Wednesday, September 17, 2008

The Picture ANOTHER Paints

This is a repost of a comment I made in a previous article:

Everything but physical gold has counterparty risk. It is everywhere. The counter party to the dollars in your wallet is the US Treasury, ultimately the whole of the taxpaying American public. That can and is being defaulted on by printing new money and deflating the value of what is in your wallet. Everything the investment banks hold on their balance sheets has even bigger counterparty risk. For one bank to live up to it's counterparty obligations requires another bank living up to it's obligations, and on and on ad infinitum.

The mob enforcer is these banks short selling their peers into bankruptcy. When they don't live up to their counterparty obligations, their peer bankers take them out. Bye bye Bear Stearns, bye bye Lehman. And there's always a next on the list until they are all gone. Buh bye.

You ask appropriately "Is the dollar that desired around the world, or can Europe, Asia, and the Middle East do without them?"

ANOTHER would answer this question with, "The world currency system has, for years been little more than digital credits backed by "usage demand"."

So as long as the majority of "things" (oil being the biggest) is priced in dollars, the usage demand will be there. That may end soon.

Also, these foreign countries find economic strength (falsely) in keeping their currencies weaker than the dollar. They see this as helping their economy by making their products cheaper on the world market. But all it really does is make their citizens holding their money poorer on the world market. Yet still they buy dollars to keep their currencies lower. This still goes on today.

Then, ANOTHER would say, "In the long run it was oil backing the US$ that kept it all together! It truly is strange, that in the end it was gold that backed oil! In a even more strange twist, [the Central Banks refusing to part with their physical gold just to support the failing COMEX gold futures market] will bring the system down!"

I think this too is coming. If the dramatic rise in gold continues in the face of physical shortages, look for a major default within the next 90 days.

You say, "Oil is traded in dollars. Oil producing nations get our dollars, and have nothing else they can do with them but buy our limited manufactured goods, and our financial, real estate/ insurance goods and services."

This brings up one of ANOTHER's biggest points. He claims to have inside knowledge about some deals that were made, presumably with Saudi Arabia, and presumably in the early 80's. My post titled The King and his Gold was my attempt to present briefly what ANOTHER said over 3 years. It's probably not totally accurate. That's why I made it into a story. But I think it captures the message he was trying to get across.

The point he makes is that they aren't interested in the dollars or the goods, etc... only in the gold that they can get for those dollars. Because they have a different view of gold than we do in the West. We view it as a commodity and they view it as wealth. But to trade gold for oil on the open market would explode the price of gold, so instead they keep the price of gold low and let the Saudis buy it from the mines which are forced to produce it and deliver it at the price on the COMEX.

If gold were to trade freely, the Saudis would get much less gold for each barrel of oil, but they would be just as happy. And the longer it takes before that happens, the more wealthy and powerful the Saudis will be once it does happen. And it will happen. It is one of those inevitable consequences of a manipulated system.

You say, "Now, those nations have the Yuan because China bought their currencies". This is not totally true. A lot of the dollars bought by the Chinese Central Bank come into the country through the trade of goods. The Chinese people sell goods to us for dollars. Then the banks buy those dollars from their citizens. So instead of holding the Yuan, we hold the goods it makes instead. By buying these dollars from the citizens, the Chinese banks keep the dollar valuable, and keep the Yuan down.

Of course the Chinese could do us great harm by spending all the dollars they hold in reserve. But so far, they do not think that is in their best interest. They don't yet fully realize that they would be fine without the American consumer.

Dollars ARE debt. Remember, the counterparty to the dollar is the American taxpayer. So as long as the dollar is the world reserve currency, our debt is their currency. And their government is STILL trying to keep our debt valuable. Why? Because it will be painful to make the transition, and pain is politically difficult to sell.

I agree that everyone could uncouple from us. But so far they are too timid to do that.

The incentive for, lets say China, to see the price of oil rise, is that they can get all that they need. If the law of supply and demand is alive and well, then a correct price puts the product where it is most needed. If the price is lower than supply and demand says it should be, there will be shortages where it is most needed. What good is a loaf of bread for 99 cents if the store is sold out? Wouldn't you rather pay more and always be able to get some?

You are right about the FDIC. I think that will become the most hyperinflationary problem in the next year.

The problem is that there are more "digital credit units" (dollars) out there locked up in banks and investments than there should be. If everyone ran to the bank to get theirs out and spend them, there wouldn't be enough. And this goes for investors cashing out their holdings as well. There are just too many. There's should only be about $60 Trillion worth of dollars out there in the whole world (including all currencies). Yet there are between $600 Trillion and $1 Quadrillion worth of "digital units" of derivatives and other stuff out there.

So as we bail out banks, and ultimately the FDIC bails out individual accounts, we will be converting those "ghost credits" into real, spendable dollars. That is hyperinflationary.

Your final paragraph is this, "I have no idea about gold and silver. With a somewhat operating Europe and Asia, the price might not really move to its former highs. But if there is a war with Iran, it will likely jump up out of panic. Most Americans don't really have much available cash to buy gold or silver, only bread and milk and college tuition and car payments and mortgages. They are hoping once their bank fails they can get their cash out."

This brings up another one of ANOTHER's main points. That we of "Western thought" see gold as a commodity. You use the word "price" with regard to gold. Would you say "the price of the Yuan"? More likely you would say the exchange rate of the Yuan. Would you say you don't have much cash to buy Yuans because you are buying bread and milk? No, because there is a difference between what you hold for wealth and what you spend to live. "Western thought" has programmed us to think of gold as a commodity. But in reality it is an artificially suppressed currency. This is proven by the fact that foreign Central Banks hold gold as part of their "foreign currency reserves". In the Euro countries, the members are required to have 15% of their foreign reserves held in gold.

So as you can see, the GIANTS of this world see gold differently than we the people do. Perception rules our world right now, just as in The Matrix. But after the collapse, the Matrix will be destroyed and reality will once again rule. At that point, those that hold physical gold, including countries, central banks and individuals, will have infinitely more wealth than anyone left holding worthless paper.

ANOTHER says that upon the crash gold will stop trading everywhere. And for a long while it will not trade. It's value will not be readily known. During that time, holding a bar of gold will be like possessing an original Van Gogh. It is not the most liquid of currencies. In fact, you probably have to auction it off if you want to spend that wealth. That is because it is so rare and yet it is valued by many people.

So imagine a world where the US dollar is carted to the market in wheelbarrows as it is in Zimbabwe. There is no Kitco gold price website anymore, because gold is not traded. It is simply a valuable store of wealth. And it's value must be calculated by it's rarity with respect to the amount of people and things in the whole world when they are compared to the amount of gold in the whole world.

Also, gold mines will not be producing much gold at this time because they will either be nationalized or they will be so heavily taxed that there will not be much profit in it for them.

This is the picture ANOTHER paints. It is both rare AND valuable.

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