Wednesday, December 9, 2009

Gold: The Ultimate Un-Bubble


The gold bubble has not popped! ...because gold is not in a bubble. There is no gold bubble. There is no such thing as a gold bubble. Never has been. Never will be. 1980 was not a gold bubble. And anyway, today's situation is entirely different.

In fact, gold is the opposite of bubbles. It is the inverse, the recipient, the beneficiary of "frothy air" that escapes at lightning speeds when bubbles pop. It has already capitalized on the demise two bubbles this decade. And it is now about to absorb the froth spontaneously expelled by two more, the two biggest bubbles the world has ever seen.

For all you technical analysts out there plotting and planning your eventual exit from gold before the blow off phase, I have a new pattern to introduce to you. I call it the Orbital Launch Pattern, or the Inverted Waterfall. In this pattern there is no blow off! It looks something like this...

As you can see, it is the inverse of The Waterfall Effect [1]:

Think about what happens when a rocket shoots for space. Its fuel is consumed in the heat of fire, it sheds its extraneous dead weight which falls back to earth and burns up on reentry, and its underlying asset, a satellite, stays up in perpetual orbit.

What causes bubbles to form?

The answer to this question lies in a simple comparison of a few actual bubbles. Most recently there was "the Housing Bubble" and before that, "the Tech Bubble" or "Dot Com Bubble". In 1929 we had "the Stock Market Bubble". There were the concurrent bubbles in 1720, the British "South Seas Bubble" and the French "Mississippi Company Bubble". And of course there was "the Tulip Bubble" of 1637 in Holland.

In all of these bubbles demand quickly overwhelmed supply in a feedback loop whereby new demand joined the stampeding herd causing the price to rise, causing more new demand to join the stampede and so on. A self-reinforcing feedback loop. Then leverage or credit was added to the rocket-fuel mixture boosting prices to even higher stratospheric levels. With cheap credit even the shoeshine boy could get in on the action!

And with the shoeshine boy in, new and improved Ponzi-paper derivative financial trading products were created allowing the hyper-acceleration of speculative trading. Accelerated paper trading created shortages in the underlying object of desire which in all the above cases was something that could be produced to meet demand. But these temporary shortages blasted the price even higher drawing more lemmings into the stampede.

At this stage euphoria, greed, delusion and mania took over. This was when, in most cases, over-supply had been stockpiled to meet the delusional demand and the true insiders took their profits and got the heck out. Cheap credit was then cut off and the weakest players were forced to sell causing a panic in the herd of lemmings who promptly ran straight off the cliff.

Of course there were subtle differences in each bubble. But the commonality was that the underlying object of desire in each case could either be easily ramped up to meet demand through a little extra human effort [2], or it could at least be valued objectively through common metrics like income, rent, earnings, interest or through careful valuation of its component elements.

The true fair value of the underlying object of desire became obscured by frantic greed-driven trading of, in most cases, its paper equivalent. Then, with leveraged profits driving the paper trade and ramped-up production of the physical object, separation between paper and physical was imminent.

Separation of paper and physical. Sound familiar? Well it's not the same as gold. It is the opposite.

Take the tulip craze. In the early 1600's a rare tulip virus was identified which made tulips bloom in a brilliant mosaic of colors. These rare flowers soon became a status symbol. Then in 1625 an especially rare "mosaic virus"-infected tulip bulb was found which rose in price to around $25,000 in today's dollars. The trading of "paper tulips" went delusional and by 1627 one of these rare bulbs sold for the equivalent of $75K! This price caused speculators to quickly cultivate this rare breed of tulip proliferating its valuable offspring. As the offspring multiplied the rare bulb became much less rare. Then, "one day in Haarlem a buyer failed to show up and pay for his bulb purchase... within days tulip bulbs were worth only a hundredth of their former prices. The tulip bubble had burst." [3] Can you see the difference yet?

In 2000 the Dot Com Bubble ended with a wave of dubious IPO's for tech and Internet companies with little more than a clever idea. The Housing Bubble ended with a rash of ridiculous condo conversions (old apartment buildings flipped into condos) and a giant inventory of new homes that could not clear at even half the price.

To make matters worse, the easy credit that had fueled the Housing Bubble became a drain on the real economy and when it was cut off, the Ponzi financing available to individuals came to an abrupt end.

Pop Goes the Bubble

So as we can see, one of two fundamental things causes bubbles to pop, and sometimes both. In one case, frenetic delusional demand outpaces supply until malinvestment delivers a surplus supply and then the bubble is done. In the other case, frenetic delusional over-valuations outpace rational objective metrics until easy credit must be cut off to save the banks and insiders and then the bubble is done.


Normally bubbles stay popped for a generation or more, at least until the pain of spontaneous impoverishment is forgotten. Of course, once the underlying object of repulsion undershoots a fair valuation the forces of currency inflation resume a gradual ascent. But this phenomenon is anything but bubble re inflation.

In some cases post-pop bubble froth appears to flow directly into new bubbles, as in the case of the Housing Bubble following the Tech Bubble. From this perspective, we are living in a "bubble economy", which is actually true. But these serial bubbles are really just the result of Central Bank inflationary policy meant to dull the pain of newfound poverty like a shot of heroin, and not a flight of real, hard-earned capital.

The flight of hard-earned, highly valued capital always flows down the inverse pyramid directly to the safety of its solid foundation. (Please see: All Paper is STILL a Short Position on Gold)

Golden Receivership

In 1971 we could say that the high value of the US dollar was actually in a bubble. The clearest sign that this bubble was about to pop was Charles de Gaulle's demand of US Treasury gold as France expressed its desire to end the dollar's wealth reserve function. In pure desperation, the gold window was closed and boarded up like a bungalow in the Keys before a hurricane. This display of pure weakness and fright was like a pitchfork impaling the dollar bubble and gold promptly rose 2300%.

In 1929 the Stock Market Bubble burst and even though gold was under strict parity rules, severe pressure had to be released by raising its price 70%. But even this wasn't enough to contain the panicked flight of capital so domestic gold possession had to be outlawed as well.

In 1720 France, John Law's paper currency and "Mississippi Company" bubble popped. The entire capital flow went right into gold and silver. A frantic Law first limited the amount of gold that could be redeemed to stem the flow, then attempted to turn his company stock into actual currency, doubling the money supply and further impaling his bubble. Ultimately he outlawed the ownership of gold in a desperate and feeble attempt to save his dying bubble. But this only made things much worse for him and he was finally forced by the King to flee France for Venice where he died penniless eight years later. [4]

Lastly, from the day the Dot Com Bubble popped until the Housing Bubble popped (7 years later) gold rose 140%. Then, again, from the Housing Bubble implosion until today (a little more than 2 years), gold has risen another 70%.

Two Historic, World-Class Bubbles are About to Pop

Bubble #1: Government Debt (with a nominal value in the tens of TRILLIONS)

Bubble #2: Perceived Wealth, denominated in purely symbolic, un backed, unsustainable-Ponzi-debt-based currency (with a nominal value in the HUNDREDS of trillions)

Darryl Robert Schoon writes:
In the early stages of capitalist systems, interest and principal can be serviced out of the debtor’s cash flow. In the final stage of “mature capitalist systems”, they cannot.

Capitalism’s final stage is what Minsky calls “ponzi-financing”, when debt payments can only be made by additional borrowing. This is what the US, the UK and Japan are doing today, having to borrow against tomorrow in order to pay yesterday’s bills.

For 50 years, not one Dollar of new debt created by the US government to fund the activities it does not wish to tax for has been repaid. The debt has simply been “re-financed” with new debt being sold to retire the existing debt.

At some point, the end finally arrives. Ponzi-financing cannot service debt forever. Investing in unhedged paper assets is the bet that it can. Gold is the bet that it cannot. [5]

Amazingly the mathematical upper limit of Ponzi-finance coincides perfectly with the mathematical limit of the 28-year rise in past-issued bond valuations!

It is the 28-year hyperinflation of the US$-denominated debt asset bubble that is about to pop. When interest rates are falling (like they have been for the past 28 years), the value of past-issued debt assets rise. Anyone who has been playing the bond market since 1981 has made a "gross" killing! (Please see: Bill Gross):

Bill Gross buys $23M mansion in Newport
Friday, August 14, 2009 10:20 PM PDT

Here is the chart of interest rates since 1981:

Flip it over and you will see the chart of Bill Gross' profits during that same time frame:

Of course the inflation of this 28 year mega-bubble was given an assist by the systematic suppression of gold prices beginning with Barrick in 1983 and accelerated by Rubin and Summers in the early 90's with their Gibson's Paradox scheme and Strong Dollar Policy.

But the thing about THIS bubble's rise that is so different from any rise in gold is that the price of past issued debt has a natural upper limit. And the "lowering of interest rates scheme" has a physical floor, an inevitable and unavoidable dead end... call it ZERO.

Yes, we have seen a couple ventures into negative interest rate territory lately. But this is simply anathema to the very concept of money, period. It is the ultimate froth, the last breath of air you can blow in before a bubble pops. It is the sure signal that the end is nigh.

When interest rates hit ZERO, they only have one way to go. And that means that the value of past issued debt, the very kind of TRASH that China is sitting on a land-fill mountain of, only has one way to go... DOWN. This is the very definition of a bubble that is about to pop. As Peter Schiff calls it, this is The Mother of All Bubbles! [6]

There is no such thing as a Gold Bubble, Never was, Never will be

Investment demand, the kind of demand that uses any object of desire as an investment rather than a useful commodity, can obviously flow into almost anything; Tulip bulbs, stocks, bonds, real estate, computer geeks working out of their garage, etc... And as investment demand exceeds utility demand, malinvestment occurs producing the object of desire beyond its commodity demand, creating an inventory surplus.

But changes in the gold price are mostly driven only by investment demand. Industrial supply and demand in gold is very stable relative to investment supply and demand. So any significant rise in the price of gold is a clear indication of growing investment demand and is also a positive confirmation of the premise behind that demand, that gold will rise. This creates a self-affirming feedback loop of positive reinforcement.

And since gold production cannot be ramped up to meet demand like it can in bubblicious items, there is no reason for gold to fall back. Gold mining does not debase gold in the same way that dollars, tulips, homes, Dot Com IPO's or government bonds are debased through production. Mine production is taken from known reserves that are already valued, owned and traded, and all gold on the planet Earth is a fixed amount, the same fixed amount it was a million years ago. All we do is move it around, like poker chips on a table, to those savers that value it the most.

Furthermore, the price of gold is arbitrary. This means that gold can go as high as the people of Earth want to take it without EVER exceeding objective valuations by common metrics like earnings, interest or the sum value of its component elements. Gold IS the element. It cannot be broken down further, except perhaps by the LHC.

One of the most common criticisms of gold's use as an investment is that it cannot be valued the way stocks, bonds and real estate can. They are all commonly valued by their yields, and gold has no yield, therefore it cannot be fairly valued, or so the argument goes. But if we invert this argument then gold can never be OVERvalued either, whilst those other things can, and are... in a bubble!

The price of gold is arbitrary, ergo, there is no such thing as a gold bubble.

And finally, as gold's role in the world evolves from barter item to pure numéraire, to transactional currency, to simple commodity, and ultimately to wealth reserve par excellence, its value relative to the rest of the world can (and has) shifted both up and down by as much as two orders of magnitude. Such phase transitions in the functional value of gold completely invalidate "fair value" methodologies like that used by Paul van Eeden.

1980? This Time is Different!

The only way for a purely symbolic fiat currency to survive the sudden, self-reinforcing and complete coup de grâce (death blow) from its nemesis, gold, is for the central banker to get ahead of spontaneously exploding interest rates without completely demolishing the economy on which it feeds like a mutant parasite.

In 1980 this was possible, but only barely, through a drastic rate increase to 20%, and only because the economy and the national debt load was much different at the time. If the same thing was tried today the economy and the government would come to a standstill, followed by a complete and utter collapse. For this reason it is not only unlikely, it is impossible.

In 1980, the US was a net creditor nation with a balance-of-payments surplus. The financial industry was small and stable. And the US was not subservient to foreign creditors. Today the national debt is over $12 Trillion, the US Treasury Secretary must kowtow to the Chinese, and the financial industry is a brittle behemoth built on derivative quicksand. [7]

Because of these fundamental differences in 1980, Paul Volcker was able to successfully defend the dollar against the same existential threat which WILL take it down this time. That threat is capital flow into the dollar's lifelong nemesis, gold!

You can thank all the players and their activities as identified by GATA for making this time different. You can thank the mining giants that sold forward paper contracts for their future gold. You can thank our Central Bankers who leased half of their gold into the market to squash their foe. You can thank Rubin and Summers for their "Strong Dollar Policy". You can thank Alan Greenspan for the easy green. You can thank them all for making damn sure that this time there is absolutely nothing the Fed will be able to do, nor will it want to!

Interest rates will rise with a vengeance, and soon. And the Fed will have no way to get out in front of them, and no desire to do so either, which would make the Fed look like the entity that single handedly destroyed the economy and the government's golden egg-laying goose. No, the Fed will prefer to let Mr. Market destroy its Ponzi currency scam with the Chairman's remote aspiration of avoiding the hangman's noose-wielding angry mob outside with nothing left to lose.

Unlike 1980, this time gold will go up and stay up! I'm not saying there will not be a temporary overshoot in actual purchasing power. But with the specter of hyperinflation looming, it will not be worth the attempt to capture the overshoot. An exit from gold may just capture YOU in the wrong paper at the most wrong time in all of history!

A Functional Change for Gold

Some people call it the spontaneous re-monetization of gold. [7] They mean that gold will resume one of the three basic monetary functions under the common concept of money. I, on the other hand, call it the complete and final demonetization of gold, meaning gold finally breaks all parity with paper equivalents and trades only in its physical form, trading as the inverse of paper. These re/de-monetization differences are only semantic. We are talking about the same thing. See my three part series titled Gold Is Money for more. [8][9][10]

As gold exchanges its commodity label for that of wealth reserve par excellence, it will mainly replace the debt-asset trade, not the equity or stock trade. But the equity trade will fall by a significant margin as well, in relation to gold, because the frothy debt trade has pushed far too many conservative investors into the risky equity market.

Orbit = Perpetual Levitation

Just as when bubbles pop they stay popped, so too when the ultimate Un-bubble Un-pops it will stay Un-popped!

Probability Distribution

So how much of your perceived wealth have you locked into a real, solid, "good as gold" wealth reserve? I shouldn't have to say this because it is so obvious, but it is clearly better to "cash out" of the paper game and "lock in" your profits BEFORE the two biggest bubbles in history pop. That way you beat the rush, so to speak.

As for the coming rush, by my back of the toilet paper calculation I figure we will soon witness somewhere between $XXT and $XXXT of perceived 2009 dollar "wealth" capital flow into roughly $XT worth of gold on a global scale. For this reason I created my probability distribution curve:

And for those of you that don't yet understand the difference between Freegold and Hyperinflation (which is apparent through statements like "what good is $100K gold if a roll of toilet paper costs me $100?"), I created this second "purchasing power" distribution curve to clarify my position:

A Final Note

For you new readers and those who are reading this post on other websites, I would like to state for the record that my thoughts are not original. My blog now has 90 original articles written by me dating back to August 23, 2008. They are a record of my journey understanding the writings of the enigmatic Another and FOA, and how they relate to our current crisis. It is to these two anonymous messengers that my blog is a humble tribute.


[1] The Waterfall Effect
[2] Gold Price is No Bubble by James West
[3] The Dutch Tulip Bubble of 1637
[4] That's Not How Bubbles Work
[5] 2010 READY OR NOT HERE IT COMES Constant prosperity through credit is no more possible than constant peace through heroin
[6] The Mother of all Bubbles by Peter Schiff 2008
[7] Why the Global Financial System is About to Collapse
by "John Law" 2006
[8] Gold is Money - Part 1
[9] Gold is Money - Part 2
[10] Gold is Money - Part 3


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Indenture said...


"So far I have not stocked up. I think there will be enough time for a careful observer. I have only planned to make sure I do buy enough once I decide to buy."

I have read incredibly bright comments from in the past you but this one shocks me. I wouldn't want to "carefully observe" the supermarkets full one day and empty the next as I'm waiting to "buy enough".

raptor said...

about the discussion why China would encourage their citizens to buy gold and silver. I think the reason is very simple. What matters at the end is who have more purchasing power if the gld/slv in the international arena is here to stay like true wealth preserver it is in their best interest for their citizens to preserve their purchasing power, because once there is no more usa consumer this is from where they will have to finance themselves. In socialist country it is easier to decree and enforce transactional fiat currencies and even if renunbi is devalued too Chinese citizens would have preserved their wealth to deploy in the aftermath. And the gold from them will flow naturally into China central bank by a matter of a trade transactions. Why would it will go into even more devalued $,euro's and pounds.

One more benefit to this scenario is that the Chinese citizens will help bank of china to fight the paper-tigers and their enormous short positions.
(think about it 300 mln middle class chinese buying 1oz mean ~10000 tonnes gold, no consortium of western banks can flood so much gold to stop it)
Why not deploy your surpluses in establishing strategic oil and other commodities supply instead of accumulating too much gold, when you know that after the crisis it flow to you in a natural flow of trade.

The cheap labor market guarantees you can out-compete most of your competitors on price level until the time is right to depeg your currency.

Ender said...

@Gody’s posts

There are almost too many questions, yet the conversion is now getting more interesting.

In the 5:14 post above, you’ve pulled up a snippet of an old post that hints that there may be purpose behind the function of gold for a currency. As you explore the ‘Strong Currency” idea provided in that paragraph, keep in mind what a ‘Strong Economy’ means for the political organization that runs that local economy. Ie. What are the benefits of a strong currency? That path, IMHO, is most interesting.

The super-producer idea being touched on in your thread with FOFOA plays a key role in helping tie things together. Place the super-producing shoes on your feet – would you establish a business in an economy that had an ever weakening currency? Or, would you look for a strengthening currency economy? Why …

Before leaving the super-producer idea, consider this, if you (as a political organization) cannot protect the wealth of your economic base, the ability to grow (or even maintain) political influence will diminish as the economy shrinks. An economy that does not have a surplus will lose the political influence that currency buys.

Leaving that behind, what is really at the root of it all? It might be worthwhile to break down the ‘wants’ that make up the big picture. What do the politicians want? What do the bankers want? What do the people want? Mixed up in all of this, I believe, there is information as to why gold – must be made available – to you and me.

IMHO, and hopefully the reasons will be exposed again in this thread, the no-ones will have as many gold nuggets as they request!

Ender said...

@No King But God

Welcome. I am looking forward to reading your words.

Martijn said...


Interesting to notice that t-holdings of Caribbean banking centers have also declined. One could expect them to take over from other countries.

Unknown said...


Thank you for your response.

The principles that you and FOFOA talk about like I said all make sense. Just so that you see that I get the points, I will answer some of you questions.

What are the benefits of a strong currency?

To the gov't, it keeps them in power because it performs the purpose/ function that is was intended for. In this case, the ability to purchase Gold and Oil. The the "no ones" most just require something that allows them to purchase what they need.

Place the super-producing shoes on your feet – would you establish a business in an economy that had an ever weakening currency?

No. Because weakening currency implies it may not perform its indeed functions. To me as a super-producer, I would be interested in storing some wealth and hence would like to obtain some gold. A weak currency would bid the "price" up of gold. At the worst case, it could even lead to hyperinflation.

would you look for a strengthening currency economy? Why …

Yes because of the reasons given above. And even better, a strengthening currency economy means it would get more gold and therefore bid the price down with the possibility that if I held on to my currency, I might be able to get the gold cheaper.

What do the politicians want? What do the bankers want? What do the people want?

Politicians want Power and Control of the masses and women and money.
Bankers want power and money and women.
Masses want to be able to live a decent life. Keep their honest wealth that they earn if they have surplus. Some may want free rides, money, power and women. Nothing new here.

Which is where my questions come from. This is a utopian concept where everybody just want to do the right thing. Well it hasn't happened in man's history. So, what makes you think it will work now?

Martijn said...


I have read incredibly bright comments from in the past you but this one shocks me. I wouldn't want to "carefully observe" the supermarkets full one day and empty the next as I'm waiting to "buy enough".

I have enough medication for a year, quite some silver and food for a few weeks, but I am not stocked up for months.

However, I is not supermarket stock I am watching, but rather political and financial developments. If something big of any kind happens, I will be buying.

So far I have learned enough to know that I am far enough ahead of enough people not to find the supermarkets empty when I do stock up.

Unknown said...

Ender, FOFOA,

My final conclusion therefore is

Freegold is a system that will be implemented between economies to settle balances of trade.

The "no ones" will not get a piece of the action. Just like mines will be nationalized, so too will owning gold be controlled for "no ones". For the common good you see.

Confidence will be restored as long as international trade continues. Most "no ones" only care about their ipods, cars luxuries etc. For those who will try to make some wealth, well buy a house, farm or whatever tangible asset or go to the black market for your gold.

This, gov't continue to get what they have always got. So too do the bankers. And the "no ones" get to have their wealth controlled through currency.

Unless someone tells me why they think "no ones" will be allowed to own gold. I rest my case.

Thank you all.

Martijn said...

An economy that does not have a surplus will lose the political influence that currency buys.

Interesting concept.

The USD basically was a local currency. Local currencies generally have use only within the domain where it is declared legal tender; buying a beer with Thai Bath.
When the USD went global, it did not make much sense for the US to exchange it for other regional currencies, as they where (and are) of little value outside their "residence".

Therefore the only way to get something of value for the dollar for the US would be to trade it for products, and hence run a deficit.

Not a stable system by far, but in my opinion it is inherently unstable to use a regional currency on a world-wide scale.

In the 19th century as international trade increased driven by technological innovations such as the steamboat, many Western countries voluntarily switched to gold backing as it was a (the) natural internationally recognized medium of value exchanged.

The wars of the 20th century made it difficult for countries to continue gold backing, and hence in '71 the world went paper, but the voluntary and natural reaction to growing international trade was to use gold.

raptor said...

Reading the comments remind me of a scene from the book "Battlfield Earth" where the main character Johny(human) after the destruction of the universes-superpower the Psychlos get all those alien warlords(that can annihilate Earth if they want in a matter of a day). What he does is shut the lights and recording mics in the conference room and tells them (paraphrasing here):

- Do you really want to conquer Earth and get some pennies when u sell it ... or want to get back to your ruined worlds with a plans of reconstructions paid by the new bonds issued by Earth bank (which as of this time was almost owner of the Galactic bank....).
So you go back to your ppl and become heroes being able to "NEGOTIATE" this good deal and at the same time buy on cheap bankrupting companies (which later will get support for rebuilding the universes) and become rich beyond all means.

They can do that cause he is giving them that inside information that they will be supported by the BANK.

Sorry for the sci-fi distraction but it is funny how true a fiction can be ;)

So my parallel here is that if you are in the inner circle if you have the info that the end solution will be freeGold, what you would do... try to keep gold as low as possible as long as possible getting almost free monies so you can accumulate more physical stuff.

- Shht guys we can't save the system, but we can prolong it until we position ourselves to benefit from the rebuilding process..
OK..i went too far.. i'm also more inclined to believe that there is several powerful groups playing each other, rather than one big-conspiracy.
But then again from time to time their goals match and it may seem like a one big conspiracy.

PS> Just as a curious fact not a conspiracy, the author of the book is L Ron Hubbard the guy that invented Scientology ;)) funny huh..;).
And btw I'm not scientologist.

Another interesting fact is that the galactic bankers are small grey unsignifical speices that can eat almost all type of food ;)

raptor said...

one more thing.. the bankers are from waterworld, evolved from a shark-like spieces ;))

stibot said...

FOFOA, or (of course) whoever ;-)

in your article Your Own, Personal, Freegold you cumputed euro is backed by gold reserves by ratio over 50 % using formula gold assets/total reserve assets. I consider this formula misleading.

If I'm looking how much euros have been issued (Euro money supply), there is number like 8500 billions euros.

Therefore for me it looks like there is less then 5 % backing by gold. Could you put a note why you didn't compare 233 billions in gold reserves to money supply instead?

Thank you.

Martijn said...

"We are not sure if this is a well known "fact", but the U.S. government has a record $2.5 trillion of its debt, including bills, bonds and notes, rolling over in 2010. That, my friends, is 35% of the outstanding level of Uncle Sam's marketable obligations having to be refinanced in one single year."

costata said...


Musing about two issues today.

1. How would one or more EU countries exiting the Euro and re-issuing their own national currencies affect the process toward Freegold?

(Apologies if you have a post about this. If so, please provide the link.)

2. Is separation of the payments system a prerequisite for Freegold to advance? (Please see link below.)

"Volcker wants tough constraints on banks and their activities, separating the payments system ..."

costata said...


"Long,,,,,, longggggg,,,, before these delivery demands ever fully surface, comex will state position limits, cash settlement and trade for liquidation only."

"I think this is already happening minus the position limits."

Trace Mayer reports (link below):

"The COMEX has raised the margin requirements for gold and silver futures contracts. Additionally, gold is trading in minor backwardation but this is probably not serious."

"Margin requirements and other exchange rules are what put a damper on the Hunt brother’s plans. Overnight the rules were changed without notice and it resulted in tremendous losses and margin calls to the Hunts."

I think this is a good question that Mayer poses:

"The effect of margin requirements on the instruments of the gold price suppression scheme does cause some questioning. For example, are they (sic big BB shorts) even subject to the requirements?"!+Mail

Ender said...

@Martijn and the regional currency

Good to see your line of thinking. Let’s not stop there though, but look for details on – how the dollar went global. There are details there that build a good foundation. Raptor’s observations really do fit.

Let’s not really explorer here, (but on your own,) what the dollar management did just after WWII to Europe (notice I did not say for). The economies were in shambles and the dollar system bought the right to trade commodities in dollars. In effect, this is similar to declaring it legal tender in areas outside the local economy. Those reconstruction dollars, for a few years being as good as gold, set the stage for what’s unfolding around us today. In the early days of the agreement, dollar actions were tempered by the fact that they may have to actually make good on dollar settlement. Today, restraint is a matter of willpower and that is against the nature of the beast.

Gody, Do you really seek and answer, or simply want hold on to your current way of thinking? We may be pawns in the game, but it doesn’t mean that we have to played blind.

For those following, it is interesting to investigate why ‘no ones’ are part of the big picture. Or, worded differently, why is it so important that a commoner to be allowed to, and actually hold, gold as our current monetary system evolves? With that in mind, we revisit the system.

That Strong Currency: The strong currency doesn’t keep the government in power, the strong currency helps with the spread of influence that government has. There are many weak (some very weak currencies) that function just fine for the local government. Weak currencies tend to not be held by anyone other than those that must. As we know through inflation, when someone holds a currency it broadens the tax base. The key point though is to think about the act of holding the currency. Perceptions and confidence over TIME is critical. People must ‘feel’ that the currency will be just as good many days from now as it is today. The managers of the currency strive to make this happen. The Strong Dollar Policy might go a little further because the dollar managers have the ability to create a surplus in any publically traded commodity that they choose (Fractional reserve futures – GATA’s story).


Ender said...


That super-producer doesn’t really think about gold. But rather, he thinks about the future return on capital. If you were to invest today to build production that will come online in 7 years, will you get a return on your investment? If everything stayed the same as it is right NOW, the calculations may be very simple. Yet, we’re talking seven years into the future which could be a lifetime in currency terms. If that super-producer sells (seven years from now) will he be in a better or worse economic position? It greatly depends on the management of the economy in which the super-producer operates.

With this in mind, if you were to manage the economy what kind of conditions would you want to try to setup? If the logic holds, you would want a place where the super-producer would want to setup shop. You need to provide confidence to that super-producer so they will give function to the currency (what they produce can be bought with the currency).

And those pesky politicians, what do they really want? Seems to me that they simply want a piece of what the super-producer makes without having to earn it. The Bankers are similar in that they also get a portion of what’s produced by bringing future earnings into the present effortlessly. Us little guys simply want fair exchanges over time. Nowhere in this picture does anyone other than a gold bug think about gold.

Ultimately, why should anyone care about gold? It’s not legal tender. What is more important holding gold or holding the right to print the local currency?

Tomorrow might be a good time to revisit this.

Unknown said...


Thank you.

Gody, Do you really seek and answer, or simply want hold on to your current way of thinking? We may be pawns in the game, but it doesn’t mean that we have to played blind.

You have explained things philosophically and they all tie together. Kudos. I have no problem with that.

You say I am holding to my way of thinking. Well you haven't provided me with anything to change it. I have history to back me up. And Super-producers have always existed even when controlled and their wealth confiscated. It has happened since the dawn of man. So, nothing new there for me. Scientists, engineers, producers of wealth have to a large extend accumulated wealth to "middle class level" which really is just another nice way of saying a comfortable standard of living. Very few achieve higher, say like Bill Gates ( but his wealth is still very small potatoes made possible by the illusion of wealth in paper. How wealthy is he really if all that paper crashes?)

Even Russia had super-producers. I can make a case that the US "won" largely because of "dollar hegemony" read world reserve currency but I don't want to have another argument on another tangent.

Even in the present time Laws can be changed at will so, mentioning legality as the linchpin doesn't convince me. The US constitution offers no solace.

Whatever most people have is controlled and has always been. Where would you get you gold if the gov't did not allow mining and the mint to provide you with coins at the scale you are talking about?

If I may be blunt this freegold is very selective in arguing about gov't power. On the one hand is argues that the mines will be nationalized and on the other that gov't can't control gold to "no ones". Now who are you kidding? That it is to their best interest to allow private ownership. I agree, until it not to their best interest to allow it. I have history to back me up. You have a theory.

you say And those pesky politicians, what do they really want? Seems to me that they simply want a piece of what the super-producer makes without having to earn it.

And I keep asking you, how will freegold allow this? Cause if freegold doesn't allow this, it aint gonna happen.

Therefore, my conclusion still stands; freegold will be implemented for economies and the masses will be controlled.

If you can disapprove by addressing my questions, I will reconsider but if you will just say that I am holding to my old beliefs then let it be so.

Unknown said...

Just for the record; I do own physical gold, just like I have a house and a farm. But I have no illusions that they cannot all be taken away. History tells me that when push comes to shove they will take them away.

Further, on the spiritual aspect, I am told by the Holy Book that a one world spiritual and economic system is on its way and "no one will be able to buy or sell without ....."

FOFOA said...


I received an email from a NY hedge fund manager after I mentioned that calculation again in Gold is Money - Part 1. It was similar to your question so I will be lazy and paste for you the entire back and forth. It will probably have to be cont...

Oct. 19

Big fan. The strength of your prose sets you apart.

Question: How do you figure that the ECB's gold reserves have risen from 15% - 55.6%? I calculate 12.9%. I am curious where this 55.6% figure comes from.

Thanks, and best of luck.


Hello ____,

Thank you for the compliment!

I laid out my calculation in the post, Your Own, Personal, Freegold. Basically, it goes like this...

The original 15% requirement was a proportion of the reserves transferred to the ECB to join the union in 1999, 15% gold, 85% foreign currency assets. Each country was required to transfer an amount around 40B euros depending on its size. July 7, 1998 – European Central Bank decides to hold gold

If we look at the ECB International reserves as of Aug. 2009, total reserves are valued at 427,967,000,000 euros. Gold reserves are valued (through the MTM concept) at 232,659,000,000 euros. 54.4%. Note that the ECB marks up the value of its gold reserves to the market value each quarter.

But with the quarterly revaluation of gold at the beginning of October, gold holdings rose by another 6.26B euros after the Aug. statement was put out.

This is reflected in the ECB's financial statement of Oct. 7, 2009, as 238,169 euros. 55.6%.

Please let me know if I have done something wrong in this calculation. So far about 10,000 people have read that post and no one has complained yet (except you hehehe).




FOFOA said...



That clears it up for me and makes sense; it is merely a semantical misunderstanding (how appropriate given your post). When I think of reserves relating to a central bank, I use the total liabilities (or "assets" since a central bank has no equity) as the denominator whereas you are identifying the reserves held in gold as a % of total reserves (FX + gold).

Since liabilities at the outset of the formation of the euro regime approached zero (on day one it was literally just FX + gold), these two figures would have been the same at that point. If you go to the consolidated opening financial statement for the ECB, it shows gold reserves of E 99,598 divided by total liabilities of E 697,160 = 14.2%. I believe short term noise in the FX markets (priced in gold) between the time of contribution and the time of the statement accounts for the discrepancy between the 14.2% actual figure and the 15% target. Therefore, I'd argue that the apples to apples comparison today to the 15% figure at the outset of the Euro regime might more appropriately be gold reserves divided by total liabities (E 238,169 / E 1,844,567 = 12.9%).

Again, however, it's a semantical distinction. Thanks for your quick reply, and I look forward to continuing to benefit from your thoughts.

Kind Regards,


Hello ____,

Your perspective highlights one advantage of Freegold. It is often said that there is not enough gold in the world to back all the currency, let alone the perceived wealth. But that is only a function of gold's price.

The euro has "printed" making its outstanding liabilities increase faster than the value of its gold. If the gold market was free, meaning price discovery came from the physical market, this would not happen.

In Freegold, a currency will be backed by gold and exchangeable with gold, but not through the CB like the old gold standard. Instead through the free market floating goldprice! Right now it is an illusion that the $ is exchangeable with gold at $1065 because of the paper gold market, and because of suppressed demand through the MSM/Fed/WallSt. et al.

The CB's FX (gold) reserves lend it credibility. It can use these reserves to increase its credibility on the global market if it wishes, by selling or buying gold. Imagine that at SOME price, all of the ECB's liabilities would be covered by its gold reserves. Then if it wishes to print some more, the gold price will simply rise in Euros as demand to exit Euros and enter gold increases.

The currency zone as a whole will be judged on the world stage by the net flow of gold in or out, as measured by currency flow through a central currency exchange, since there will not be a $ reserve currency. A productive (properly managed currency) zone will have a net inflow of gold, a strong and stable currency, and an inflow of capital for business!

My guess is that the trend is now leading us to regional currencies, Latin America, GCC, Euro, Asia, etc...

I don't expect that the SDR will become the new dollar.


FOFOA said...

@Costata (12:06),

I have stated that I believe the trend will take us to more localized currencies. See Bondage or Freegold. And that is what we are seeing in the Eurozone. It is very difficult to manage a single interest rate across different regions with different needs. Especially in a floating fiat regime with no anchor. See the Mundell/Friedman debate (ONE WORLD, ONE MONEY?).

The Eurozone is experiencing these problems now. But in any case, it is neither here nor there with regard to Freegold. We will have Freegold whether we end up with all local currencies or a new One World Currency (NWO). The transactional currency in use is irrelevant once the monetary functions have broken apart.

The Euro was built to withstand the destruction of the dollar. But its weakness is in its fixed exchange rate zone with a wide range of economies of differing strengths. The goal was price stability across a wide region. The cost is unstable debt and deficits.

I believe we will ultimately end up with many floating currencies, but they will float (be judged) against the wealth reserve gold, not against each other.


FOFOA said...

@Costata (12:06) cont...

"2. Is separation of the payments system a prerequisite for Freegold to advance? (Please see link below.)"

Not sure I understand your question. I believe Volcker and I are in agreement that commercial banking should and will ultimately return to little more than a utility and separate from investment banking. That may be a subsequent consequence of Freegold, but I don't see the causal relation in the other direction.

FOFOA said...

@ Costata (12:22),

As long as the commodity markets for gold and silver are functioning at status quo the leveraged paper players will certainly play havoc with the price, especially if the exchange tinkers with margin requirements.

In 1980 the Hunts tried to corner the silver market using leverage. (See The Story of The Hunt Brothers) Today the threat to the Comex is not from a leveraged corner. It is from a cash/physical corner. It was easy to cut the Hunts off at the knees. That same move today will only quicken the paper default.

The exchange is protecting its own liability by changing the margin. I think this says something important. And all they are doing is driving leverage out of the market which may make it more susceptible to running out of physical. Think of this phase as the final consolidation before backwardation.

FOFOA said...


"Unless someone tells me why they think "no ones" will be allowed to own gold. I rest my case."

Skipping entirely the argument that the trend seems to be that more and more nations are actually encouraging their "no ones" to own more and more gold, including to a lesser extent the US through its Eagle program, here are a couple more reasons:

1. Because the more people that are buying gold, the more valuable their gold is. Gold is a game of "how much is your slice of the pie worth"? Not "how big is your slice of the pie"? In wide circulation a small slice can be worth MUCH MUCH MORE than a very larger slice in a controlled and limited distribution.

2. It will decentralized the trade deficit settlement function. Right now the US trade deficit is settled centrally by the US issuing Treasuries to foreign CB's in exchange for dollars they bought by printing their own currency and purchasing the dollars from their exporters. This settlement function will soon fail and slow or stop international trade. (See Bondage or Freegold) In order for international trade to resume it will need to be settled at the ports, so to speak.
Centralized settlement
Localized settlement

This resumption of trade flow will also indicate a resumption of TAXABLE trade flow.

The calculation of the government will be that it is better to tax a healthy flow of trade than to have total control over no flow. In any case, regaining the centralized settlement function will be impossible, improbable, and/or possibly dangerous for the central government to attempt at that point.

This is far from utopia. It is simply where the river of time is taking us, imho.

Govt has refined its confiscation technique. It's called taxes. Confiscation and taxes, one and the same. Confiscation and debt inflation, different. When debt inflation dies it cannot be replaced with confiscation without giving up the tax base.

Unknown said...


I guess we do agree. We just disagree at the end game.

Nations encouraging ownership now does not imply continuation of the same. That is where we disagree. You believe it will continue to be so, I believe in the possibility of otherwise. The reasons to which I have given.

Further you write Confiscation and taxes, one and the same. Confiscation and debt inflation, different. When debt inflation dies it cannot be replaced with confiscation without giving up the tax base.

Different in how they work but same effect. Yes I agree that you have to give up the tax base. Not a huge problem for the rest of the world, a problem for the US. Further, in this 2 tiered system, strong currency economies can keep gold from the people without resorting to force. How? Greed. I can get gold cheaper later. For weak currency economies, control or economic annihilation. And if done as part of sovereign internal affairs, does not impact the concept of freegold at all. No?

1. Because the more people that are buying gold, the more valuable their gold is. Gold is a game of "how much is your slice of the pie worth"? Not "how big is your slice of the pie"? In wide circulation a small slice can be worth MUCH MUCH MORE than a very larger slice in a controlled and limited distribution.

Good point but doesn't require "no ones" to be just as effective. The nations of the world are sufficient. IMHO. Again we agree but disagree on the depth.

Your point number 2 is in agreement to what I have been saying. So, no argument from me.

costata said...


Thank you for the reply and the links. I have read several of those posts but I think I need to read them at one sitting to fully apppreciate them.

Regarding the payment system question I should have made a distinction between Freegold and fiat currency becoming purely a transactional medium. I tend to think of them as two sides of one coin (a gold coin of course).

In any event you helped me to clarify my thinking a few comments later in your remarks about this issue eg.

"In order for international trade to resume it will need to be settled at the ports, so to speak."

Absent an international reserve currency there doesn't seem to be any rational reason for a payment system to be the exclusive province of a banking system.

Also if most Banks are discredited by their bad behaviour I am imagining a time when allowing them to, in effect, control the international trading system may be considered too risky.

In short I am envisaging a more neutral payment system, a fee-for-service much like the InterWeb, a postal service or something along these lines conceptually rather than something mediated (distorted?) by the banks.

The bi-lateral currency swaps that China, Russia etc have been putting in place suggest an evolution in this direction IMHO.

Unknown said...

Predictions for the Next 10 Years by Dmitry Orlov

He of the famous Reinventing Collapse:The Soviet Example and American Prospects

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