Thursday, November 26, 2009

Saturday, November 21, 2009

Gold is Wealth

Why should we own gold? What is gold good for? What does it mean to say "gold is wealth"? And what exactly is wealth? We have contemplated the pure concept of money. [1][2][3] How about the pure concept of wealth?

We all have needs. In fact, we all have the same needs in sustaining our lives. In some things, some of the most essential needs, we are all equally and extremely wealthy. We could even build a pyramid of these needs and their supply relative to our demand for them. In many cases, the most needed things are in such complete supply as to overwhelm demand. No need to hedge against a future shortage of these things through derivatives or swaps. You see, wealth in fact is anything that helps us in meeting our future needs. To have more than you demand for immediate survival is to be wealthy!

Take, for example, the Higgs Boson. Assuming this particle actually exists, it is the foundation of all things, of all life. It is something we all need in order to survive! We would simply disappear (or not exist) without it. It is what makes matter matter, so to speak. And again, assuming these things really exists, then there must be plenty of them around. More supply than we demand. Or at least, theoretically, the perfect supply to meet demand at all points in time.

Another essential need we all have is gravity! What would you do if you ran out of gravity? Float away? Thankfully we have a plentiful supply of gravity that "outweighs" demand. ;)

How about sunlight? Are you wealthy in sunlight? Well, we may not all be equally wealthy when it comes to sunlight, but there is no doubt that we all need it to survive. And amazingly enough, supply seems to always meet demand without the need for hedging or storing sunlight for future use.

Moving on up the pyramid we come to oxygen. Yes, there are some situations in which it pays to store oxygen for future use. If you are planning a trip to outer space or, perhaps, to the bottom of the ocean then it would make sense to hedge your bets and load up on more oxygen than you think you might need. The risk:reward ratio highly favors a surplus of oxygen in situations where it is possible for demand to outrun supply!

Topping off the pyramid we have the needs we humans all strive to secure, food, clothing and shelter. And in our modern world of electronics and internal combustion we could also add energy to this list. Under the most extreme conditions, we could probably find wood to burn in the forest for cooking and heating. But who wants to live like Ted Kaczynski (pre-arrest)? Even Mad Max had fuel for his car!

But luckily for us, 5,000 years of trade have taught us that we don't need to plan as meticulously for survival as an astronaut or a deep sea diver. As Aristotle [4] explains:

We can generally blunder our way through day to day and year to year in the comfortable fact of life that, through the open market--through the ability to trade with others--we can generally obtain what we materially need in one facet in exchange for some of our own wealth in another facet. Food for clothing seems like a pretty reasonable medieval exchange, doesn't it?

We all know the inefficiencies of barter, don't we? As civilization and trade evolved from the dawn of man to the 20th century, Gold revealed itself to be the single most reliable, universal agent that could be traded in various quantities for anything anywhere on Earth. Maybe most remarkable in this is that Gold is not itself something that is needed or consumed in satisfaction of our basic material needs for survival. But due to it being perfectly and uniquely suited for this universal role in trade for any other person's available wealth as necessary to meet our own specific needs, Gold has become such a near proxy for the real wealth we require for life that many of us have permitted ourselves the casual inclusion of Gold into our otherwise strict definition of wealth.

Those in the financial industry have come to call this universal wealth asset (Gold) by the name "money," but that unnecessarily confuses the issue. In their efforts to facilitate various objectives in modern life, those in the financial industry endeavored to master the alchemist's craft--to methodically create "money" from such substances as worthless base metals or from paper. Even the village idiot can clearly see that "the bankers and others" didn't succeed in creating Gold. But the village idiots were never so sure that these nickel coins and paper notes weren't in fact successfully turned into this other thing that the experts called "money." As for me, I'm comfortable calling these lesser creations by the name "currency," and further, I recognize that they can and do serve a useful purpose in modern society. With this distinction I am not so easily baffled as the village idiots into thinking that these currencies created in the image of "real money" can actually attain the superior wealth function of the asset they sought to imitate--that being Gold. And you shouldn't be fooled either.

Every currency made in imitation of Gold goes hand in hand with the financial architecture that supports it right into the trashbin of failed efforts, and are logged into the collective wisdom of those who vow not to be fooled again. Based on the "conception, care, and feeding" of the various currencies and their supporting architectures, the life span--or timeline--of predictable rise and fall milestones may vary in length from one currency to another. They may serve a purpose while they last, but they all suffer the same eventual demise at the hands of inflation. Remember, these currencies are man's artificial attempt, time and time again, to imitate Gold for use in modern commerce. They are built for speed--built to be borrowed specifically, and spent rapidly! They are not suitable for saving. For that you must turn to the master--the near-wealth proxy upon which all currencies must bow down in inferior imitation.

So you see, learning how the world works is all about each man coming to the understanding about the real wealth we all require to best ensure our survival. Knowing that Gold is the master proxy for our life's day-to-day and year-to-year shifting requirements for food, clothing, shelter, and energy, it simply makes more sense to gather in Gold for later use than to gather in clothes (that we may outgrow,) food (that may spoil,) houses which are more than our needs, or energy (that we can't store.) You see, time bears witness to this undeniable fact: Gold can be called wealth because it is an enduring wealth proxy in exchange for our life's needs. Currency, on the other hand, serves a specific modern economic purpose--to be borrowed and inflated in placation of man's immediate desires. It is not wealth, it fails as a proxy for the Gold it tries to imitate. Do not confuse the two.

I think we can chop off the bottom four "foundational" layers of our pyramid now, since they are in full supply. Let's think of them as the solid ground upon which this wealth pyramid stands.

Now that we have established a solid pyramid of life's necessities and the need for a pure wealth concept in order to secure a future supply, let us take another look at John Exter's inverse pyramid of paper products based on wealth derivatives. I first introduced this concept on my blog in the post called All Paper is STILL a short position on gold. And by the way, George Washington himself [5] helpfully pointed out that the image I used, from Wikipedia, may not be the correct Exter pyramid. Perhaps Trace Mayer's pyramid [6] is better. In any case, let's make a fresh one for our conceptual purposes:

Next, let us place this paper derivative inverse pyramid atop the real wealth pyramid. Let's see how it looks!

Does it look a little like an hourglass?

Now picture this. The inverse pyramid on top is actually ten (10) times larger than the pyramid on the bottom. And it is 100 to 200 times larger than the golden capstone!

In ancient times gold was the very best item for trading and as such, it became the very best wealth reserve. Later, gold became currency and came to be known as money. Today, gold is commonly believed to be only a commodity and is traded as such.

I propose to you that we can estimate that as a mere commodity today, gold is relegated to a trading range of between $700 and $5,000. As a currency, which it has not been since at least 1933, it would be range-bound between $4,000 and $11,000 according to Jim Rickards. [7] And set free to fill its ancient role as a wealth reserve, gold will rise to somewhere between $10,000 and $100,000 in today's dollars.

Be wary of the "men's suit comparison". Just a couple hundred years ago a wealthy man amidst 1 billion others on this planet might have had a handful of fine men's suits, a nice house and a large plantation. Today a wealthy man would have dozens of fine suits, a couple mansions, a large yacht, 29 flat screen TV's, an iPhone, and a sizable paper-wealth trading account. And that is among 6.75 billion souls on the planet. Compare wealth with wealth, not suits with suits.

Can you imagine a gold price of AT LEAST $100,000 per ounce? How about a real purchasing power increase, measured in today's dollar purchasing power, to somewhere between $10,000 and $100,000? In the bell curve below we can see that the most probable PP landing zone is between $25,000 per troy ounce and $85,000 per troy ounce. Can you think of a better reason to invest in physical gold coins right now? How about protection from hyperinflation? $100,000 is the bare minimum in this case. The top is infinite! Imagine $12 trillion per troy ounce... the size of today's US national debt reduced to one single gold coin you could buy tomorrow! Can you imagine it? It doesn't really matter if you can't see it like I do, as long as you buy the coin. As JFK liked to say, "a rising tide lifts all boats", not just the ones that believe in rising tides.

You don't have to buy my story as long as you buy gold!


[1] Gold is Money - Part 1
[2] Gold is Money - Part 2
[3] Gold is Money - Part 3
[4] Full credit goes to Aristotle for his acute clarity of Thought. Sir Ari, where are you?
[5] The first president of the USA converses with FOFOA
[6] The Great Credit Contraction Liquidity Pyramid - By Trace Mayer
[7] Jim Rickards on CNBC's SquawkBox, 11/19/09

Wednesday, November 18, 2009

Sunday, November 15, 2009

Is the Dollar "Good as Tungsten"?

A chief Austrian finding is that counterfeiting causes malinvestment. The fact that most counterfeiting is done by governments and called monetary policy does not change the consequences one iota. --Richard Maybury

Counterfeit n (15c) 1: Forgery 2: something likely to be mistaken for something of higher value.

Imagine if the Louvre crafted a near-perfect counterfeit Mona Lisa and hung it in the gallery behind bulletproof glass. Then imagine that the Louvre held a public auction selling the real Mona Lisa, but also refused to admit that the one in the gallery was a fake. Ridiculous! Isn't it?

In most cases a counterfeiter wants to pass off his work onto an unsuspecting and paying public or to a specific mark. This is true for works of art as it is for currency. The counterfeiter must make his work at least good enough to pass muster with the inteded mark.

But it is a special kind of counterfeiter that hides his deception as a prized possession within his own collection, only to sell the real thing in hopes of reducing its value. And I do mean special as in education, Olympics and central bankers.

Alan Greenspan

The Tungsten Story

I'm not going to say too much about this story yet because I am still skeptical. I'm not skeptical because it doesn't fit the context that we know. On the contrary, it almost fits too perfectly. But this, I think, is my main point in this post. What is most important as we observe this unfolding story is our clear understanding of the context that surrounds it.

We live today in a world of rampant fraud and misinformation. Not much is surprising. In fact, I fully expect some surprises which will DWARF this tungsten story. But still, so far this story relies on the credibility of only one analyst who has uncovered, and/or been given, some incredible information. If the story is true, then we will soon receive corroborating stories from other sources for reasons that I will discuss in a moment.

If this story turns out to be true, then the context discussed on this blog and delivered by ANOTHER 12 years ago explains it perfectly. This context stands alone and aside from this tungsten story. Also, if the story disappears or turns out to be false, it does not invalidate the pre-existing context that would have explained it.


Some believe this story is a myth because gold bars are melted down all the time to make coins, jewelry, or specialized gold disks for industrial plating used in commercial-grade electronics. This argument doesn't hold water with me. As I said in this comment, "You would not just set them loose on the market. You could not afford for them to get sold to the commercials who would melt them down..."

No, if this story is true then the delivery of tungsten bars to the Chinese was a fatal "leak". And not necessarily an accident.

What I am skeptical about is this part:
I know folks who have copies of the original shipping docs with dates and exact weights of “tungsten” bars shipped to Ft. Knox.

Not that Rob Kirby is lying, but this part of the story seems less likely to me. First of all, you would have to move the new gold in and the old (real) gold out at some point. It seems unlikely to me that you would do this in a way that would a) create shipping docs, and b) leave them existing in the hands of c) someone who was free to later talk about it to Rob Kirby.

I would like to see these documents released online to be scrutinized. I would be happy to release them here. ;)

The one other thing I would like to see before I attack this story with the deadly seriousness it deserves, is some sort of a corroborating story out of China that they indeed unearthed a tungsten scandal. Perhaps there already is one. If so, please post a link in the comments section!

The fact of the matter is that there should not have been any gold flowing in or out of Fort Knox during the mid-90's, let alone the whole enchilada. So "shipping docs with dates and exact weights" of the bars would be very interesting to see.

Larry Summers

On The Other Hand

On the other hand, like I said at the beginning of this post, the Kirby story fits the known gold manipulation paradigm perfectly. Let's have a quick review.

In his article, Rob Kirby says:
And here’s what the Chinese allegedly uncovered:

Roughly 15 years ago – during the Clinton Administration [think Robert Rubin, Sir Alan Greenspan and Lawrence Summers] – between 1.3 and 1.5 million 400 oz tungsten blanks were allegedly manufactured by a very high-end, sophisticated refiner in the USA [more than 16 Thousand metric tonnes]. Subsequently, 640,000 of these tungsten blanks received their gold plating and WERE shipped to Ft. Knox and remain there to this day.

The mention of Rubin, Greenspan and Summers especially caught my eye. It tells me that Rob is thinking the same as me if this story is really true. For the sake of this quick run-through, let's imagine the tungsten bar story is true.

If so, this epic journey of stupidity by these three men began way back at the beginning of the Great Depression in 1930 when John Maynard Keynes wrote in his "A Treatise on Money" that interest rates and general price levels (infation) were observed to be correlated. Keynes called this Gibson's Paradox.

John Maynard Keynes

58 years later, in 1988, while at Harvard University Larry Summers published a paper called Gibson's Paradox and the Gold Standard. In the paper he theorized that government bonds could be made valuable by manipulating the price of gold downward. GATA summarizes it like this:
Essentially, the scheme as implied by Summers' paper is to keep interest rates down and government bond prices up by rigging the gold market, gold and interest rates ordinarily being inversely correlated.

I've long had a hunch that the scheme became U.S. government policy because of President Clinton's resentment upon being told, soon after taking office, that the foremost objective of his administration should be to placate the bond market. There is a famous quotation about this in Bob Woodward's book about the Clinton administration's early days, "The Agenda." The full book isn't available on the Internet but the quotation appears in several reviews of the book that have been posted. Clinton says:

"We're Eisenhower Republicans here. We stand for lower deficits, free trade, and the bond market. Isn't that great? ... We help the bond market and we hurt the people who voted us in."

Bill Clinton

So Clinton was elected in 1992 and took office on January 20, 1993. Meanwhile Larry Summers, who is known for proposing brash ideas, had left Harvard in 1991 and joined the World Bank as Chief Economist. On April 5, 1993, less than three months after Clinton took office, Larry Summers left the World Bank to join the Clinton administration as Undersecretary for International Affairs in the Dept. of Treasury.

One month later, on May 18, 1993, Alan Greenspan made an amazing statement at a Fed meeting that has only now come to light:
"I have one other issue I'd like to throw on the table. I hesitate to do it, but let me tell you some of the issues that are involved here. If we are dealing with psychology, then the thermometers one uses to measure it have an effect. I was raising the question on the side with Governor Mullins of what would happen if the Treasury sold a little gold in this market. There’s an interesting question here because if the gold price broke in that context, the thermometer would not be just a measuring tool. It would basically affect the underlying psychology.”
--Alan Greenspan (05/18/93)

Less than three months later, on exactly Aug. 5, 1993, the (c)overt gold manipulations begin:
The appearance of the intervention in NY, repeatedly led by principal actors JP Morgan Chase and Goldman Sachs, is so marked that a particular day August 5, 1993 can be identified as the date of onset of the anomalous downward trade in gold on the NY Comex. [1]

How do we know the date when the systematic interventions began? By observing their execution times. These actions are not divided evenly throughout the day, but instead tend to focus on important time points such as the PM-Fixing and the New York closing price. Additionally, COMEX trading hours are preferred. This creates an intra-day pattern that can be statistically identified and allows us to pinpoint the starting date of the interventions on August 5, 1993 (*). [2]

Robert Rubin

Of course Robert Rubin joined the team as Treasury Secretary on January 11, 1995, promoting Larry Summers to Deputy Secretary. This lasted until July 2, 1999 when Summers took over Rubin's job as Secretary of the Treasury!

A few years ago a man named Frank Veneroso did some amazing reseach on the mid 1990's and the gold market. This report is a must-read. Here was his conclusion about the mid-90's:
What are the implications of all this dry statistical analysis for the claims of GATA? To our mind, it is very simple. There is much evidence that the consensus data on supply and demand is wrong and that the supply coming from the central banks is higher than the consensus estimates. In our opinion, the fact that the central banks do not acknowledge this but simply keep affirming the consensus data---despite abundant evidence to the contrary---represents considerable support for the allegations of GATA that there may be something deliberate and intentionally clandestine about the large flows of official gold that have been depressing the gold price.

Now, with all of this context in mind, let's take one more look at Rob Kirby's "conspiracy theory"...
Roughly 15 years ago – during the Clinton Administration [think Robert Rubin, Sir Alan Greenspan and Lawrence Summers] – between 1.3 and 1.5 million 400 oz tungsten blanks were allegedly manufactured by a very high-end, sophisticated refiner in the USA [more than 16 Thousand metric tonnes]. Subsequently, 640,000 of these tungsten blanks received their gold plating and WERE shipped to Ft. Knox and remain there to this day.

Can you see now how his mention of Rubin, Summers and Greenspan caught my attention? I am still a little skeptical of the details, but the story sure seems to fit. It will be interesting to watch what else develops.

Clash of the Titans

I mentioned earlier that I would talk about why I believe that more information will definitely be forthcoming if this story is indeed true. Well, here it is.

Us little people (the Lilliputians) tend to believe that "the Giants" have a master plan for controling us and stealing everything we have. This is simply not true, hard as it is to believe for us lilliputians. Just because things work out a certain way doesn't mean it was planned just that way. Yes there are many evil plans. Yes there are some really bad guys. But with all the players in the global scheme of things the law of probabilities says that some will come out way ahead and be dubbed... "the masterminds".

But the way it works in reality is that there is a battle royale raging between these "Giants". I call it the Clash of the Titans. And in this tungsten story, as it stands today, one of these Giants has royally screwed another, and maybe many more.

Any Giant sitting on a hoard of 400 oz. LGD bars today as his personal wealth reserve is checking them out very closely. Count on it! And this includes some very large investors in GLD (among other ETF's) that were certainly not "in on the scam".

So keep your eyes peeled for relevant stories and please post them here. I don't have time to read everything. Like I said in my linked comment above, "if this duped buyer found out what he had, he might be inclined to keep it a secret until he could unload the bad bars on someone else." But now this strategy has changed. Now that Rob Kirby has published his articles, these "duped buyers" will come to the conclusion that it is better to blow the lid off this scam and go after the perps.

My Conclusion

It has been speculated by many people over the past decade that once we are in the heat of the fire the US Treasury's gold will be employed in defense of the dollar. Perhaps this was what some of the Giants were counting on. Before 1971 the dollar was considered to be "good as gold". Since then it was considered to be "hard currency" amongst a world full of soft currencies. Perhaps now it will be considered to be "Good as Tungsten"? I wonder how this will affect the next move from the People's Republic of China. Hmm....



This post was based on Rob Kirby's article,

On Doing God’s Work
“Gold Finger” - A New Take On Operation Grand Slam With A Tungsten Twist
November 12, 2009

which can be found at the following websites:

These next three were the articles leading up to the "Gold Finger" article. All extremely relevant must-reads:

Central Banking: A Blight On Humanity
October 9, 2009

Blight on Humanity Addendum
October 15, 2009

28 days before he published "Gold Finger", Rob Kirby published this email from an acquaintance in Blight on Humanity Addendum:
I discussed these irregularities with a very informed source [the same one who informed me of specific [allocated] trades settled last week] and the reply I received was as follows:

“What can I tell you that you don't already know?

They are all scrambling big time since a number of large interests have demanded audits. Independent auditors are NOW descending onto the various vaults to verify, validate and certify.

They can move this as many times in circles as they like to try to fool people.

In an Asian depository they’ve found “Good Delivery” bricks that had been gutted and filled with tungsten.

Soon, there will be xxxx hitting the fan all over place.”

10/20 Rob Kirby - Update to Addendum: Q and A
October 20, 2009

Thursday, November 12, 2009

Gold Urinals or Smokes?

In the comments section tonight, someone asked, "What happened to the price of gold in Russia when they defaulted? If anyone knows or can send a link, that would be helpful."

An answer was proffered that I thought was worth posting. At the bottom of this post I have included a link to Alf Field's latest, about Zimbabwe. Here is the anonymous reply that came in about two hours ago...

Regarding of price of gold after Russian default:

I was quite young then, and didn't know anything at all. I just reached 18, when the hyperinflation broke out. Honestly, I can't tell you much about gold, because it didn't exist in my experience. I can only tell you what I was smart enough to notice.

First, when you talk USSR, you have to understand that we were living inside a propaganda aquarium that was inside of the propaganda aquarium that exists from our common point of view today. Meaning, that for us then, to know the truth as average American knows it, was a huge progress already, unthinkable, and you could find may-be one in a hundred (may-be) who even knew enough to understand that USSR is just a big bold lie. I am not aware of any single soul who knew more than that, no-one who could participate in this current discussion.

Gold. All we knew about it is that urinals supposed to be made of it when we reach the communist prosperity. And, a lie that USD is backed by gold. Nothing else about it. We knew that Stalin mined gold, and that gold mines are still in operation, but we thought it was all for the jewelry. I did not know that Stalin purchased every bit of "landlease" from US for pure gold, until I was here. They told us that "landlease" was a completely free, selfless gift from the United States, and that without that gift, we would have fell under Germany. As far as I know, every honest person loved US for that magic help in the worst time.

At any time before and during hyperinflation, one could go to the swap meet and sell his jewelry to gypsies. This was a better deal that Soviet "ALMAZ", a government run jewelry store that was the only other purchaser of gold. ALMAZ was giving us a penny on a dollar and Gypsies were giving us two, but were much more riskier to deal with, as they used all kinds of tricks.

Most everyone I know sold their family gold, what small amounts they had, to survive the hyperinflation. Sold for nothing, due to widespread lack of knowledge and consequently lack of marked, also helped by import controls and price controls.

Personally, I had no gold. My father was an important communist, and my mom was a typist. Our family heirlooms were taken back during the revolution, in 1917.

My mom paid for 18 years into my "maturity fund", which sat in the Savings Bank and accumulated tiny interest. As I reached 18, then a withdrawal could be made. This was a thousand rubles, big enough to buy several boxes (not cartons) of imported cigarettes. Through her cries I did just that and hide it all. About a week later, the news anchor said that the rumors of devaluation were completely off base. The next day, Saturday, the finance minister personally assured everyone on TV, that everything is honky dory and no devaluation is even in the plans.

The devaluation announcement was made on Sunday, yes, the next day after that. Suddenly, all money were not good for anything. You had to stand in a huge line to get in to the bank and then to exchange only a small amount of old money into the new banknotes 1 to 1. Everything above that, burned.

After that, the price increases really started in earnest. I couldn't decide what to do with my smokes, because the prices were going up so fast.

So, we were surviving like most everyone, by stealing from factory plants. Somehow, all of that industrial high quality stuff ended up abroad. I saw it all on swap meets in Turkey, few years later. Wherever one had been working, this is were he took the stuff from. Again, I can't trace it for you who was providing the other side of transactions, as I wasn't asking myself those questions.

When prices finally began to stabilize, the country was swept clean, of most of the industrial base. This is how we paid for it.

Those who just purchased homes, found themselves to be able to pay them off awesomely quick, because prices were increasing faster than any interest owed, and the salaries were increasing too, although at a magnitude slower pace, but still much faster than the rate of interest. Some folks made last bulk payments equating years of normal payments with just their last paychecks.

But this was happening only to relatively high income ones. Those on the bottom, saw real estate prices running away forever.

I sold my smokes pack by pack, basically where there were no stores, along with smuggled moonshine. Smokes turned out to be the ultimate store of value par excellence even showing some ROI. I can't think of any other commodity that did so good and wasn't perishable as sugar, tires and flour that other folks hoarded.

I have found out that this is the single item that is always in demand, and easily traded and sold. Smokes were also easy to buy in bulk even as the whole thing already started to slowly unfold.

I say that this is the item to spend the last paper that you know will burn, but it is too late to buy food or better stuff. Some people had literally warehouses of tobacco products.

So, that is it. I am sorry I can't tell you anything useful about gold.


Zimbabwe: A Fresh Start
by Alf Field

Wednesday, November 11, 2009

New Open Forum

Excerpt from Jeremy Grantham:

Yes, of course every country needs a basic financial system to function effectively with letters of credit, deposits, and check writing facilities, etc. But as you move beyond that it is worth remembering that every valued job created by financial complexity is paid for by the rest of the real economy, and talent is displaced from real production, as symbolized by all of the nuclear physicists on prop trading desks. Viewed from the perspective of the long-term well-being of the whole economy, the drastic expansion of the U.S. financial system as a percentage of total GDP in the last 20 years has been a drain on the health and cost structure of the balance of the real economy. To illustrate this point, in 1965 the financial sector of the economy took up 3% of the GDP pie. The 1960s were probably the high water mark (or one of them) of America’s capitalism. They clearly had adequate financial tools. Innovation could obviously have occurred continuously in all aspects of finance, without necessarily moving its share of the economy materially over 3%. Yet by 2007 the share had risen to 7.5% of GDP!

The financial world was reaching into the GDP pie and taking an unnecessary extra 4%. Every year! This extra rent is enough to lower the savings and investment potential of the rest of the economy. And it shows. As mentioned earlier, the growth rate of the GDP had been 3.5% a year for a hundred years. It had proven to be remarkably robust. Even the Great Depression bounced off it, and soon GDP growth was back on the original trend as if the Depression had never occurred. But after 1965, the growth of the non-financial slice, formerly 3.4%, slowed to 3.2%. After 1982 it dropped to 3.1% and after 2000 fell to well under 3%, all measured to the end of 2007, before the recent troubles. These are big declines. It is as if a runner has a growing and already heavy blood sucker on him that is, not surprisingly, slowing him down. In the short term, I realize that job creation in the financialindustry looked like a growth driver, as did the surge in financial profits (which we now realize were ludicrously overstated). But in the long term, like a sugar high, thisstimulus was temporary and unhealthy.

The financial system was growing because it could. The more complex and confusing new financial instruments became the more “help” ordinary citizens needed from the experts. The agents’ interests were totally unaligned with the principle/clients’ interests. This makes a mockery of “rational expectations” and the Efficient Market Hypothesis, which assumes (totally unproven, as usual) equivalent and perfect knowledge on both sides of all transactions. At the extreme, this great advantage in knowledge and information held by the financial agents has the agents receiving all the rewards, according to the recent work by my former partner, Paul Woolley, and his colleagues at the Woolley Centre for the Study of Capital Market Dysfunctionality. (With a great name like that their job is half done before they start.)

Shake the Disease
Say Goodbye to Wall Street

[Most Recent Quotes from]

Sunday, November 8, 2009

The New Global Reserve

Someone once asked me if all of our thoughts were on the level? Well, at a young age I often thought there was a difference between fact and opinion; then I learned that everything spoken was opinion and anything written was fact! A few years later, someone told me that anything spoken is not true and anything written is opinion! Last year I was told that everything is an opinion and nothing is true! Ha! Ha! So, today, I state for the record that all of our Thoughts are Absolute fact! (smile) -- FOA (08/06/01)

You know, I am not making this stuff up. What I write on this blog comes from journey, discovery and understanding of a train of thought that was many decades in the making. A thought process that began in the 1960's, around the time that Charles de Gaulle, president of the French Republic, began to seriously question the sustainability of the Bretton Woods system.

The process of journey, discovery and understanding of the transition we face today, on a collective scale, has taken just as long as the unfolding of time itself. Isn't this a curious thought?

Please join me on the Gold Trail and discover with me the anti-dollar train of thought that has not only been coming down the tracks of time straight at us for more than 40 years, but is bearing straight down on us today. Or, dismiss these thoughts if they make you uncomfortable because of everything the dollar system has taught you since 1971. But do so at your own financial peril.

I do not want a one world currency, and in fact, I think it is most unlikely. I am not anti-dollar. I am not anti-American. Quite the opposite! I am simply an observer, reporting what I see... from my own little perch on the poop deck of the Titanic.

A Paper for your Property

Let's start off with a fantasy visualization. Have you ever checked your coat at a show? Yes, some people still do this. And the coat check clerk will give you a small paper ticket with which you can retrieve your coat at the end of the show. No? You've never done this? Okay, then imagine the valet ticket you get when you drop your car off at the front of a nice hotel. One small piece of paper with a number on it represents your right to later retrieve your car.

Now imagine that I, a smashingly handsome salesman-type character hanging out near the valet line, offered you a very special valet ticket, one that was good for ANY car in the valet lot! How much would something like that be worth? How much would you pay for such a magic ticket? (Assume that it is totally legal.) And if you bought it from me, how long would you feel comfortable holding the ticket before you "tested it out" to make sure it was really what I said?

Now imagine that I offered you another special valet ticket. Only this one was good for any car on any valet lot anywhere in the world! Would this one be worth a little more? Assuming you redeemed the first ticket I gave you successfully, would you be willing to take this second, "global" ticket home with you? Maybe test it out somewhere else, like Italy?! On a nice Ferrari perhaps?

Now imagine that both tickets performed perfectly and legally as advertised. Can you imagine how such extremely special tickets might circulate as currency, only rarely getting turned in for a car? Especially if they cost less than the outright purchase of a car?

So now that my little experiment with special valet tickets has caught on, imagine that I start printing them wholesale and selling them far and wide. They clearly exceed the number of cars parked in valet lots around the world at this point. And perhaps at some point soon you will realize that such a wide distribution of these special tickets raises the odds of your own car being reclaimed by someone else!

You see, even if all these fantasy auto ownership transfers were somehow legal, the circulation of "universal valet tickets" would make car ownership very AMBIGUOUS. If you hold a ticket, do you really own a car? If so, what kind is it? And if you own a physical car, how long before someone takes yours?

I suppose at this point you would stop leaving your physical car with the valet! Right? With odds like this, sooner or later someone is going to take YOUR car, and perhaps it will be the last one in the lot! And as this perception spreads, less and less cars will be entrusted to young valets around the world, putting them out of work and sending them to the unemployment line. And with empty valet lots all over the world, what do you think will happen to the value of all my little paper tickets?

So... Is Gold Money or Not?

When gold was used in straight trade it was not money. It was simply gold, an item to barter with. In fact, it was the very best possible item to barter with. And because it was the very best property to own for future trading purposes, it became the wealth reserve par excellence.

The very concept of money evolved from the coinage of gold (the barter item) allowing for a numerical accounting system backed by rudimentary laws. This allowed for the emergence of great civilizations. These civilizations died off eventually when the legally enforced parity between the numerical accounting system (money/a medium/an incomplete transaction/ambiguous ownership of the physical world) and the physical market place (gold/barter/complete transactions) was stretched to the breaking point.

What we have today is a breaking point that will return gold to its ancient job, wealth reserve par excellence. In this role, gold will be revalued by the global marketplace, in its physical form only, to somewhere between one and two orders of magnitude higher than it is today!

Perception is the key. Early in the life of a currency (like my valet ticket currency or paper gold) full value parity is the perception of the masses. But there always comes a time when the masses begin to perceive that the outstanding claim checks outweigh the tangible deposits. And you can imagine what this shift in perception does to the per unit purchasing power of the paper tickets.

When we proclaim "Gold is Money!", we give the bankers full license to treat gold just like they treat money. This opens the door to AMBIGUOUS notions of ownership and lost purchasing power of the metal itself.

The best reason to pursue this concept, to cement in our minds that gold is simply property, simply the very best tradable, tangible item, is to end the misguided attempts to use gold as a currency by those who will not let gold simply be gold. So we call it "wealth", since our Western upbringing forces us to "pigeon hole it" (and "wealth" IS what is should be called anyway). But be careful calling gold money, unless you are prepared to retract your statement when unexpected wisdom visits you like puberty some fine day!

A deep contemplation of the "honest money" concept will reveal some longstanding misconceptions about gold, the physical item. Your personal journey to understanding money must *MUST* encompass two very influential factors. The first is banking. And the second is government (or law). In other words, you can't claim a full understanding of the money concept without a commensurate understanding of its defining institutions.

Banking institutionalizes the accounting of money while government, or the Rule of Law, institutionalizes the vitality of monetary contracts. How well these two operations serve a society is revealed in the value that society entrusts to its monetary unit.

Gold is the perfect physical property existing in nature, used by and passing through these evolving money systems in cyclical ways. The exchange of a lump of gold for something else of value, say a chicken, is a barter exchange. It is a full transaction of physical items. There is no "medium" in this exchange. But it was the evolution of gold from lump state into coined state that catalyzed the emergence of the money concept as a pure numerical system.

The money concept emerged as this new numerical accounting system peacefully coexisted with the physical barter exchange world of the property item gold. Together they grew and matured, because an UN-COERCED marketplace of physical exchanges (including gold) was allowed to "GEL" with the new Rule of Law and the new numerical accounting system. This symbiosis, while it lasted, allowed for great advances in human civilization!

The problem with the US dollar as a monetary concept is that it was never actually allowed to gel with an un-coerced marketplace. And the problem with gold today is that it has a low barter value because it is not free to behave like a piece of physical property. It is encumbered by the bullion banking system as a token standing behind an artificial value created by derivatives trading.

The risk that has developed is that the US dollar will collapse if this low priced gold is removed! This low priced gold is THE stabilizer in the unbacked US dollar's 38 year bid to be the world's currency. But if low priced gold becomes HIGH priced gold, then perhaps the dollar has failed in its bid to be "money par excellence".

Newer currencies like the Euro are trying not to make this same mistake. They want the marketplace to form a stable network of pricing and contracts without the false pretenses surrounding gold. They are refining the evolving money concept in the hope that it will gel with the physical marketplace. They mark their gold reserves to whatever the market says they are worth, and they don't fear a price rise because it will only make their reserves more valuable.

In fact, they even encourage the free trading of gold by making it available at common places people go! Why do you think this is not done inside the dollar's zone?

If this new and improved money concept works well throughout the transition to Freegold, currencies like the Euro that adopted this new concept may actually become the world's first full fledged money, in the most proper use of the word! In fact, by trading peacefully along side an un-coerced gold market, they could even be said to be "honest money"! At least as honest as the Rule of Law that stands behind them.

This is not an argument for saving, holding or trading these currencies for profit, but instead it is an argument for using as a medium only currencies that "gel" with gold used as a parallel reserve!

But of course, as we know, the Rule of Law can change as the hungry collective elects socialists into office. This is why we will use honest gold property as our core wealth holding! We will own it to compensate for the human inability to create PERFECT money!

In other words, because we have to settle for using, AT BEST, a system of honest money which will always be flawed by human nature, we need GOLD to return to its ancient job description as perfect property. The kind of stuff that can be OWNED, not "as money," but rather, OWNED....... (wait for it......).... UNAMBIGUOUSLY!!!!

Political Money, Political Gold

Today the ten-year-old Euro currency is not defined as any certain quantity of gold. Instead, it uses gold as a financial reserve so that each increase in the price of gold brings an increase in the Euro's reserves and thus an increase in the value of the Euro itself! This Freegold concept is closer to the tenets of Libertarianism than the gold standards of the past because of the gold exchange restrictions that always inevitably followed a gold standard.

Freegold is not a new currency. Instead, it is a completely sustainable exchange system between transactional fiat currency and gold, the wealth reserve par excellence!

On an individual level, the idea that your wealth is meant to be placed in harms way in order to earn a yield is a perpetual lie of the current inflationary system. Low risk yields cannot beat real inflation in the long run, and they often don't in the short run either. Your hard earned wealth was never meant to be risked. It only needs to be preserved!

We view the US dollar's value today through the window of the USDX, a relative comparison of the dollar with its most significant trading partners, primarily, the Euro. But imagine the situation of an exploding gold price combined with a terminal dollar. The ECB could easily use not only its dollar reserves to buy up spot gold, but it could also print Euros outright to buy any gold still offered for sale.

The dollar, on the other hand, must SELL gold if it hopes to slow its own collapse. So the dollar must sell gold to defend itself, while the Euro is free to BUY gold while defending itself from a systemic collapse!

Freegold will not compete with the Euro the way it will with the dollar. Freegold is not a competing currency to the Euro, but instead it is a wealth building asset within the Euro's monetary construct! As this transition unfolds, even the raw printing of Euros for gold, normally an inflationary event, can strengthen the Euro from within its golden asset base. Architecture! Planned, executed, now in use.

FOA taught us that clarity in understanding this new gold market comes from the understanding that there are many political factions involved in this dramatic monetary evolution. The largest pro-gold factions are actually those that want a global currency that is not subject to the health of the American economy (or ANY economy for that matter). Currently, most forex reserves held by foreign central banks are merely a debt of the US government, backed only by a properly functioning, tax-paying American economy.

You would be surprised how clearly this concept is understood outside the USA. It is quite an uncomfortable position to be in, to have your wealth's very existence depend on your neighbor's ability to produce enough income to service his unsustainable debt!

These most-pro-gold factions are not necessarily the ones you would think. They are much of Europe and the oil producing Middle East for the most part. These are the major factions that will be hurt least by a collapse of the dollar's economy, because they have been preparing for it for decades. But others, like China, are starting to come on board with this anti-dollar, pro-gold movement. (Perhaps even India too?)

These political factions are not interested in a new gold standard like the failed Bretton Woods system. No, they are seeking something far better. They no longer see any advantage in holding a Treasury promise of future payment (half a transaction) over holding physical gold as a payment in full. The fact that Treasury's pay interest has become a joke in these central banking circles. They see clearly now that economic instability and currency fluctuations can easily wipe away any interest earned, overnight!

No, the only reason left for holding these paper reserves is the futile effort to stabilize a collapsing system. You hold foreign currency today so that you can sell it to buy back your own currency if it falls. Or you buy foreign reserves to lower your own currency if that is desired. This is not a game of wealth accumulation as it has been played. And this fact is not lost on many countries outside of the dollar zone.

On the other hand, buying gold on the open market, using either your own currency or your excess Treasury's and dollars, creates a far different exchange/reserve dynamic. It takes physical gold off the market, increasing its value. Gold has always been the dollar's only competitor for global exchange reserve status. And no nation will ever run out of its own currency (which it can print) when buying gold. Of course this will drive the price of gold sky high, but from a CB perspective it is viewed as taking on reserves, not selling them off.

Basically, this is the direction the entire non-dollar world is heading. This new system is not being built on the foundation of any single nation-state or economy. In the future, any one fiat or its attached economy can fail completely without bringing down the whole system. This is what stability is all about. It is the separation of the money concept from both gold, the tangible, tradable physical wealth reserve, and from the albatross of the hungry nation-state.

Would you like to get a glimpse of the future the way the Giants see it? Pick any price for gold. Say, $39,000 per ounce. Then list out the CB reserves of each country as they are now, and also as they will be when their dollar "assets" are worth maybe a nickel on the dollar (purchasing power) and gold is $39,000. This will give you the "birds-eye view" that they have their eyes on. With this view it is easy to see why there is a movement to end the dollar standard, which is backed only by a healthy US economy. In other words, it is currently unbacked!
When you understand how it is, that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold. -- Unknown (but wise) Author (11/05/09)


Credit for elements of this Thought mash up go out especially to Aristotle and FOA, but also to Belgian, The Invisible Hand, MK, and of course Another. I stand here in full view because I stand on the shoulders of true Giants! Thank you all!

Friday, November 6, 2009

Open Forum

The last thread was getting a little full! :)


News Snips:
Nov. 6 (Bloomberg) -- The U.S. Treasury rejected Fannie Mae’s request to sell $2.6 billion in low-income housing tax credits that the mortgage-finance company wasn’t likely to use.

“Every politician on Capitol Hill right now hates Goldman,” said Paul Miller, a bank analyst with FBR Capital Markets in Arlington, Virginia. “Politically, this would look really bad.”

Fannie Mae has posted $120.5 billion in net losses over the past nine quarters and requested $59.9 billion in Treasury aid.

A Goldman Sachs spokesman, Lucas van Praag, declined to comment, as did a Fannie Mae spokesman, Brian Faith.

The blocked sale illustrates the political and policy challenges facing the government as it looks to conserve both companies' capital while balancing larger policy and political goals.

The deal pitted two government agencies against each other over how best to run Fannie and its smaller rival, Freddie Mac. The government took over both mortgage-finance companies 14 months ago through a legal procedure known as conservatorship.

A Goldman Sachs spokesman declined comment. A representative of Berkshire Hathaway couldn't immediately be reached.

A Goldman Sachs spokesman declined to comment.

The sale of the tax credits would have helped stabilize Fannie Mae. The company on Thursday said bad mortgages and a federal foreclosure prevention program left it with a $18.9 billion loss, forcing it to tap a Treasury line of credit again to plug a hole in its net worth.

FLASHBACK! (14 months ago)

Tuesday, November 3, 2009


Every time gold has a big up day like today I see a lot of forum comments from people that say "you can't eat gold". Or, "I'd rather buy some farm land". Or, "Gold is no different than any other commodity, why not buy silver? Look, in percentage terms silver went up twice as much as gold today!" Or, "Gold is not good for anything. It is useless. Its value is a myth!"

What all these people don't understand is that gold is truly only a wealth asset. It is a tangible, tradable wealth asset that is valued by central banks, by the elite, by the wealth giants of this world, and even by the little guy. Especially in regions outside of the US dollar currency zone. But what is so special about gold's price movement this time around is that this is the very beginning of a functional transformation for gold. Gold is right now in the process of complete demonetization. It is being set free from the dollar which has held it captive in a monetized (controlled parity) state for a long, long time. Gold is transforming into a completely demonetized wealth asset. And along with this move will come a whole new level of value, completely detached from any linear analysis of gold's dollar-based price history over the past century or two, or three.

People seem to have the most difficulty understanding how gold will have a much higher value as a pure wealth asset than it had as a medium of exchange or unit of account. As a currency circulates through the economy, productive participants squirrel away a little wealth each time the currency passes through their grasp. They do this by purchasing whatever they perceive to be the best wealth asset at that time. This wealth asset accumulation grows, over time, to be much greater in size than the whole of the circulating transactional currency. For example, the global money supply (monetary base) is around US$5 trillion. [1] Yet the global stock and bond markets are currently valued at around US$120 trillion and all the markets combined (stocks, bonds, forex, credit derivatives, hybrid securities, options, futures, forwards, swaps, OTC derivative, real estate, etc...) are currently valued at well over US$1,000 trillion. [2] [3]

Even though gold is no longer used as money, it was still confined in a pseudo-monetized state for the last few decades through the dollar system's paper gold market, which intentionally inflates the supply of paper gold beyond its underlying physical backing in order to keep the much smaller physical gold market locked in a relative parity with the dollar. Consider that all known above-ground gold (approx. 5 billion ounces) is worth only about US$5.4 trillion at today's prices. Does this sound like gold is trading at par with wealth, or with transactional currency?

What Another and FOA came forward to tell us back in 1997 was that the European architects of a new regional currency had already thought this whole debt accumulation process through to the end, and were preparing for just such an unavoidable eventuality. That structurally, the new Euro monetary system had been designed to withstand this single, inevitable event; the complete demonetization of physical gold!

Another and FOA revealed their knowledge under the cover of anonymity on an Internet forum over a period spanning four years. But other clues to this underlying design were also released through official public statements over the past decade. Please compare and contrast these statements with what you get from CNBC, the Fed, the Treasury, and everyone else who speaks on behalf of the dollar.

In July of 1998 the brand new ECB announced that gold would be included as 15% of the required foreign reserve assets behind its new currency and that the gold asset would be marked to the market price each quarter, a decidedly NON-monetary thing to do! You don't mark your "cash" to market, but you do mark your ASSETS to market.

In September of 1999 the European central banks met in Washington DC and signed "The Washington Agreement on Gold". Here was their press release after the meeting:
Press Communique - 26 September 1999
Statement on Gold

Oesterreichische Nationalbank
Banca d'Italia
Banque de France
Banco do Portugal
Schweizerische Nationalbank
Banque Nationale de Belgique
Banque Centrale du Luxembourg
Deutsche Bundesbank
Banco de España
Bank of England
Suomen Pankki
De Nederlandsche Bank
Central Bank of Ireland
Sveriges Riksbank
European Central Bank

In the interest of clarifying their intentions with respect to their gold holdings, the above institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.
2. The above institutions will not enter the market as sellers, with the exception of already decided sales.
3. The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tonnes and total sales over this period will not exceed 2,000 tonnes.
4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.
5. This agreement will be reviewed after five years.

It is believed by some that while this Washington Agreement was a uniquely positive event for the gold market, that the real purpose of this agreement and its public statements on CB gold sales was the cooperative and coordinated redistribution of publicly held gold in preparation for the coming revaluation that I call Freegold. That the purpose was to use market-priced transfers of gold between central banks, in broad daylight, to create a careful distribution of gold, proportional in size to other reserves held by each central bank, before the inevitable reset the entire financial system.

In 2002 in his acceptance speech for the International Charlemagne Prize which was awarded to "the Euro" that year, ECB president, the late Willem F. Duisenberg had this to say:
The euro, probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state. Indeed, what Sir Thomas More said of gold five hundred years ago – that it was made for men and that it had its value by them – applies very well to the euro.

Why would he say it was the FIRST CURRENCY to sever its link to gold? Hadn't the dollar done that in 1971?? Perhaps he meant something deeper!

In 2004 the European central banks renewed the Washington Agreement and this was their press release:
ECB Press release
Joint Statement on Gold
8 March 2004
European Central Bank

Banca d'Italia
Banco de España
Banco de Portugal
Bank of Greece
Banque Centrale du Luxembourg
Banque de France
Banque Nationale de Belgique
Central Bank & Financial Services Authority of Ireland
De Nederlandsche Bank
Deutsche Bundesbank
Oesterreichische Nationalbank
Suomen Pankki
Schweizerische Nationalbank
Sveriges Riksbank

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

Gold will remain an important element of global monetary reserves.

The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2004, just after the end of the previous agreement. Annual sales will not exceed 500 tons and total sales over this period will not exceed 2,500 tons.

Over this period, the signatories to this agreement have agreed that the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the date of the signature of the previous agreement.

This agreement will be reviewed after five years.

During the next five years to 2009 the central bank gold sales gradually dwindled, not reaching their prescribed limit, until finally in 2009 the central banks, as a community whole, actually became net BUYERS of gold rather than sellers! [4] [5] [6] And when the central bank gold agreement (CBGA is the same as the WA) was renewed this past August, the ceiling was lowered from 500 tonnes to 400 tonnes per year. Not that it mattered anymore with the banks being net buyers now. It was simply a formality this time. Here is the latest CBGA press release, again reaffirming the importance of gold:
7 August 2009 - Joint Statement on Gold
European Central Bank

Nationale Bank van België/Banque Nationale de Belgique
Deutsche Bundesbank
Central Bank and Financial Services Authority of Ireland
Bank of Greece
Banco de España
Banque de France
Banca d’Italia
Central Bank of Cyprus
Banque centrale du Luxembourg
Bank Ċentrali ta’ Malta/Central Bank of Malta
De Nederlandsche Bank
Oesterreichische Nationalbank
Banco de Portugal
Banka Slovenije
Národná banka Slovenska
Suomen Pankki – Finlands Bank
Sveriges Riksbank
Swiss National Bank

In the interest of clarifying their intentions with respect to their gold holdings the undersigned institutions make the following statement:

1. Gold remains an important element of global monetary reserves.

2. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on
27 September 2009, immediately after the end of the previous agreement. Annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes.

3. The signatories recognize the intention of the IMF to sell 403 tonnes of gold and noted that such sales can be accommodated within the above ceilings.

4. This agreement will be reviewed after five years.

European Central Bank
Directorate Communications
Press and Information Division
Kaiserstrasse 29, D-60311 Frankfurt am Main
Tel.: +49 69 1344 7455, Fax: +49 69 1344 7404

And just yesterday, during the LMBA conference in Edinburgh, Scotland, keynote speaker Paul Mercier, 'Principal Adviser in Market Operations' and 'Chairman of the Working Group on Monetary and Exchange Rate Policy Instruments and Procedures' for the ECB said, "gold is no longer important from a monetary point, but is important as an asset."!!!

Did you catch that? Here it is again... is no longer important from a monetary point, but is important as an asset.

Here is a little more context from Dow Jones:
Gold To Remain Important Asset Of European Central Banks-ECB

EDINBURGH -(Dow Jones)- Gold will remain an important asset for European central banks as risk diversification becomes a more significant issue, the European Central Bank said Monday.

Speaking at the London Bullion Market Association conference, Paul Mercier, deputy director general of market operations at the European Central Bank, said gold is no longer important from a monetary point, but is important as an asset.

"Gold makes sense as a contributor to risk diversification," Mercier said. " Even if some central banks continue to sell and there is a new potential seller with the IMF, I wouldn't conclude that gold holdings in central banks will decline in the coming years."

He said the Eurosystem holds 10,800 metric tons of gold, roughly one third of world gold reserves.

-By Devon Maylie, Dow Jones Newswires

And then of course, today we learned that the IMF has "redistributed" 200 tonnes of gold to India! Surprise surprise!! One can only wonder what message was intended with this sale. The message I take is that there is a new floor under gold now! A new put. A new bid. And clearly more than just the Chinese want it!

Nov. 3 (Bloomberg) -- The International Monetary Fund said it is selling 200 metric tons of gold to the Reserve Bank of India for about $6.7 billion...

The transaction, which involved daily sales from Oct. 19-30 at market prices, is in the process of being settled, the IMF said in the statement. The average price in the transaction with India was about $1,045 an ounce...

The lender has said it is ready to sell directly to central banks and later make transactions on the open market if necessary. The IMF official declined to say whether other central banks have expressed interest in purchases.

But what is most significant about this ongoing redistribution of gold, the "important element of global monetary reserves", in preparation for the Freegold value reset, is that in countries like India, China and in the Eurozone this redistribution is even inclusive of us little people, not just the central banks, elites and giants! In China, the government is encouraging its citizens to buy gold and silver. In fact, it only recently opened up this market! And in India the State Bank of India recently announced in its annual report:
The number of branches for retail sale of gold coins has increased from 250 in 2008 to 518 in 2009. The Scheme will be extended to cover all important centres of the country in 2009-10 by increasing the number of branches selling gold coins to about 1100.

They are trying to make buying gold coins EASIER for the people in India! And so it is in Europe as well! In the Euro currency zone, the VAT (value added tax) was removed from gold but not from silver (or anything else for that matter), and gold is now sold to the public right through the commercial banking system!

It is only here inside the wonderful dollar currency zone that we are "sheltered" and "protected" from the truth about gold! Did you notice that the UK central bank, The Bank of England signed the first Washington Agreement but not the second or third? The BOE is a staunch supporter of the Fed and the dollar system.

But outside of the dollar faction, serious preparations are underway for the end of dollar supremacy and the emergence of the completely demonetized gold wealth asset, and all that it will mean! And it will mean and reveal a whole lot of truth about the world we live in! It will reveal the end of dollar and US hegemony. And it will reveal the emergence of a de facto worldwide meritocracy. It will reveal that most of what we thought was real wealth based on an unsustainable debt pyramid was just an illusion of wealth! Gone... to where all illusions eventually go.

I read where some of you say I am wrong about Freegold. That it won't or can't happen because country A isn't ready for it, or country B doesn't want it. Or that "the elite" will never allow it. Etc... etc... Blah blah blah...

Well, Freegold, or whatever you want to call it, is kind of like a runaway freight train coming right at us. It is not stoppable and it is not controllable. It has a mind of its own and too much momentum to do anything but prepare for its arrival. It is not for any elite or any country to decide when and if it happens. It is only for them and us to be as prepared as possible when it does.

Here is one more interesting story from this week:

Saudi: dollar role 'confused' in oil pricing

KUWAIT - Saudi Arabia's top monetary official said denominating oil sales in dollars does not necessarily mean that payments from those sales are received in dollars or that investments would be done in dollars either.

"The pricing issue has no relationship with the payment issue and doesn't have a relationship with the investment issue," said Muhammad al-Jasser, Governor of the Saudi Arabian Monetary Agency, at a financial conference. "There is a big mixup between the three roles for any currency."

"The dollar is the most used currency in pricing all imports and exports, especially for commodities and not only in the Gulf -- even the Europeans still price in dollar," Jasser told reporters.

"But pricing in dollar does not necessarily mean that you receive in dollar and does not necessarily mean that you will invest in dollar," he said

"That's why I think that it is important not to confuse between the three roles for any currency, whether it is the dollar, sterling, the yen or the euro," Jasser said.

Allow me to translate this for you:
"For the time being, we will continue using the dollar in FOFOA's "pure concept of money" function, the mental unit of account, because that is what the world is used to. But soon we will no longer be using the dollar in its other functions vital to US hegemony. We are already phasing out the transactional function, the medium of exchange role, and we are no longer using the dollar in the store of value function for our wealth."

Does it strike any of you as much as it does me, how insignificant another $6.7 billion in the IMF coffers seems when compared to the quite significant 200 metric tonnes of physical gold being transferred from one single entity to another? This is the largest single publicized gold purchase in at least 30 years! When you think about the Fed literally PRINTING $300 billion for the US Treasury over the last 6 months, or the $500 billion in currency swaps, or the unknown $trillions in Fed quantitative easing, it really makes you wonder if this was the best way for the IMF to raise another $6.7 billion.

This striking paradox WILL be corrected, by the way, through Freegold.

For a bit of perspective on India's score, the heaviest load ever carried by the largest airplane in the world was 253.82 tonnes, but that was a short, low altitude test flight exceeding its rated capacity by 4 tonnes. The heaviest single job this flying behemoth has ever been hired for was a generator weighing 187.6 tonnes. It has also carried train locomotives that weighed less than India's new gold. So India's gold would certainly be considered a "full payload" for the largest plane in the world. And there is only one of them! With any other plane it would take several trips. This is the Ukraine-based Antonov An-225, which can be hired for a job like this through a broker in Beverly Hills.

So India, if you would like some help bringing your gold home, let me know. My fee will be modest. I actually have hired this plane before. It is true! Although it was not for transporting gold. So what do you say? Let's make some history, set a world record for the most gold transported on one plane, and avoid that Somali coastline in the process! You can find my email address, India, by clicking on the donate button to the right. ;)


Sunday, November 1, 2009

Money Talk Continued

We had a good discussion on the concept of money developing after the last three posts. Here are a few of my comments, re posted by request:

This first one was a response to a question about a potential dollar rally during another global liquidity crisis...

Hello Anonymous (6:05PM),

Here are some thoughts and comments as you requested:

We need to keep a few principles in mind in order to understand what is being discussed in these confusing discussions about a liquidity crisis, currency swaps, and supposed dollar strength. My apologies if I simplify this too much for your taste, but my thoughts are simple ones...

1) First of all, what are all banks and bankers afraid of? A run!

2) Hyperinflation coincide with a multiplication of the monetary base (which is the natural response to the market devaluing "broad money", near-cash credit assets), not with the credit expansion of broad money through commercial bank lending.

3) The USDX measures the supply and demand of actual base money needed for transaction clearing, not the willingness of banks to stick their necks out further. Base money is the "reserve" in the term "fractional reserve banking". We could call it "fractional base money banking".

4) Currency devaluations are long term and permanent. USDX quotes are short term and temporary.

5) There is no difference between the $ and the $-financial industry ($-FI). What is bad for one is bad for the other. A run on the system is just as bad as a run on the banks, or a run on the dollar. Any run screws them all.

6) Much of what we all think of as money (dollars) is not really dollars in the same sense as the dollars needed in a liquidity crisis. We think of money mostly as M2. But a liquidity crisis requires MB (Monetary Base, or base money)

7) "The system", meaning the worldwide financial industry is divided into sub-systems; The Federal Reserve system, the Eurozone system, the British system, etc... What differentiates these sub-systems from one another is their own currency, which can be created on a whim by the central bank and lent to banks that need extra funds with the CB taking collateral from the borrowing bank in the form of assets denominated in that currency.

8) Each sub-system is a completely interconnected network of financial institutions, including commercial banks, investment banks, brokerages, etc... 99% of all transactions within each sub-system clear without ever having to move money (dollars). For example, within the bigger banks, most transactions clear in-house. One person might buy a house, taking out a new loan for $100,000 while some other bank customer sells his house paying off his $100,000 loan. These two transactions cancel each other out in-house. Inter-bank transactions cancel each other out as well. For the most part, finance and banking is a zero-sum game within each sub-system, from stock transactions to bond transactions to new loans to settled loans to you writing a check to your dentist. If one bank ends up with more at the end of the day and another with less, then the central bank clears the trade with a book entry transferring "reserves" from one bank to the other. Even new loans do not really create the kind of money that is needed in a liquidity crisis. They create credits issued by the bank, liabilities that are counterbalanced by the debt papers you signed. Those credits entitle the bearer to dip into the bank's actual dollar reserves, but do not create new dollars. The only new dollars that get created are when the bank must move funds to cover fractional reserve requirements. Those funds then become new monetary base. THOSE are the kinds of dollars needed in a liquidity crisis.

9) Each sub-system has a TREMENDOUS amount of flexibility since the CB acts as the ultimate clearing house between all the financial institutions in that sub-system. And since we are now on a purely symbolic fiat currency, the CB can create any liquidity the system needs. If one bank comes up so short at the end of the day, owing another bank more reserves than it has, then the CB just creates new reserves and lends them to the bank that is short and the CB takes assets (from the borrowing bank) onto its own balance sheet to counterbalance and collateralize the loan of fresh new money. This flexibility has virtually eliminated all banking liquidity problems within any given sub-system. Only an actual bank run on physical cash within a sub-system presents a real threat. And if that run happens to only one bank in that sub-system, then that bank is sacrificed. If a sub-system-wide run on cash were to happen, we would have a bank holiday while they figured out the best way to devalue the monetary base and increase it.

10) Viewing the whole worldwide financial system, in which the BIS acts as the ultimate clearing house, there is much less flexibility because the BIS does not print the currencies it clears. The BIS would prefer ITS central clearing to be done in gold bullion, stored in its vaults and moved from one countries slot to another when necessary. But the $-system doesn't want to play that game. Even still, 99% of the worldwide transactions clear without the need to transfer any funds around... as long as it is a "business as usual" day.

11) Problems start to arise in the international clearing house when daily transactions become unbalanced, meaning too many people trying to do the same thing all at once, with no one willing to do the opposite thing. The two sides of a zero-sum game are never in perfect balance, but they are usually close enough that market pricing takes care of the difference. (If there are too many sellers then the price drops until the sellers equal the buyers.) But sometimes an event happens that spooks the markets and sends everyone to one side of a trade all at once. Prices go into free fall which spooks the markets even more. Then the exchanges are shut down "to let cooler heads prevail". But this only spooks the market further. Finally, at the end of the day, the clearing house is left with a big one-sided mess to clean up.

12) Here is the big problem. Each of these sub-systems has its own currency which its CB can print at will... flexibility! But with the dollar being the global reserve currency, there are lots and lots of dollar-denominated assets held by financial institutions in many non-$ sub-systems. So when there is turmoil in the dollar-denominated markets, the non-dollar sub-systems run into a clearing problem because they can't print dollars to help banks that owe other banks more dollars than they have. So they turn to the BIS, who also can't print dollars. Only the Fed can. So the Fed ends up being the de facto CB to the world. But it is not the clearing house for the world, and it does not take assets onto its books from those foreign banks that got into trouble. Instead, it lends directly to the other CB's which print some of their own new currency and send it to the Fed in exchange. This is why it is called a "swap" instead of Quantitative Easing. They are swapping freshly printed currencies instead of assets for currencies. All base money! The same as cash. TWICE as potentially inflationary as QE on a global scale because two sides are now exposed to currency risk.

13) When the Fed makes these international currency swaps, it doesn't send pallets of hundred dollar bills on a plane. It simply makes a contract with the foreign CB and a book entry. The contract is a two-way promise to later provide pallets of physical cash if anything goes wrong and cash is needed. And with this promise in hand, the foreign CB makes a similar contract (promise) with the European bank that got in trouble. The foreign CB promises to later provide physical cash if necessary (if something goes wrong), and the bank submits assets to the CB as collateral. Next the troubled bank passes those dollar promises (IOUs) on to the bank it owes the dollars to and that bank credits its customer's account with dollars it doesn't have, but now has indirect access to (if needed). The idea is that as things return to normal and transactions start clearing in a more balanced state that ultimately the dollars that were needed will be able to be gotten on the open market without causing a spike in the price and they can work their way back to the foreign CB. The troubled bank, for example, can later trade assets for dollars and pay back the foreign CB which will then pass those physical dollars on to the bank holding the IOU. And now that the European problem has been cleared, the foreign CB can cancel that portion of the two-way swap agreement with the Fed. And no physical dollars need cross the ocean. And that portion of the currency risk is eliminated.

14) Base money is either physical cash or a liability (IOU) that traces directly back to the Fed, which includes reserves held at the Fed. In other words, it is physical cash, or the promise of physical cash from he who can print physical cash. The Fed is willing to issue these promises willy nilly but hopes it doesn't actually end up having to do the printing.

15) The USDX is a measure of dollar exchanges with other currencies that happen on the open market. The Fed can counteract a rise in open market dollar demand by providing a supply of dollars directly to banks within its own sub-system, or indirectly to foreign banks through swaps with other CB's. Last year the Fed had a lot of practice doing this fast. I am sure the contractual transaction with the foreign CB's took several hours and included recording video teleconferences in which the agreements were legally bound. But now that they have experience doing this in a crisis, next time it will probably be almost instantaneous.

16) So as long as there is more demand for dollars than supply, the Fed can control the price of the dollar on the USDX by its own willingness to lend dollars at zero interest with toxic assets or foreign currency as collateral. This costs the Fed nothing, except currency risk and bad PR at blogs like mine. But where the Fed loses control is when there is more supply than demand. And that is what is coming because of this very inflationary policy of providing dollars to save the system at any cost.

17) The problem is with the assets that are being swapped around for dollars, whether with the Fed or with the foreign CB's. These assets are becoming less and less liquid because they are not valued correctly. If they were valued correctly, the banks would be insolvent and have to file bankruptcy. They wouldn't even have enough assets to settle their debts by swapping with the CB's. This is why the assets need to remain marked to myth. But this makes the assets only sellable to the CB's. The open market doesn't want them. So the clearing mechanism that is needed to reverse the flow of supposedly temporary base money into the system is breaking down. The Fed tells us with a straight face that it can reverse everything it has done so far. But that is only the case if the free, open market is willing to take up all the slack the Fed put out there by private investors buying toxic assets at marked to model prices.

18) So the next time the Fed has to create a trillion new dollars of liquidity, it is likely going to stick in the system as base money that cannot be removed. Ultimately the Fed will be contractually obligated to print actual bills and supply them to the banks and CB's that hold the contract for them. And this is what devalues the dollar.

Conclusions: The USDX is a rather poor metric by which to judge the dollar, even in the short term. As long as there is a demand for base dollars, like there is in a panic or a crisis, the Fed has total control over whether it wants to let that demand bid the dollars on the open market, or provide them itself. And the Fed cares more about the financial system than the value of the dollar, so it will surely provide any liquidity that is needed.

The next crisis, if it is mainly in the US financial system, will likely not spike the dollar because the Fed has total control and flexibility within its own system. If it is spread throughout the world it may spike as foreign banks bid up dollars on the exchange, but the Fed is now more experienced than it was a year ago and will likely put a lid on it very quickly.

But this next dollar shock will probably be irreversible, unlike the last. And in such, it will increase the global supply of dollar monetary base by a large percent. Perhaps by 100% or more. This alone will devalue the dollar and be the cause of the next shock which will require a similar response by the Fed, perhaps increasing the base by another 50% as China and others dump the last of their bonds onto the open market in a highly one-sided transaction sending the value of the bonds to zero, US interest rates to something so high they are non-existent, and the purchasing power of the dollar down into the stinky, Zimbabwe dirt.

So in short, I guess I agree with David Bloom. Of course it COULD rally, but I don't think the Fed will let it (unless it happens to have some T-bonds to sell that week!). Letting it rally too high would crush the financial system (by driving asset values into the dirt) which the Fed wants to save at any cost. Even though the cost will be the crushing of the system. The ol' Catch-22.

Sorry if this seemed a bit simplistic or a little elementary. Of course there are more complicated issues involved, like the $ carry trade and cross-currency investments. Derived foreign exchange activities become very complicated very fast! Too complicated for the banks, obviously! But I hope I at least covered the basics of the problem, enough to explain my answer. You all will be sure to let me know if I got something wrong... I am sure of that! ;)


PS. This is the big secret that George F. Baker didn't want to tell Congress in 1913. That most all of what we think is money is really just promises issued by banks to supposedly credit-worthy entities giving them the right to withdraw value from a small reserve of actual money, but at the same time praying to God that they don't! It's like saying, "here you go, it's all your's, whenever you want it come and get it" with their fingers crossed behind their backs hoping you won't ever actually "come and get it".

But whatever happens in the short term, the USDX will ultimately collapse just as Jim Sinclair says because ultimately it DOES represent a preference of currencies for use in international trade. And we know where that is heading, especially while the Fed hyperinflates the monetary base trying to save its own precious global $-FI!


And in response to "Then why is the FDIC closing so many banks?"...

Hello Allen,

The FDIC is closing banks because they are insolvent. This is actually a system-wide problem as so much of the asset base is built upon the housing and commercial real estate sectors. But the bigger banks are being protected by accounting rules that let them lie about the value of their complex derivatives.

The smaller banks still hold a lot of raw mortgages, not yet securitized. These losses are harder to conceal. Many banks are still lying by not foreclosing even on badly delinquent homeowners. But this is only making the problem worse and "kicking the can down the road".

These smaller banks don't have the assets to acquire the loans they need to cover their liabilities. They are insolvent, just like the big banks, but they can't hide it anymore, thus they get closed.

This is what people mean when they say, "this is not a liquidity crisis, it is a solvency crisis". "Liquidity" means being able to get money for your assets from the CB (or from the open market). "Insolvency" means you don't even have the asset values to do that!


Some comments on Fekete's latest...

Wouldn't it be great if they just did away with all legal tender laws? Perhaps they could just keep one stating how they want you to pay your taxes. But let the courts defend any and all contractual agreements no matter what they are denominated in. And open the mint to free coinage! Of course this is all part of the world that SHOULD be, not the one that WILL be. So it doesn't give us much guidance for preserving (and increasing) the purchasing power we have NOW.

Isn't it interesting that the legal tender laws came out in 1909, just two years after the panic of 1907? As Fekete says, they led to the governmental ability to finance the world wars. But is legal tender really the problem? Or is it that the people continued to confuse the store of value function with the other monetary functions? If we now return back to the system of 1906, are we not returning to a system that has already reached a less than ideal end several times? Perhaps it would be better to embrace the separation of monetary functions as this will take away the ability to finance wars the same as a new gold standard would. Right?

Is it really the forcing of paper to be used as money (medium of exchange/unit of account) that allows the collective to rob the citizens? Or is it the conning of people into holding said paper as a store of value?? I think it is the latter much more than the former. Both to some extent, but more so the latter.

If people only hold the currency for the short time period of the medium of exchange function, then there is much less for the inflation tax to tax. The higher they turn up the inflation tax, the shorter the time people will hold the paper. In this case, the inflation tax would only be on the difference between your work contribution to the economy and what you could buy with your paycheck two weeks later. And the tax base would be limited to the amount of currency in circulation. But if people hold paper as wealth, the taxable base is orders of magnitude larger, and the inflation tax can be administered more slowly and surreptitiously because of the larger "tax base".

Imagine if every saver in 1909 started holding only gold coins in his possession as soon as they passed the legal tender laws. The parity between paper and physical gold would have snapped long before even the roaring 20's. Roosevelt would have confiscated gold valued in the many hundreds. But people trusted their governments back then. So it was easy to CONvince people that it was better to hold paper with a "yield"!

Fekete notes that no one hoarded gold until AFTER war started in 1914, at which time gold "went into hiding". But imagine if gold went into hiding in 1909 right after the legal tender laws were introduced. Perhaps then, there would not have been war at all. Or at least it would not have been so well funded!

It would sure be nice if Fekete would apply his brilliant mind to this Freegold concept! But alas, he is advocating for a new gold standard. A non-inflationary system, so we can all hold the same money we use in trade as a store of value.

Perhaps the next step in monetary evolution after a period of Freegold will be the elimination of legal tender laws in certain zones in order to gain economic advantage. This would likely be followed by the re-emergence of Fekete's "real bills". Of course I am only speculating way out into the future.

My point is that I like Fekete's analysis. It has great value! Hopefully he can help steer the direction that economic study turns as we pass through this crisis. But what are the odds that the governments of the world will suddenly listen to Antal Fekete and reverse the course of the Titanic in time? Zero perhaps? And even if they did, what would be the immediate consequences? The unintended ones?

My only point is that any superficial differences between Fekete and this blog boil down to the perspective with which we attack the problem. As you say, Shanti, "another angle"!

Fekete takes an activist approach while I take a passive one. Fekete would like to fully remonetize gold, locking it into all three monetary functions. I, on the other hand, can see that we are already in the process of fully DEmonetizing gold, which will unlock a tremendous hidden value that is desperately trying to bust out of its shell. In the end, Fekete says that he wants people to have "the right to park their savings in gold coins, as they did before 1909." But they DO have that right already! They just haven't realized how good it will be... yet!


On "is it possible that most of what we think of FED is mistaken?"...

Hello Anon,

You are inching closer to the truth than you may think. The whole system is an elaborate, global illusion. The money itself is an illusion. Why do you think banks are now offering CD's with no early withdrawal penalty? It is a gimmick. It is a carefully constructed illusion. The main goal is to keep people from withdrawing their perceived value from the system. And to create a believable illusion, they have to say, "look, you can withdraw it whenever you want". Study the logical reasoning behind Certificates of Deposit and you will see that a CD that you can close at any time is an oxymoron. It is a new gimmick for desperate times. The whole system and all Fed statistics are a gimmick now, to keep you in their system.


And finally, a little bit from FOA...

It is the dollar and all of its flaws that have led us to this place in history. Because of the dollar's obsession with gold, we are now entering a period where for the first time the monetary functions will separate out of necessity. It didn't have to be this way, but now it is. As FOA said,

"To their amazement, it turns out today, that digital use demand was the best function that supported their efforts all the while; by increasing the world's use and need for currency. Had they understood this modern economic function early on, they could have somewhat printed the currency outright with almost the same result while arriving at today's destination. They could have let gold float, not to mention they could have skipped a large portion of the debt build up that will now end the dollars timeline."

What he meant was that the post 1971 "purely symbolic dollar" architects thought they needed to cap the price of gold in order to keep the dollar in use. But in fact, it was the dollar's ease of use in the trade function that kept it in demand. Not its illusion of being a store of value. And had they realized this concept then, we could have had freegold soon after 1971 and the dollar would have lasted well beyond 2010. But instead, they set in motion a sequence of events that could only end one way, in the permanent backwardation of the gold market, meaning the emergence of a physical-only gold market at a much, much higher price, and also the end of the dollar's use in global trade.

This is where we are today. And as you watch the volatility in the markets (look a the Dow over the last few days!) think about this statement FOA made eight years ago...

""""""It's not that price inflation may erupt --------- It's not that the massive dollar debts won't be paid--------The risk is; that our money system requires dollar (goods prices) and debt stability -------- so without said stability the currency system fails""""""

Without an international floating gold reserve pricing, to balance against their devaluing debt reserve, the entire dollar banking system can only rely upon extreme dollar inflation to float its accounts. Price inflation will have to be ignored. To this end the group of dollar supporting countries, we refer to as the dollar faction, has locked itself into a box. It must find a way to float gold prices"

"The entire dollar banking system can only rely upon extreme dollar inflation to float it's accounts."!!! It must ignore the (hyperinflationary) consequences of this policy and just do it. This is what S(herlock Holmes) uncovered!


Please continue discussing.... :)