he was not personally part of it, but that the $30,000 gold revaluation was a projection that came out of this "study". So without further ado, here is that post (highlights, underlines and brackets are my emphasis and contextual notes):

FOA (09/13/1999; 09:09:03 MDT - Msg ID: 13518)
Reply

ORO, Some things I know.

This work started back in 1988, not long after the 87 crash. Important people were asking some very serious questions about the timeline of the world monetary system. They expected a longterm evolving report that would expand ongoing events into a format of true life context. A context to be understood at all levels of economic exposure. In other words, it had to do a better job of explaining the (then) recent illogical swings of world economic affairs and the effects of those swings on various national economic groups. Were we progressing into a new, better age, or was our system responding in a death like downtrend? [To put the "swings of world economic affairs" he mentioned into perspective, the world's stock markets had just crashed in October of 1987. The dollar's exchange rate had reached its all-time high of USDX 164 in 1985, followed by the Plaza Accord to devalue the dollar in September of that year, the Louvre Accord to subsequently halt the dollar's devaluation in February of 1987, and the stock market collapse eight months later. Also, the price of oil had just dropped by more than half in 1986, and the Dow reached its all-time high in August of 1987, less than two months before the crash.]

Because the questions grew from a fear that the world economy would indeed contract in the future, leaders wanted to know how one could retain the most wealth during such an event. It was thought that if the basic extended family blocks of a nation could survive such a collapse, savings intact, those nations and their children would be a benefit to economic affairs of the future. In effect, negate a possible return to the Dark Ages of European history. Our time frame was outward some 20+ years. I cannot offer the full report or its complete ongoing analysis. But, the effort you have seen to date is one of sharing somewhat for the common good of all. [So Another was involved in presenting this "report" spanning or projecting out 20 years starting around 1988, which was requested by some "important people" who were concerned that the $IMFS would eventually end and wanted to A) make it through with their wealth intact, and B) avoid returning to the "Dark Ages".]

In a search for reasoning, they looked first, not only at the most broad perspectives, but ones that had the effects of history for confirmation. Often the record of historical human reactions are the only precedent that can refute the use of modern day financial theory. Especially if that Theory is in a "practice for proof" stage that might last for a generation or more. [So Another and his group thought that it was more useful for the specific purpose of this "report" or "study" (being one focused on a transition period in particular) to favor known historical human reactions over more recent theoretical economic analysis.]

1. They found one absolute repeating event that shaped the lives of countless individuals. Its effects upon the destiny and life directions of recent society had no equal. That one most striking and frightening observations was of the failure of paper money. With irony, we stood here in the middle of 1988, a time of advanced thinking using higher education for guidance and could easily document that no paper money ever put into use had ever survived. Whether backed by precious metals or in stand-alone form, not one lasted! Yet, we were hip deep in an entire economic world that based and denominated its wealth upon the further extensions of "fiat paper money".

2. The second major observation was in the evolution of what debt is. From the very beginning of time humans have borrowed and owed, from and to each other. During most of history, the period of time between a debt owed and a debt paid was looked upon as "a period of risk". The accepted longline historical concept was that the item borrowed may not be returned to the owner. In addition to this view it was ingrained that the primary real loss came from not being able to replace the "item" lent, not the secondary loss of not receiving the medium of exchange. Yet in today's world (1999), the "thing" that is usually at risk in a debt is the currency. Modern common perception stands that no one should have to accept these losses. In concept, governments nurture these perceptions only because they "can" replace the currency with ease. Yet the actual physical structure of the debt (the economic good that the loan was based upon) is never regained. This engine alone is a major force in the destruction of currency systems. Its effect is to shrink the platform that creates real wealth and expand the financial instruments whose value depends upon that platform's continued function. Indeed, it is a complete conflict to historical, natural human interactions.

From these two grand perspectives we view the unstable trend lines of our modern economic structure. It is from this present structure, that many entities, both large and small now attempt to retreat. But, in order to transport wealth with assets intact, they had to understand these money dynamics as an ongoing breakdown of our economic system. A breakdown that ebbs and flows with a political posturing that makes this journey very uncomfortable without a stable, long term grasp of the process. As the river Nile floods and withdraws in its endless rush for the sea, so too will the energies of paper currencies be eventually absorbed into the ocean of history.

Onward:
Michael Kosares of USAGOLD knows well the very early coins of gold. Money coins that by their very existence today prove victory over the past creations of mankind's fraudulent commerce. The value of these coins now reflects an even higher value as art. Another minor means of wealth transportation that has historically outperformed money gold.

But, in distant times past these same coins performed a far more noble role. They remained the only existing money stock after "major economic societies failed". This particular function of gold is not important for 99% of time that economies function. One small evidence of this is present in the old Gold standard. With ragged inefficiency, paper currency circulated as gold deposit receipts along with gold coins during the course of normal financial dealings. However, after we endure that once in a "several centuries failure", the gold money stock becomes the vital building block of the next generation. History has shown that during that brief time, the owners of every ounce of gold provide the only efficient medium of exchange that rebuilds the marketplace. In transition, these latter day gold owners never rule the financial world. Rather they perform the act of energizing a dead economy by transporting buying power into the next expansion. The history of past human interaction was never one of hoarding money so much, as it was that of trading to gain life's things.
Life goes on.

Viewpoint:
It was pointed out that one need not invest in gold to negate the effects of an inflation. All we have to do is buy real things that increase in currency value faster than the loss of buying power. True, in that light gold is but one of many things that should keep us at least even. However, we are in the process of experiencing a "breakdown" or at the very least a major change in the entire financial system. Not just an ongoing inflation during a phase of a longline expansion. Our goal for certain individuals, is to show this dynamic at work as the real life events unfold and document its progress. For private individuals that read these pages [that's you and me!], historical purpose and present day logic will build further support for the holding of physical gold as these events reveal the true season. In this light I offer Another's direction given some many years ago, "in this special season, let others buy things to hedge their present worth, let us buy gold in support of our future generations".

Onward:
After reading ORO (9/8/99; 8:24:51MDT - Msg ID:13029), I wanted to at least be more direct in offering this ongoing discussion of events. You do a wonderful job of writing and I often find my information is just a reword what is said:

---- "In order to gain action from people, one needs to provide a timetable for the events (within my nephew's lifetime, mine, my parents' or my grandparents', or before the year turns, any time now...). This is the kind of support that I myself required before I was willing to accept the need for putting resources into "gilded insurance". The same need for support with numbers and charts that I am working on filling is needed to induce the financial pros to give their clients direction. The issue is a patriotic one. Small business America will not survive without small capital hoards. The same problem they had in the depression. The reason for the length of the depression, was the confiscation of gold. The inability of small businesses to find capital pools in an atmosphere of credit unwinding, and the simple death of the money supply in lew of the indestructible gold that was confiscated was the cause for an extra decade of suffering. The only way I see to avoid it is to convince people to build these pools now or end up working for a foreigner for the rest of their lives, since only foreign pools of gold capital will be available (India, perhaps Europe, Arab countries, Asians from countries that managed to pick up the pieces most quickly)."-------- [GIMME THE TIMING, DAMMIT!! :D]

ORO, on these points I completely agree. However, all that is left to drive the last remnants of this world engine is the "American Dream". The leverage to attain that "Dream" is presently stretched so far that any withdrawal back into reality will implode the dollar with amazing speed. The time may be already past for any large scale building of gold stocks based upon reality. But, still the effort is not lost. [OH NOOOOOO, it's now 2015 so he must have been WRONG ABOUT EVERYTHING!!! :D (I don't think so)]

Also:

---- "The key to the numbers is that set of numbers that quantifies the issues. Particularly important is the understanding of how the international dollar system works, how leveraged it is, how that makes it susceptible even to small shocks, how a dollar collapse in international markets would play out in the US. Once the arguments and the numbers are shown and it is possible to convince a professional of the dangers facing the dollar both as reserve currency and the currency of the US, only then is it possible to make the argument for gold as anything other than another paper airplane to ride in the markets. Perhaps you will start a presentation of the qualitative issues regarding the dollar (rather than gold), interspersed with the data you may want to quote. I am currently working on the data to show the details of the situation."------------- [I NEED THE DEEETAILS, DAMMIT, AND THE TIMING!!]

Onward:
The best indicator one could find to advance the warning of a reserve currency breakdown is the fall away of price inflation after decades of local currency and debt expansion. To observe the history of paper money is to view its constant loss of value as expressed in the price of daily things. Whether backed by gold or nothing but "a dream", no world economic power has ever let its currency increase in value for the long term.

The only way any currency can, in the short haul become price inflation neutral is through the demise of its competing moneys. This effect is seen as an increase in the holdings of one major currency and the corresponding sale (increase in trading velocity) of the displaced foreign money. In the case of the modern world reserve currency, the dollar, we look to the net increase of foreign holdings of US treasury debt. The proxy for holding US cash. [Hmmm… that's a pretty good description of what's happening right now! ;D]

(Note: A table of this recently appeared on the Investech web site. I cannot reproduce it. Perhaps someone else can.)
From 1979 through 1994, the increase was always positive, but never in fully manageable amounts. From 1995 till mid 1998, the accumulation exploded off the chart as money competitors became the spending currency and the dollar the holding currency. It's well documented how this effect has kept price inflation in terms of the local US markets from rising. However, this long trend also had the effects of denominating almost all world debt in dollar terms. This was seen throughout the 90s and is considered the end time event that will break the dollar. Because the local American economic structure has always been finite, it cannot defend its currency with the exchange of real goods nor represent the value of the debts of the entire world. The downside, not discussed result of this will be the complete destruction of the dollar as a reserve currency. This begins as an attempt is made to reverse the dollar holding process. The same chart above also presents a massive decline in net foreign US debt purchases beginning in 1999+/-. The trigger of this action was the successful establishment of a larger competing reserve currency, the Euro. [Of course we know what happened when China picked up the ball in 2001 that Europe dropped, but what he's describing is happening again RIGHT IN FRONT OF OUR VERY EYES!!! :D]

Because a world reserve fiat currency can only represent the tradable value of its local economic structure, the world markets will now devalue most all debt based upon the dollar. This effort will begin a real "catch up" phase on the US price inflation front, even as dollar debt is burned with a vengeance world-wide. This loss of the dollar vehicle will also bring the destruction of many contemporary derivative markets that priced commodities for their value as trading items, rather than their traditional good use.

More in a later time. Thank You FOA

Right after that post, Cavan Man asked FOA who he was referring to as "important people":

FOA (09/13/1999; 18:52:08 MDT - Msg ID: 13574)
Comments!

Cavan Man (09/13/99; 09:43:46MDT - Msg ID:13521)
FOA
I do not read "important people" wanting to know as being academics of any stripe. Am I correct?

Cavan Man,
To the best of my knowledge, the ones that initiated this were major oil producers. Strange as it may seem, the very first questions came from a US natural gas producer in 1985+/-. Later the initiative came from outside the US. Again, all of this was some time ago.

I find that last bit about "a US natural gas producer" intriguing! Who do you think FOA might have been talking about? My guess (and it's only a guess) is Peter Munk, because I recall that Barrick Resources switched from oil and natural gas to gold mining around 1983 or 1984. From Wikipedia:

"After suffering huge financial losses in oil and gas,[3] principal Peter Munk decided to focus on gold."

Footnote [3] is from the book Golden Phoenix: The biography of Peter Munk by Richard Rohmer. Peter Munk is an interesting person. And whether or not he is who FOA was referring to in that post, we do know from Another and FOA that his company was an integral part of the development of a new kind of paper gold market in the 80s. So I decided to check out the book and see what I could find.

Peter Munk graduated from the University of Toronto in 1952 with a degree in electrical engineering, and in 1958 at the age of 30, he founded a high-end electronics manufacturing company in Canada, but that business went sour by 1970. Then, in the 70s, he founded a large hotel chain in Australia from which he made his first real money when he sold it in 1979. From the hotel chain sale, he was left with about $100M which the book says was "burning a hole in his pocket." So, in 1981, he went into oil and natural gas production. That investment quickly went sour, and within a year or two, he had lost a good portion of his 1979 windfall.

By 1983, according to the book, Klosters, a ski resort town near Davos in Switzerland, had become a central part of his life—a place "for reflection and review." In the chapter titled The Move To Gold, the book quotes Munk himself:

"At Klosters I have made some of the most important business decisions of my life. Because when I'm there I can see the forest, not just the trees." His move from oil to gold was decided there…

"I certainly now believe that Klosters is a very important part of why I'm maybe a bit different from other executives, because there I have a vantage point. I go at Christmas and come back at Easter; I have a little office, but I don't work that hard. I like to ski for four or five hours…"

Here's what Wikipedia says about Klosters:

The Klosters ski resort has long been the winter destination for the British Royal Family for over 3 decades.[9] Prince William and Prince Harry grew up in the village learning to ski and were often spotted at their usual haunt Casa Antica.[10] Among other historic notable usuals include the likes of Paul Newman, Gregory Peck, Yul Brynner, Lauren Bacall, Juliette Gréco, Irwin Shaw, Robert Capa, Greta Garbo and Gene Kelly… In more recent history other regulars include, Lord Mandelson, billionaires Nathaniel Philip Rothschild,[13] and Peter Munk[14]...

Can you imagine Peter Munk, perhaps in the winter of 1982, in Klosters asking one of the Rothschilds about how to preserve intergenerational wealth, since he'd just made and then lost a fortune in the previous three years? Clicking on Nathaniel Philip Rothschild, we learn that there is indeed a connection between him and Peter Munk. Nat is "a member of the International Advisory Board of the Barrick Gold Corporation."

With a quick Google search, I also found that, in 2011, the 83 year old Peter Munk showed up with his 140 foot yacht named the Golden Eagle at Nat Rothschild's 40th birthday party. Incidentally, Munk's yacht was named the Royal Eagle before he changed the name in 2010 to Golden Eagle. Nathaniel Philip Victor James "Nat" Rothschild would have only been 11 years old in the winter of 1982, but his father is Nathaniel Charles Jacob Rothschild who would have been 46, and who made the news just last month.

But Peter Munk was not only hanging around with the Rothschilds and other European elite during this time, he also counted some powerful Saudis among his friends and investors. From the book:

[by 1983] Munk had enlarged the stable of investors in Barrick Resources to include not only Adnan Khashoggi, Prince Nawaf, Joe Rotman and Norman Short, but also Kamal Adham, a former financial advisor to the Saudi Royal family.

From Wikipedia:

Adnan Khashoggi is a Saudi Arabian businessman. At a peak net worth of up to $4 billion USD in the early 1980s, he was considered one of the richest men in the world. Khashoggi along with Kamal Adham was one of the founders of the gold company Barrick Gold Corporation, established in 1983.

Kamal Adham (1929 – 29 October 1999) was a businessman and former director general of Saudi Arabia's Al Mukhabarat Al A'amah or the general intelligence directorate. He served as a royal counsellor to both King Faisal and King Khalid.

Nawwaf bin Abdulaziz is a senior member of the House of Saud and was a close ally of the deceased King Abdullah.

During some time he spent in Australia in 1982, Peter Munk claims that he "learned how to do a profit-and-loss of a gold mine on the back of an envelope." And in 1983 and '84, through Barrick Resources, Munk started buying up gold mines and dumping his oil and gas investments, and he was only interested in producing mines, not exploration companies.

By 1985, he was actively improving the efficiency and productivity of the mines he was buying:

With the funds already in hand, Barrick closed on the Mercur deal in June 1985.

Smith and his team immediately went to work installing new high-tech equipment with the financial assistance of the Bank of America. A $10-million state-of-the-art autoclave unit was the major piece. When it was installed, processing went from 3,000 tons per day to 5,000 tons; morale among the workers took off, the cost of recovering the gold out of the ground was down from US$285 to US$199 per ounce.

This reminded me of something Another said about what the CBs expected to happen in the mining industry in the mid-80s:

The BIS and other various governments that developed this trade ( notice I didn't use conspiracy as it was good business, as the world gained a lot ) , thought that the paper gold forward market would have allowed the gold industry to expand production some five times over!

More from the book:

Production and productivity went through the roof.

In February 1985 Peter Munk had announced his strategic goal for Barrick Resources: in three years its mines would be producing 300,000 ounces of gold a year. In 1984 the production was 34,000 ounces.

As 1985 closed out, Peter Munk was beginning to maximize the leverage that only ownership of the gold reserves of producing mines could bring. He borrowed (at 2-percent interest) 77,000 ounces of gold against Mercur's reserves. He then sold that bullion on the open market for US$25 million. Those funds were used to pay off the total short-term debt to the Bank of America, leaving only $8 million in long-term debt for the Mercur acquisition.

Munk's involvement in pioneering gold-backed financings was emerging.

You might be thinking, like I was, that if Peter Munk was the one who asked the "first questions" that FOA was referring to, then why was he buying mines and not physical? Does this make sense? Does it fit with the storyline we learned from Another and FOA? I think it does.

First, understand the difference between a company and an individual. Companies don't ask questions, individuals do. And companies don't have intergenerational wealth, individuals do. Companies are groups of people doing things together in order to make money, not simply to avoid losing wealth that was previously attained. So even if Peter Munk learned something about preserving intergenerational wealth in the early 80s, I think it also fits that he took his company in the direction he did.

Consider that, in 1983, Munk was maybe personally worth around $10-$20M (just a guess based on what he'd just made and then lost). Then he got into gold mining and became a billionaire over the next 10-20 years, even while the price of gold was declining from $500 to $250. How on earth did he pull that one off?

Well, for one thing, he left the actual gold mining to his employees while he engaged in money mining! More from the book:

During the remainder of 1987, Munk focused on raising capital for American Barrick Resources. He left the mining development to Bob Smith and his professionals. Munk and Gilmour, with their expert number-cruncher partner, Bill Birchall, would orchestrate the money mining.

How he did that was groundbreaking. One almost wonders if the BIS was involved behind the scenes as Another said. In fact, in the book, there's a curious story about a big Canadian bank (also a bullion bank) who, in 1986, suddenly did an about-face and started courting Munk.

In 1985, Royal Bank of Canada (RBC) was in a fight with Barrick over $74M, and the bank accused Barrick of dishonesty. Then, a year later, the bank suddenly apologized to Peter Munk in grand fashion and made nice, and then a year after that, the same bank made the largest gold loan ever to Barrick. Here's how Peter Munk described it:

A year later, in 1986, Brian Gregson, one of the top people of the Royal, came from Montreal and gave a beautiful lunch at the Royal Bank dining room. There were all the big shots from the Royal Bank. Gregson said, "We're giving you this lunch in the most prestigious of the boardrooms in the Royal Bank to tell you how wrong we were and how right you were. And we're here to tell you that we at the bank don't very often apologize, but we apologize." Because of that, the Royal Bank remains our favourite Canadian banking institution. Two years later, we went to them for the largest gold loan ever done in the world, 1,050,000 ounces. We sold the gold for US$450 million. It was because of that single action, the lunch and apology. It was a very gentlemanly thing for them to do.

How often do banks come cap-in-hand and throw a fancy lunch in their finest boardroom to apologize to a client? It makes me wonder if someone wasn't pushing them to make nice with Barrick. Here is Another discussing these deals where he makes it clear that the CBs were behind the deals:

Date: Sat Feb 21 1998 23:47
ANOTHER (THOUGHTS!) ID#60253:

A CB lends gold at 2% to a producer for a better purpose than make money on idle asset. This gold loan is now the gold asset with a mine behind it! Such assets are traded and create solid paper for oil. If reason for good return was real, it would look like below. Read ABX page and consider, please.

There is much with this question!

Why doesn't a CB enter into a "reverse spot deferred gold contract" from the same Bullion Banks it lends gold to? Conditions:

1. CB lends gold at 2% to the Bullion Bank.

2. The Bullion Bank sells the gold at $300US.

3. The BB earns interest on the proceeds.

4. One year later, if gold is below $300, the BB buys in the gold and the CB gets its gold back plus the contango.

5. OR, if gold is above $300, the CB invokes the "spot deferred" clause and lends more gold at $300+ to the BB. The first deal is deferred until another time as intrest builds.

6. In this process the CB will bypass the gold companies and gain more return.

Read the ABX hedging page, we discuss at another time!

www.barrick.com/f-hedge.htm

You see, Barrick was essentially selling gold that it hadn't yet dug up for $428.50 an ounce. And as we now know, the price fell to $250 over the next 13 years. The more mines Barrick could acquire and the more in-ground reserves it could claim, the more paper gold it could sell! Here's more from the book:

Munk had successfully completed, in September (of 1986), a deal with Merrill Lynch Canada Inc. for the sale of C$43 million worth of units of American Barrick's common shares and gold purchase warrants. Each unit offered consisted of one common share and two warrants to purchase gold at US$460 an ounce. For those who had faith (or were prepared to bet) that the price of gold would rise beyond US$460 by September four years later, the enticement was complete. Merrill Lynch had no trouble selling them.

[…]

On March 13, 1987, an ad in the Wall Street Journal announced the sale, worth US$50 million, by Barrick Resources (U.S.A.) Inc. of "2% Guaranteed Gold Indexed Notes due 1992"; redeemable for (a) a cash amount indexed to the price of gold or (b) at the option of the holder, gold bullion, and unconditionally and irrevocably guaranteed by American Barrick Resources Corporation.

[…]

On Thursday, October 29, 1987, Barrick arranged a gold loan of 263,713 ounces from the Toronto-Dominion Bank. This was a major deal that TD chairman Dick Thompson was pleased to approve, and it allowed his friend Peter Munk to authorize the immediate sale of that gold by Barrick into the market for about C$160 million. The initial interest rate for the TD loan was a phenomenally low 1.65 percent annually.

By this time, the cash in hand and short-term investments of American Barrick were over C$300 million. Peter Munk had funds substantially in excess of the planned capital spending programs for both Goldstrike and Barrick's Holt-McDermott mine in Northern Ontario.

For Peter Munk, at Klosters with Melanie on the eve of the New Year of 1988, there was ever reason to celebrate…

All kinds of paper gold! It's amazing, Barrick was essentially in the business of selling paper gold and delivering the real stuff later. The declining price was not only good for Barrick, but as we now know, this process of expanding the paper gold supply had a hand in making the declining price happen by diverting real demand from physical. Barrick shares did very well, "oil" got "solid paper" and some physical gold, and Peter Munk, the "golden phoenix", became a billionaire in the process, all while the price of gold was declining. Can you see how it makes sense?

Date: Sun Apr 19 1998 15:49
ANOTHER (THOUGHTS!) ID#60253:

It truly started with Barrick, in Canada in the 80s. It was a "thin market", but grew big in oil.

FOA (5/15/99; 21:38:42MDT - Msg ID:6212)

One of the first signs that a new gold market was being created was when bullion banks were allowed to sell Central Bank gold "ownership invoices", for cash to the benefit of Barrick. The CBs got only a very small rate of return for this risk. The money set in a bank account and interest was made. The new owners of the gold paid cash but let the gold set in the CB vault. All that happened was that Barrick could earn interest on its unmined reserves and call it "the higher price they were getting for gold"! In addition, the CBs said they could roll it forward for ten years +/-, if the price of gold rose! Really clear eyes could see that the CBs were paying mines interest on unmined reserves if they would replace the CB real gold with mine collateral. Because the gold didn't really leave the vault, the new securities were used to match the mine future assets against the new owners of the gold!

Neat trick. After the public bought it as "the CBs earning interest on a nonpaying asset", the gates were opened. It wasn't long before gold was lent without any gold at all! No different than "fractional reserve" banking. The mines were (are) being used to expand the gold trading arena and they don't even know what is happening. Now, as the price has fallen, all mines must earn interest on reserves, just to survive. The dollar bears are, in effect, nationalizing the mines gold reserves at ever lower prices. Tell me the CBs are dumb???

FOA (5/16/99; 13:50:14MDT - Msg ID:6244)

Why would anyone conclude that Barrick was a "passive foil" of the BIS? At the time, they made a smart, innovative move that allowed them to earn interest in unmined reserves…

It was never done before on this scale, but that is only because the CBs never had a reason to lend gold for almost zero return. I am taken by the naivety of the public and the boards of these companies. It shows the extent that greed holds when no one asked why the CBs were suddenly giving away gold to lend. Remember that interest rates were much higher when all of this lending started.

Trail Guide (11/02/00; 08:07:42MT - usagold.com msg#: 40451)

The original "gold deal" as it first came into play involved lending the gold, the borrowers (BBs) selling it for cash and then they (the BBs not the mines) pooled that cash in a holding account. There it was held in interest bearing instruments, not delivered as financing to the gold mines. That pot of cash grew with its added interest and became the ever increasing per ounce price the mines sold their production to in later years. Fulfilling their contract.

Having entered into these contracts that guaranteed a pot of cash to buy their gold production, the mines could use these contracts as fixing their profit margins to borrow money against and expand their operations. OK;, so this is how it started. I think American Barrick was the pioneer of this back in 1986??

But, as I opened with above, this was just a lead-on sanctioned by the governments to create a market for paper gold dealings. All the rest that followed we have discussed endlessly. However, my main thrust in this is that the CB did have a political return to gain by starting this, it wasn't done for free.

Now, if this was a real lending operation with the intent to get some return on their idle bullion, they could have easily structured it far differently. As it is they lent the gold into a contract scheme that gained them far less then the actual rate returned. The mines would have been happy to create the deal even if it fetched a static guaranteed gold purchase for them. Thus giving the CBs a much higher return. You see, the mines motive was not to receive a higher than market price for gold, rather receive a stable price for gold so financing could be arranged. The fact that gold prices fell made Barrick (and many others) look real good and their staff stood for all the praise. When in fact they didn't know it would work this way (back then).

Today, and over the last few years, with gold ever falling, all sorts of gold deals have bee worked out that have no connection to the CBs. A lot of it is completely outside the mine industry too. It's been carried so far that much of the stuff is just naked financing based on gold's price. The real return was in playing the official stance that gold must fall a little every chance it had to encourage dollar settlements for trade. It's that simple.

Trail Guide (06/27/01; 17:51:32MT - usagold.com msg#: 57005)

ABX has evolved into little more than a banker's extension. One that trades gold for their gain. On ABXs side,,,,, I see their massive paper short position as a financial tool that allows them to make a return on in place reserves without mining them in total,,, at once. That is all their program is really doing. It's a product of banker's games.

The greatest risk for them could be that a good portion of their dealings may not have involved CB gold sold short,,,, and they didn't know this for a long time. The other side of those trades were real cash buyers that simply wanted to work their money in government debt while waiting for the mine to produce gold. The buyers were willing to do this because an outright buy would have gunned the market…

Ha! Ha! It's kind of a joke when one thinks about it. The mine was leveraging their unmined assets to produce a simple return and telling their investors it got a higher realized price for gold production (and it was) ,,,,,,,,, while locking out any chance for profit if gold ran.

FOA (10/15/01; 07:49:09MT - usagold.com msg#120)

It's no accident of nature that our world monetary structure embraced derivative expansion as it has over the last ten or twelve years. I think we can say that this modern creation of risk management began around 1988 or so. ( It's funny, but I remember living in San Diego and reading a paper about a gold company called Barrick that just started only a few years earlier?)

Golden Phoenix standing atop the Golden Eagle

Sincerely,
FOFOA