Sunday, November 16, 2008

Gresham's Fractal

Gresham's law states that "bad money drives out good". What this means is that bad money drives the good money out of circulation. Think about silver coins, pre-1965. If someone had $50 in silver coins and $50 in paper money, they would put the silver in a jar in the closet and they would spend the paper money. So the paper would stay in circulation and the silver would go into hiding.

In our current environment, legal tender laws do not allow gold to function as money. Nevertheless, central banks around the world still hold gold as a "foreign reserve". So the world has not forgotten its "money function".

Also, in our current environment, it is a widely held belief that the value of physical gold is greater than the price of paper gold. So in a way, it is behaving like a competing currency. If you have $700 in cash and one ounce of gold, you are more likely to spend your cash and stash your gold.

This explains the apparent shortage of physical gold right now. It is Gresham's law in effect, even though gold is not legal tender.

But on the national scale, we hear stories about China, Russia, the Middle East and others "diversifying" their reserves into gold, and away from the dollar. So are we seeing the large scale fractal pattern of Gresham's law?

One thing we know from Ender is that the dollar gains value from usage. In other words, the USDX will rise when the dollar is being used in great quantities. The USDX does not go up if everyone is stuffing greenbacks in their mattress.

And the flow of value from unreal derivatives to real things, like gold, must pass through dollars. So that explains the recent rise of the dollar on the USDX. It doesn't mean that people or nations are stashing their dollars in the closet... it means they are SPENDING them. All the trashy derivatives in the world cannot be used to directly purchase real things like real estate or gold. They must first be sold for dollars, then those dollars can be used to buy real things. This is happening right now.

So let's go back to Gresham. The "good money" disappears into a glass jar in the closet. This is gold. It is not available on the open market in great quantities right now because those that have it are net-hoarders, not net-sellers. On the other hand, the "bad money" is spent. This is the dollar, in which an increase in transactions is reflected in a rise on the USDX.

So I propose to you that we are currently witnessing the fractal pattern of Gresham's law being played out on the largest scale. The close view of this will seem confusing, or "chaotic". But the long view makes perfect sense.

Look at Hugo Salinas Price's graph again. Foreign paper reserves (which are mostly dollars) are declining at $30 billion per month. At that rate, they would reach $0 in 20 years. That's pretty fast when you consider that they took 40 years to reach this height. Also, that would be a completely linear decline. But we had a parabolic climb. So it is likely that we are just seeing the topping right now, and the steep decline is yet to come. In any case, these reserves don't have to go to $0 to cause major problems for the dollar. In fact, just by not increasing exponentially, the dollar dies, simply because this change causes the inability of the US to keep paying its mounting interest payments with new debt. This would mean either a crushing economic super-depressionary collapse, an outright payment default, or a hyperinflationary printing default, a la Zimbabwe. These options are unavoidable in this situation, which is almost assured at this point.

So the bottom line is that Gresham's Law is killing the dollar right now. And it is an exponentially accelerating process. So I will go out on a limb here and predict that given the G20's impotence this weekend, we should see gold over $1,000 possibly by December 1st, and probably by Christmas. I give it a 25% chance for Dec. 1 and a 50% chance for Christmas. In other words, some unknown, unpredictable human action is required to stop this from happening, and I give that unpredictable event a 50% probability.

Further, I believe we will see a major sea change taking us in the direction of FreeGold possibly by January 20th, and probably by February 20th. Personally, I put a 25% probability on this. Increase that probability to 40% by the April G20 meeting and 50% by July 1st. I give FreeGold a 75% probability by the end of 2009. So please, by all means, be sure to "diversify" your financial portfolio accordingly.



FOFOA said...

This is an excellent article from Eric Janszen at He is saying the exact same thing as I have been saying, and exactly the same thing as Another was talking about. The only difference is that EJ is very careful not to mention really high prices. But that does not mean he doesn't fully expect them.

A year ago when I read his book, America's Bubble Economy (he contributed the gold chapter), I was struck by this statement in the book: " its height, gold prices could become truly stratospheric--so high, in fact, we won't even mention our best guess for fear of losing credibility."

His sentiment in that statement comes through very clear in this article. This subtlety, however, seems to be lost on much of the iTulip community, even though they hold their leader in such high regard.

I note that Janszen thinks it will take two years for things to get bad enough for us to see a FreeGold price of gold. Personally, I don't think any semblance of the status quo can hold on that long. Everything I see is exponentially and parabolically peaking right now, or it has already begun it's crash. To me, this suggests a great acceleration is in the works.

FOFOA said...

The new Leap2020 is more aligned with my thinking. While Janszen puts the real pain two years out, Leap puts it at next summer, a timeline to which I assigned a 50% probability above.

And with gold not yet in the picture, Leap2020 notes that the FT in London is starting to add up the United State's "wealth reserve". This is eerily reminiscent of a bankruptcy court taking stock of someone's assets just prior to handing them to the creditors. Or perhaps even a pack of wolves sizing up their dinner while it is still alive:
"Sign of the times, the Financial Times has started to list the US federal state’s tangible assets: military bases, national parks, public buildings, museums, etc… everything has been evaluated for a total amount of approximately 1,500-billion USD, i.e. more or less the probable amount of the budget deficit in 2009 (see the detail of these assets in the chart below)."

Anonymous said...

how do you interprete the last sentence of Bernanke in this video:

FOFOA said...

Ron Paul: Does the subject of gold ever come up in any of your conversations?
Ben Bernanke: Only in terms of the sales that the central banks are planning.

I think that was actually an honest answer. Central banks sell their gold to keep the price of gold down, to in turn, keep the price of the dollar up. And in Ben Bernanke's world, that is what gold is for.

A good follow up question would have been "which central banks are those? And how recent was that conversation?" Because if central banks other than the Fed are still planning sales of gold with Ben Bernanke, then my guess is they are pulling his leg. Why would you tell someone as powerful as head of the Fed that you were going to do something you had no intention of doing? You would only do that if you thought that the collapse of the dollar was so imminent that your time to sell would never come.

This reconciles perfectly with how I believe the G20 meeting went. The US leaders laid out the rules, and the others all nodded their heads, knowing full well that judgement day is not far away.

In other words, Bernanke and Paulson are now out of the loop, and they don't even know it. That's my interpretation.

FOFOA said...

Taking that thought further...

If I believe that was an honest answer from Ben, which I do, then it has other implications.

The first is that whatever is being planed on a global scale will not include the dollar. If we are to see a "basket of currencies" become a new world reserve, the dollar will not be in that basket. This is really bad news for America. Other possibilities could be more along the lines of Another's Thoughts. "Oil" has refused to support the IMF (which IS the dollar faction) and is buying gold right now. Taken in light of Ben's answer, this is also really bad news for America.

I am certain that something big is being planned somewhere. And I had hoped that we were in on it. It appears this is not the case. Unless that was a complete lie from Ben and he is a really good actor, which I doubt.

CAUTION-Trouble ahead

Anonymous said...

Ron Paul should have asked Bernanke WHY the ECB is marking its goldreserves to maket and the UST isn't !

FOFOA said...

These are some interesting posts from EconomicRot from back in June and late July.

Link 1
Note that this was in July, and Lindsey Williams predicted $50 per barrel oil was coming. He said the "illuminati" gave him this tip. At the time, oil was around $130 per barrel. Today it is $54 and dropping...
"Back in June, I told you about Lindsey Williams - who was an ordained Baptist minister in Alaska during the energy crisis of the 70's. Lindsey was present in several "Top Level meetings" when the largest oil field ever discovered in North America was celebrated (Gull Island Oil Field)-- only to become "Classified" the next day and never tapped/put to use.

Why? To control oil supplies and establish a dollar pricing agreement w/OPEC -- so OPEC would recycle those dollars, and buy our national debt and establish US Dollay Hegemony, as the country who controls oil and oil pricing, controls the world.

For those of you unaware, recently (due to subject sensitivities) Mr. Williams' life was threatened and he was forced to shut down his web-site and stop selling his books and CDs."

Link 2 These are videos of a talk Lindsay gave in 2006. The message is similar to Another's.

Anonymous said...

Interesting post! I agree that bad money, including COMEX paper gold contracts, is driving out good (physical metal). In fact, the market for physical metal has become a de facto black market, except that it's not illegal (yet), like black markets usually are.

I think something big is coming, even if it's not being planned. Money and Markets has an article ( that suggests Middle East countries are moving into gold out of fear of something. Perhaps they know what's coming.


Ender said...

Not exactly sure. And, not exactly sure what you’re hinting at. Can you provide your point of view?

Side reading:

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