Saturday, January 30, 2010

Living in a Powder Keg and Giving Off Sparks

Well, we had quite a week! Obama's State of the Arrogant speech confirmed that we will continue on with more of the same. More big projects, cool new bullet trains, and more big, expensive government. Helicopter Ben was confirmed for another four-year term, sure to be chock full of QE, both overt and covert. And Congress cleared the way for another $1.9tn in deficit spending. Quite a week indeed!

It almost seems like there is nothing at all that could stop these guys in Washington. With all the green lights, rainbows and good news, what could possibly go wrong?

It is this question that is most important to us savers and investors. What could go wrong?

Sometimes history repeats. The rest of the time it just rhymes.

Flashback: 1967

London: Nov. 19, 1967 - The new Labour government had inherited an £800m deficit from the Conservatives when it was elected just three years earlier.

Labour Prime Minister Harold Wilson proudly said the party had managed to reduce the deficit over the past three years. Nevertheless, the cost of hostilities in the Middle East, the closure of the Suez Canal and the disruption to exports through the dock strikes had put a tremendous strain on the pound sterling.

Harold Wilson

After weeks of evil speculators pounding the pound, the Bank of England had to, in one day, spend £200m worth of its gold and US dollar reserves buying back sterling in a futile effort to shore up its [f]ailing currency.

It was from this backdrop that Prime Minister Wilson announced the surprise devaluation of the pound.

"Our decision to devalue attacks our problem at the root and that is why the international monetary community have rallied round", said Mr. Wilson in a radio and television broadcast.

"From now the pound abroad is worth 14% or so less in terms of other currencies. It does not mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.

"What it does mean is that we shall now be able to sell more goods abroad on a competitive basis."

The Conservative leader Edward Heath also appeared on television to reply to Mr Wilson's broadcast. He accused the Labour Government of failing in one of its foremost duties - to safeguard the value of the country's money.

Heath said, "Having denied 20 times in 37 months that they [Labour] would ever devalue the pound, they have devalued against all their own arguments."

But the only alternative, said the Prime Minister, was to borrow heavily from governments abroad. And the problem with this option was that the only loans being offered were short-term loans.

Prime Minister Wilson defended his decision to devalue the pound saying it would tackle the "root cause" of Britain's economic problems. He went on to say that he hoped a boost to British exports would lead to increased production and more jobs at home.

He said there would be cuts in defense spending and in some other capital expenditure programs.

Finally, he said that although there would likely be increases in the cost of some imported goods, such as food, he hoped this would not feed into excessive wage demands. [1]

A Banquet of Consequences

This relatively small (14%) devaluation of one single national, non-reserve currency in November of 1967 turned out to be quite a spark in the monetary powder keg of the Bretton Woods gold exchange system and the London Gold Pool. Within weeks of the devaluation the group of central bankers known as the London Gold Pool had to sell 1,000 tonnes of their own gold into the public market, 20 times the normal amount!

Then France under Charles de Gaulle withdrew from the gold pool and demanded US gold rather than Treasury debt in exchange for France's surplus dollars.

And less than four months after the British devaluation the outflow of official gold was so severe that Buckingham Palace had to declare a bank holiday, the London gold market closed for two weeks, and the London Gold Pool disbanded officially and permanently.

Three and a half years later the Bretton Woods system was done.

In 12 short years following the 14% surprise devaluation of the pound, the world saw the end of the London Gold Pool, the end of the gold standard, and a 2,400% rise in the price of gold. If gold rose 2,400% from "Brown's Bottom" like it did in the 70's we would see a price of $6,300 per ounce in 2011. If it went up 2,400% from today the price would be $26,000 per ounce, just to give you some perspective.

Of course my view is that we are not living a repeat of the 70's. My view is that something much more dramatic and fundamental is happening today. Even still, the London Gold Pool is a pretty good case study for understanding today's gold market.

The London Gold Pool

The London Gold Pool was a covert consortium of Western central banks, a 'gentleman's club' of sorts, that agreed to pool its physical gold resources at predetermined ratios in order to manipulate the London gold market. Their goal was to keep the London price of gold in a tight range between $35.00 and $35.20US.

London had become the world's marketplace for gold. For more than a half century nearly 80% of the world's gold production flowed through London. The "London Gold Fix" daily price fixing began in 1919 and only happened once a day until the London Gold Pool collapsed in 1968 and an "afternoon fix" was added to coincide with opening of the New York markets.

In 1944 the Bretton Woods accord pegged foreign currencies to the US dollar and the dollar to gold at the exchange rate of $35.20 per ounce. At that time gold was not traded inside the US, but in London it continued to trade between $35 and $35.20, rarely moving more than a penny or two in a day.

Through the first decade of the Bretton Woods system there was generally a shortage of US dollars overseas which lent automatic support to the fixed gold peg. But the US was running a large trade deficit with the rest of the world and by the late 1950's there was a glut of dollars on the international market which began draining the US Treasury of its gold.

Then, in one day in October 1960, the London gold price, which would normally have made headlines with only a 2 cent rise, rose from $35 to over $40 per ounce! The Kennedy election was just around the corner and in Europe it was believed that Kennedy would likely increase the US trade deficit and dollar printing.

That October night, in an emergency phone call between the Fed and the Bank of England, it was agreed that England would use its official gold to satiate the markets and bring the price back under control. Then, during Kennedy's first year in office the US Treasury Secretary, the Fed and the BOE organized the London Gold Pool consisting of the above plus Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg.

The goal of the pool was to hold the price of gold in the range of $35 - $35.20 per ounce so that it would be cheaper for the world to purchase gold through London from non-official sources than to take it out of the US Treasury. At an exchange rate of $35.20, it would cost around $35.40 per ounce to ship it from the US to Europe. So the target range on the London markets acted as a shield against the US official gold which had dwindled substantially over several years.

The way the pool was to work was that the Bank of England would supply physical gold as needed into the public marketplace whenever the price started to rise. The BOE would then be reimbursed its gold from the pool according to each countries agreed percentage. If the price of gold fell below $35 an ounce, the pool would buy gold, increasing the size of the pool and each member's stake accordingly. The stakes and contributions were:

50% - United States of America with $135 million, or 120 metric tons
11% - Germany with $30 million, or 27 metric tons
9% - England with $25 million, or 22 metric tons
9% - Italy with $25 million, or 22 metric tons
9% - France with $25 million, or 22 metric tons
4% - Switzerland with $10 million, or 9 metric tons
4% - Netherlands with $10 million, or 9 metric tons
4% - Belgium with $10 million, or 9 metric tons

And since they, as a group, were doing this in secret, it turned out that they were able to make a substantial profit in the first few years of the pool. Since they were buying low and selling high within a fixed trading range that only they knew was fixed, they reaped substantial profits and even increased their reserves as much as FIVE-FOLD by 1965!

But with the cost of US involvement in Vietnam rising substantially from 1965 through 1968, this trend reversed and the dollar came under extreme pressure. From 1965 through late 1967 the gold pool was expending more and more of its own gold just to keep the price in its range. Seeing this, France (who was one of the insiders and knew of the price fixing operation) began demanding more and more gold from the US Treasury for its dollars.

And as this trend progressed, the world was flooded with more and more dollars that were backed by less and less gold, creating an extremely volatile situation. Public demand for gold was rising, the war was escalating, the pound was devalued, France backed out of the gold pool, and in one day, Friday March 8, 1968, 100 tonnes of gold were sold in London, twenty times the normal 5 tonne day.

The following Sunday the US Fed chairman announced that the US would defend the $35 per ounce gold price "down to the last ingot"! Immediately, the US airlifted several planeloads of its gold to London to meet demand. On Wednesday of that week London sold 175 tonnes of gold. Then on Thursday, public demand reached 225 tonnes! That night they declared Friday a "bank holiday" and closed the gold market for two weeks, "upon the request of the United States". (So much for "the last ingot", eh?)

That was the end of the London Gold Pool. The public price of gold quickly rose to $44 an ounce and a new "two tiered" gold price was unveiled; one price for central banks, and a different price for the rest of us. Even today official US gold is still marked to only $42.22 per ounce, $2 LESS than the market price in 1968! [2] [3]

A highly recommended read is the Fed minutes from its December 12, 1967 FOMC meeting, one month after the devaluation of the pound sterling. It can be found on the Fed's own website, and is an amazing, priceless window into the final days of the London Gold Pool. Here is a small excerpt:
...the announcement on Thursday, December 7, of a $475 million drop in the Treasury's gold stock seemed to have been accepted by the markets as about in line with prior expectations of the costs of the gold rush following sterling's devaluation. What the market did not know, of course, was that only a $250 million purchase of gold from the United Kingdom saved the United States from a still larger loss in the face of some foreign central bank buying, notably the $150 million purchase by Algeria. The actual pool settlement for November took place last Thursday and Friday, December 7 and 8; the U.S. share of the $836 million total was $495 million. The logistical acrobatics of providing sufficient gold in London were performed with a minimum of mishaps, although the accounting niceties were still being ironed out.

Of greater concern, however, was the fact that the drain on the pool was accelerating again, Mr. MacLaury observed. Last week there was a small net surplus, but yesterday the loss was $56 million and today $95 million; for December to date, the pool was in deficit by $183 million. Some of the demand shortly after devaluation apparently represented large individual purchases by Eastern European countries, Communist China, and possibly Middle Eastern countries, although demand was more general in the last two days.

On the whole, it was Mr. MacLaury's impression that the measures taken by the Swiss commercial banks and by some other continental banks to impede private demand for gold worked quite well, although it was clear from the start that such measures could serve only as a stop-gap until some fundamental change was agreed upon. Persistent newspaper leaks--mainly from Paris--about current discussions on this subject and their reflection in gold market activity Monday and today pointed up the need for speed in reaching a decision. Mr. Hayes was in Basle this past weekend and might want to say a few words about recent developments. So far as the prospect for further declines in the gold stock were concerned, the Stabilization Fund now had on hand about $100 million. He knew of no firm purchase orders at the moment, although there was a distinct possibility that Italy might want to buy $100 million before the end of the year to recoup its losses through the pool. No one could say, of course, how many orders might be received from other quarters, but it would be surprising if there were not some. [4]

Of course the London Gold Pool was just one in a long chain of wars declared on the gold price by our modern central banks. [5] The current war on gold, led by the US Fed and Treasury, that we have been living under for at least 15 years now, is being documented - with sweeping precision - by no one other than GATA. Go GATA! [6]

Repeat of the 70's?

As I said earlier we are not reliving the 1970's. In the 70's we lost the gold standard but not the reserve currency. Today we are not only going to lose the reserve currency, but perhaps (and I say most certainly) the very idea of a reserve currency. Can you imagine a reserve that is not a currency? Can you imagine a transactional currency that is not a reserve? How about on a global scale? A global reserve? A global currency? How about a global reserve and a bunch of local or regional currencies? So many options to consider!

In the 1970's the gold market was a lot more "physical" than it is today. So while the flow of funds that went into gold was more directly reflected in gold's price, there also was not a paper gold derivative market like there is today that could swell along with demand and then rupture all at once.

Another difference was that in the 1970's the Dow was cheap compared to the decades of "passive" monetary inflation that preceded it. The Dow was the "virtual wealth" (as FOA says) of the 70's that had the great potential to explode upwards as wayward global dollars finally found their footing. Please read carefully FOA's description of this important distinction between then and now...

FOA (2001): Back in the mid to late 70s Sir John Templeton always drove his point home for investors watching Luis Rukiser's show. (how does one spell his name,,,,, we always called him Lou Baby (smile))

Sir John, living here on Layford Cay, kept saying that the Dow of the 70s was very under priced and would soar. He was the most absolutely correct person stating that then! But more into the mechanics of his perception: he knew that anyone buying the Dow and waiting a decade or more, would gain way beyond mere price inflation. Monetary inflation would eventually drive the perceived virtual wealth of US stocks ever higher. So high, in fact, that their percentage gains over price inflationary gains would be incredible. They were!

Truly, what John was referring to was the effects that simple "passive inflation" has on paper assets; especially in a "reserve currency's" domestic market. In this; real price inflation is mostly exported by importing "real goods". This happens as we export excess credit dollars to buy things. It also has another effect; some of that same exported printed money flows in a circle and joins native investor's buying of local paper assets. When this process first starts, "passive inflation", in the form of massive money creation that's far beyond real price inflation, allows one to gain "virtual paper wealth" even before the markets price out the gains. That is; the Dow stays cheap at first then eventually rises to absorb the money inflation! As long as [CPI] prices don't rise too much.

People that followed his advice, accumulated the Dow over a decade or more; buying "virtual wealth" before the fact! Stock investors made a killing by positioning their assets where this created "passive monetary inflation" would eventually end up. Even though hard money players laughed at them all thru out the 70s, 80s and early 90s! Look who is laughing now? Stocks tromped hard money plays hands down for over 20+ years! Even considering the latest fall on wall street.

My friends:

Today, this same "virtual wealth" effect has been created again and is located in physical gold bullion. I believe Sir John has already made part of my point but I will repeat it.

When a currency system comes to the end of its reserve use -- I'm speaking politically here -- its domestic market will come to a point where it can no longer export "real price inflation" in the form of; "shipping its excess currency outside its borders". This happens because internal money inflation, that is super currency printing, is increased so much that it overwhelms even its export flow. Worse, even that export flow later tumbles as the fiat falls on exchange markets.

The effect is that local "passive inflation", built up over decades and fully reflected in "Sir John's" paper assets, spreads out as "aggressive inflation" and hyper price rises begin. In this action, the very same wealth effect that was eventually priced into "John's" Dow stocks and other assets, begins a long march of being priced into real gold.

Anyone that has accumulated physical gold over this past long period was doing the exact same thing Dow buyers of the late 60s and early 70s were doing: ------ saving "wealth" as unpriced "virtual wealth" stored up over that "passive inflation" period. ---

As "political will" begins to impact the economies of the US,

our old "virtual wealth" that is no longer in the form of "passive inflation" nor limited only to the currency, and is openly displayed in our vast sea of paper assets values including stocks & bonds--------

must now be defended in the open with official printed money flow.

The "virtual wealth" in gold, saved over years by patient investors, will also be priced to market in this process.

Never mind that during the Dow years the paper gold market could not work in parallel with all the other asset gains; it couldn't. Hard money players, trying to somehow play the Dow's game, never caught on to what was happening. Instead of buying "virtual wealth" by saving real gold; they brought leveraged bets that gold would be priced correctly during the "paper asset" years.

Obviously, this "trade" failed our hard money investors as the waves of profits from other paper gains and derivatives leverage were employed against every long bet on gold. Not only that; the "virtual wealth" in gold was never opened for them with the super price inflation they all thought was coming during that era!

Now that the paper game is about to stop for the Dow, it will also cut off the leverage of gold bets. Just as the real game begins.

The reason for this is that our massive, decades-long gains in our stock markets did not bankrupt the leverage in the money system. Where as any massive rise in physical gold values cannot be priced into "derivative gold" without crashing the system.

Remember; in political inflations, money is printed to save the assets as they are currently priced; not to create new loses by saving the leverage that's countering their play!

This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed.

Michael Kosares--

In this perception USAGOLD has been guiding its clients, and now the world, in much the same way Sir John did decades ago.

"Buy what has value at the greatest discount and waits for the politics of money to price your new savings correctly"!

The politics of wealth today is centered around gold bullion and only gold bullion: that is where the wealth and power will be manifested: this is where the gains will be! To bet on the rest of the hard market, is to bet against the coming inflation making your asset whole!

Place as much of your wealth in physical gold as your understanding allows and save this "virtual wealth" of the ages today: waiting for it to become real wealth, priced correctly in the market place, tomorrow.

Make no mistake, the wealth is there "but only there in bullion"! Because a free bullion market cannot be denied or controlled

--- when it stands between the opposite goals of political powers! ---

In this: it will separate from the politically crushing reality the current dollar based paper gold markets represents. The premium on bullion will soar!

The "Political will" of old world Europe is about to help make our investment real. For myself, a large percentage of my wealth is being saved by going with the evolution of paper moneys: not against!

This trend is visible now and based on the forward flow of human affairs, not the backward rules of money theory!

Our future is today; if not just around the trail!

Sir Douglas; aka FOA

your: Gold - Trail - Guide

What could go wrong?

What could go wrong is that the producers and savers of the world, those with the most to lose, might just decide that the US dollar under the governance of Obama, Geithner and Bernanke is no longer a safe store of wealth for any length of time. This includes both physical dollars and digital "electron" dollars as well as ALL non-physical "dreams" denominated in this symbolic unit of account, both debt and equity, stocks and bonds. If the dollar is deemed unsafe in the time dimension, then so is anything and everything else denominated in dollars that does not include the built-in safety hedge of also occupying the three physical dimensions!

The key here is time. The difference between the two primary functions of money (transactional medium and store of value) is time. It is the amount of time one is willing to hold onto a currency, or any paper proxy for physical goods denominated in that currency.

Of course time is a relative dimension. So the differentiation between a purely transactional currency and a wealth reserve is up for valid debate here in the theoretical realm. But in the real world we would expect to see a sign if the trend was heading in this direction.

I suppose you could say that a preference would emerge for shorter terms of holding versus the longer ones. As FOA said in 2001, "Are you worried that our 10 year bond, the new bench mark, will soar and squeeze off any recovery? Don't! We will just remove it from use and move to the 5 year,,,,,,,, to be replaced later by the 2 year,,,,,,,, to be replaced later by the 6 month,,,,,, 1 month,,,,,, 1 week,,,,, 1 day,,,,,, then,,,,,,,,,,,,,,,,, CASH!"

What FOA was talking about eight years ago was the government's "statistical efforts" to mask the market's evolving preference for shorter terms of holding dollars. In the ensuing eight years it has not played out exactly that way. But one would still expect to see some visible indication if global dollar preferences were heading to the short term. Or to put it another way, "to the here and now"!

For the really big money, "here and now" cash accounts in insolvent banks that are only guaranteed up to $250,000 are a poor option. But there is no such guarantee limitation on Treasury bills. So for the really big money we might expect to see a rush of funds into the shortest end of the yield curve, the 1 month Tbill. And with such a rush, we should expect to see the value of these bills soar as the yield falls to zero, or even possibly less than zero!

You see, for the really big money, it might be better to receive ALMOST all of your cash in 30 days if the system were to implode during that time, than to only receive $250,000 back from the FDIC. Of course you can always just keep rolling over your 1 month Tbills as long as the system doesn't implode. But as long as you, Mr. Really Big Money, see implosion as a possibility, it's best to keep your funds as close to the here and now as possible!

So what might we expect to see at the very end of this? How might it all end? As the pictures so graphically illustrate, it can't end well.

My friend and fellow blogger Sir Topaz has a few ideas...

The Stock Markets expected, will be (are) the first skittle to fall here IMO. At approx 10% the size of the Bond arena, you'd expect this segment of the Market-place to be jettisoned first.

As the days (and weeks perhaps) wear on, we're likely to see the intensity of this "flight to the Here 'n Now" increase in magnitude.

The Precious Metals (price) will capitulate along with the rest of the general Market ...and this price capitulation will ultimately lead to a point where there's NO METAL on offer at the price.

An acquisition opportunity par excellence ...for those amongst us who fancy themselves as being uber-astute and ...."not one minute too late"

You see, when all this is done ...and the dust has settled, it WILL BE - all about the Metal!


[1] 1967: Wilson defends 'pound in your pocket'
Lessons From The London Gold Pool
R.I.P. - The London Gold Pool, 1961-1968
FOMC minutes 12/12/67
The Early Gold Wars

Tuesday, January 19, 2010

Gold: The Ultimate Hedge Fund

For the FOFOA noobs, I'm talking about a >>personal "hedge fund"<<, as in physical gold in your own physical possession. Not a monthly paper statement that comes in the mail saying "John Doe owns x shares in the Acme Gold Hedge Fund in New Haven, Ct." I just wanted to clarify this right at the top because this is a long post and I know some of you will give up once you realize there aren't any more cool pictures. Also for the uninitiated, length and repetition on this blog are completely intentional.


hedge vb hedged; hedging vt (14c) 1: to enclose or protect : encircle 2: to protect oneself from losing by a counterbalancing transaction (a bet) 3: to evade the risk of commitment esp. by leaving open a way of retreat 4: to protect oneself financially: as - a: to buy or sell commodity futures as a protection against loss due to price fluctuation - b: to minimize the risk of a bet

hedge fund n (1967) : an investing group usu. in the form of a limited partnership that employs speculative techniques in the hope of obtaining large capital gains

hedge hog n (15c) : an Old World, spiny, well fortified mammal

The dollar is the most fundamental of all markets because of the size and desire for a means of diversification.

All you need to do is to keep a weekly record of what China is spending on energy and materials to know dollar diversification is a simple business tactic for nations lacking debt.

-Jim Sinclair (today)

Our whole paradigm is about to change. It will feel like a tidal wave when it finally hits, and it will not be slow and measured. Literally everything today is completely unsustainable and one day soon, just when you least expect it, the marketplace will rise up and suddenly sieze reality. Prepare now because when the wave rises it will be too late for preparations.

The Dying Dollar

Today's dying dollar, in all of its incarnations, is a mind boggling web of contradictions. Massively inconsistent demands push and pull on an aged and crippled debt system. Inside versus outside the US are vastly different in their needs from the dollar. Wall Street versus Main Street require opposing strategies. Even the needs of the US Treasury and the Fed are not aligned. Push pull, tug of war, this is the life of a dying currency.

In its younger years the dollar had a wide berth in which to find its place, plenty of wiggle-room, a large margin for error. And yes, many errors occured, testing the limits of that margin several times along the way. This dollar is not a senior citizen that lived an easy life.

But today there is no more wiggle-room. Every error has the potential for instant death. And every crisis today requires the most extreme measures imaginable, both overt and covert, just to keep blood circulating in the patient for one more round of chemotherapy.


Truly, debt is the very essence of the dollar. The whole game has become "we must hold every debtor to his debts, in real terms, denominated in a dollar that can be expanded with ease." What a contradiction. What a hipocrisy. Every debtor but the biggest of them all, the dollar's own creator.

The dollar desperately needs a much higher gold price, denominated in dollars. It needs this so that the debt of the world CAN be serviced in real terms. It needs a very high priced gold so that it can service its own debts, with credibility. Shipping large weights of gold at low prices is not a sustainable activity for anyone. And these days, everyone seems to want the physical stuff rather than empty promises.

But for the financial industry that has sold forward into the low price of gold this would be catastrophic. And the dollar must save Wall Street in order to save the debt which is its very essence. So there will ultimately be a break between the Wall Street pricing of gold and the price paid for the physical stuff that everyone seems to want. This is inevitable, unavoidable.

Pretend and Extend

The how and why of gold suppression over the past 22-30 years is only one small piece of the pie that makes up the endgame of the dollar's timeline. One very small piece, albeit a key one for those who hope to sail through shifting paradigms, and of course a very important one to us physical gold advocates. But just like today's web of contradictions, the dollar's long path to its own end was a hodgepodge of contradictory missteps, fraud and false signals, some done for personal gain and other's with sincere intentions.

Here is another piece of the pie, presented only to add scope and perspective to our limited focus on gold: far back as 1993, Fannie and Freddie were buying risky subprime and Alt-A loans, but routinely misrepresenting them as prime... I warned in the 1980s that government involvement in the housing market would inevitably produce catastrophe. Even Republicans attacked me as an enemy of home ownership.
-Fannie, Freddie, Fraud

The point is, that the dollar has been going to one extraordinary length after another, for decades now, in order to extent its timeline just a little bit farther. Talk about near-death experiences; there was 1970, 1980, 1990, 2000 and then today. And trust me when I say the dollar does not have nine lives.

But don't be too impressed with the dollar's talent for survival. None of these sequences of events requires a mastermind theory to explain it in the simplest way. It was a structural advantage that was built into the Bretton Woods system that gave the dollar its advantage that has carried it all the way to the present. An advantage that was plundered for profit along the way, but one that has always had a definite timeline, an inevitable end.

Hard Currency

The dollar's secret during the Bretton Woods years was that internationally it was considered to be as good as gold. Foreign businessmen, bankers and even central bankers held dollars as a hedge against their own currency. Holding dollars was just like holding gold, since the price of gold in dollars was fixed at $35. So as their own local currency devalued against a basket of consumer goods, their hedge, the dollar, took up the slack.

This international demand for dollars in turn kept the dollar strong and kept price inflation on the home turf of the dollar in check. As long as foreign economies were experiencing price inflation faster than the US, their products would be relatively cheap inside the US, masking the massive monetary inflation of the dollar.

And then, surprisingly, this masking effect accelerated after 1971, after gold backing was removed from the dollar. The world was now on a floating exchange rate system whereby every central banker in the world had to inflate just to keep up with the dollar if they wanted to seem economically competitive in international trade. This local inflation kept international goods ever competitive within the dollar's own currency zone and continued to conceal the dollar currency inflation that was underway, at least in the US it did.

Of course there was price inflation for everyone during the 1970's. But as the reserve currency of the world and the transactional currency for international gold and oil, the dollar's true printing volume was hidden well within a volatile global supply and demand dynamic.

And ever since the 1970's the US has enjoyed relatively falling prices on foreign-made goods. From French wine to German cars, to Italian leather, to Asian pianos, Korean TV's and cell phones, Chinese furniture, Japanese personal computers, even Arabian oil... the list goes on and on. Goods made overseas for American consumption have been relatively falling in price for Americans for decades due to the masking effect of true US monetary inflation. Meanwhile these laboring currency zones experienced higher price inflation than the US! What an illusion! What a contradiction!

The amount of dollars and dollar denominated paper assets that exist today has no correlation to the real US economy or its ability to trade goods in exchange for those dollars at current prices. This reality will soon wash over the world like a tidal wave.


According to Wikipedia the first hedge fund was created in 1949 when Alfred W. Jones formulated a method for going long certain securities while shorting others in order to neutralize the risk of movements in the overall market. He was balancing his exposure to uncontrollable but inevitable cycles.

Today, the big money is all hedged. Almost no one with a sizable account holds only long position bets. The market isn't balanced by 50% betting on one side and 50% betting on the other. It is balanced within each portfolio through leveraged hedges. And it is the evolution of these hedging instruments that has both extended the life of the dollar like a steroid injection and at the same time, sealed its fate.

During Bretton Woods, foreigners held "good as gold" dollars, "the hard currency", as a hedge against their local currency risks. But once those paper gold derivatives we like to call FRNs grew too numerous, all bets were canceled, conversion denied, and those who still held the paper lost out in the immediate devaluation. The same thing happened 38 years earlier... and the same thing is happening 38 years later!

In the 1970's the liberated physical gold market proved to be an excellent hedge against both currency and default risk. Then in the 1980's we were treated to an amazing growth spurt in electronic exchange traded futures and new global exchanges trading these derivative hedges, ultimately netting more than 90 different futures and futures options exchanges worldwide.

In the early 90's, the dollar saw its match as the Euro was taking shape. To counter this threat it promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar system beyond its ability to serve as a real fiat money system. The whole dollar landscape become just a trading asset arena, evolving away from any meaningful currency use to trade for real goods. It can head in no other direction now because our local economy, the US economic base, cannot possibly service even a tiny fraction of the purchasing power currently held in dollars worldwide.

We are now at the "end time run" in fiat dollar production that will soon crush all hedging vehicles. One item alone, physical gold, because it is the main wealth asset behind the next currency system (see: Central Banks), will outrun everything by a wide margin. No matter the derivative's hold on it! Just like gold to the pre-'71 dollar, paper and physical will soon blast off in opposite directions.

Paper Promise Hedges

The purpose of modern paper hedging instruments is no longer to simply balance a portfolio with opposing bets, but it has instead evolved into a risk dispersion game. Like an insurance company, the writers of these instruments issue highly leveraged promises of protection from the risks inherent (and inevitable) in an unstable and unsustainable system.

The two main risks that are hedged today are default and currency risk. The primary instruments for hedging these risks are credit default swaps (CDS) for the former and interest rate swaps (IRS) for the latter. But the sheer number of promises that have been issued (for a fee) has become so large that it has now become the market driving force.

Think about this. The hedges are now guiding the markets. What do you think will happen when they all of a sudden fail to function? The financial world today turns on dollar assets that are all hedged, not just pure bare holdings! Block the hedge markets from performing and the dollar itself is unseated.

Today's Fed policy of saving Wall Street at all costs is in direct opposition to the risk transferring dynamic of derivatives that has kept the dollar alive. Contradictory forces! Of course the alternative would have been almost as devastating, but that's the problem with Catch-22's.

The dollar's structural support system, its very skeleton, its integrated hedging operation has failed. It is no longer a matter of time, it is only a matter of recognition.

Please read the following story about Harvard University's experience with derivatives, and note the key players who were true believers in this structural system as they led their own institution down this poisoned path. I realize it is long, but I have provided an excerpted, abbreviated version.
Harvard Swaps Are So Toxic Even Summers Won't Explain

Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps.

Harvard panicked, paying a penalty to get out of the swaps at the worst possible time. While the university’s misfortunes were repeated across the country last year, with nonprofits, municipalities and school districts spending billions of dollars on money-losing swaps, Harvard’s losses dwarfed those of other borrowers.

Borrowers use swaps to match the type of interest rates on their debt with the rates on their income, which can help reduce borrowing costs. Lenders and speculators use swaps to profit from changes in the direction of interest rates. A bet on higher rates, for example, means paying fixed rates and receiving variable. At Harvard, nobody anticipated some interest rates going to zero, making the university’s financing a speculative disaster. [Note that they were "betting" on something controlled by Central Bankers, not by market forces]

Harvard’s failed bet helped plunge the school into a liquidity crisis in late 2008. Concerned that its losses might worsen, the school borrowed money to terminate the swaps at the nadir of their value, only to see the market for such agreements begin to recover weeks later.

Harvard would have avoided paying the costs of its swap obligations by waiting. Its banks, including JPMorgan Chase & Co., headed by James Dimon, were demanding cash collateral payments -- ultimately totaling almost $1 billion -- that Harvard in 2004 had agreed to pay if the value of the swaps fell. At least $1.8 billion of the swaps the school held were with JPMorgan, said a person familiar with the agreements. Dimon, a 1982 Harvard Business School alumnus, declined to comment.

Summers became [Harvard] president in July 2001, after serving as U.S. Treasury Secretary. He earned a Ph.D. in economics from Harvard, and became a tenured professor there at age 28. He served from 1991 to 1993 as chief economist at the World Bank, which initiated the first interest-rate swap with IBM in 1981. As president and as a member of the Harvard Corp., Summers approved the decision to use the swaps. Summers, who left Harvard in 2006, declined to comment.

When the plan was made public in 2005, Harvard’s financial team had been busy for more than a year behind the scenes, devising a financing strategy for the project using interest-rate swaps. These derivatives enable borrowers to exchange their periodic interest payments. They typically involve the exchange of variable-rate payments on a set amount of money for another borrower’s fixed-rate payments.

The agreements were so-called forward swaps, providing a fixed rate before the bonds were actually sold. Harvard was betting in 2004 that interest rates would rise by the time it needed to borrow.

While the university could have paid banks for options on the borrowing rates, the swaps required no money up front.

“There have been lots of forward swaps, but out longer than three years is relatively rare,” Shapiro said in a telephone interview. That duration increases the risk, because the longer the term of the contract, the more volatile the value of the swap, he said.

Corporations might use derivatives to lower their borrowing costs as many as four years before a bond sale, according to bankers who sell derivatives. Anadarko Petroleum Corp. used the swap market in December 2008 and January 2009 to secure rates for $3 billion it plans to refinance in October 2011 and October 2012

Other members of Harvard Corp. in 2004 and 2005, who served with Summers and Rothenberg, were former U.S. Treasury Secretary Robert Rubin, Summers’s previous boss and predecessor at the U.S. Treasury, who was an instrumental supporter of his bid for the Harvard presidency

All except Rothenberg declined to comment or didn't return telephone calls.

Harvard University’s finance staff worked with JPMorgan to develop the size and the length of the forward-swap agreements.

For more than 20 years, investment banks such as Goldman Sachs Group Inc., JPMorgan, and Citigroup Inc., all based in New York, have been selling swaps as a way for schools, towns and nonprofits to reduce interest costs and protect against rising interest payments on variable-rate debt. The swap agreements can be terminated if either the bank or the issuer is willing to pay a fee, which varies with interest rates.

Swaps have become widely accepted by the rating agencies [Think of them as an "FDIC sticker"] as an appropriate financial tool,” according to a slide entitled “Swaps Can Be Beneficial” that was used in a 2007 Citigroup presentation to the Florida Government Finance Officers Association. Debt issuers can “easily unwind the swap for a market-based termination payment/receipt,” the slide said.

‘Rapid Meltdown’

The problem resulted from the rapid meltdown in the markets, which culminated in November when short-term interest rates and swaps rates collapsed.”

After credit markets seized up in 2007, central banks worldwide pushed some bank lending rates to zero in their effort to rescue the financial system.

‘Structural Problem’

Harvard not only lost money on the swaps last year. The value of its endowment tumbled a record 30 percent to $26 billion from its peak of $36.9 billion in June 2008, and its cash account lost $1.8 billion, according to Harvard’s most recent annual report. [They lost $11 billion in a year... that's some fancy Ivy League PhD hedging, eh?]

“They have a structural problem,” [Is he talking about the entire dollar financial system?] Lewis said in a telephone interview. “There’s something systemically wrong with [the dollar?] Harvard Corp. It’s too small, too secretive, too closed and not supported by enough eyeballs looking at the risks they are taking.” [Who's that? The Fed you say?]

By June 2005, the value of the swaps tied to Harvard’s debt was negative $460.8 million, meaning that’s how much it would have to pay the banks to terminate the agreements, according to the school’s annual report that year. [This was one freakin' year after the swaps were created!]

By 2008, Harvard had 19 swap contracts on $3.5 billion of debt with JPMorgan, Goldman Sachs, New York-based Morgan Stanley, and Charlotte, North Carolina-based Bank of America Corp., including the swaps for Allston, according to a bond- ratings report by Standard & Poor’s released on Jan. 18, 2008.

Financial Burden

The swaps became a financial burden [That is, the dollar's support structure became a burden...] last year as their value fell and collateral postings rose. In a contract with Goldman Sachs, the school agreed to post cash if the swaps’ value fell below $5 million, according to a copy obtained by Bloomberg News. The collateral postings with the banks approached $1 billion late last year as central banks slashed their target rates, according to people familiar with the situation.

The value of Harvard’s swaps plunged and its need for cash soared. Under contracts signed in 2004, Harvard had to post larger and larger amounts of collateral to cover the negative value of the swaps; the total amount would approach $1 billion.

Tumbling Index

On Nov. 13, the index used to value the agreements, the U.S. dollar 30-year swap rate, closed at 4.247 percent. By the time Harvard held its bond sale Dec. 8, the swap index had tumbled to 2.7575 percent. Harvard exited three of its swaps tied to $431 million debt on Dec. 9, when the benchmark fell again to 2.6885 percent. The interest-rate swap market reached a record low of 2.363 percent on Dec. 18.

Harvard’s decision to borrow money came at a time when the difference, or spread, between yields on corporate and U.S. Treasury securities was the widest since at least 1990, according to data from Barclays Plc. That meant AAA-rated Harvard was selling bonds when the market was demanding the biggest premium in at least 18 years.

Unwinding Swap

The school on Dec. 12 paid JPMorgan $34.5 million from the tax-exempt bond proceeds to unwind a swap tied to $205.9 million of variable-rate bonds it sold for capital projects, according to documents obtained from the Massachusetts financing authority. It also paid Goldman Sachs $41.6 million on Dec. 9 and $23.2 million on Dec. 11 to end agreements on another $226.8 million of existing debt. Harvard didn't disclose recipients of the other termination payments because it paid them from the taxable bonds.

Stability, Safety

“In evaluating our liquidity position, we wanted to get ourselves some stability and some safety,” he said in an Oct. 16 interview this year at Harvard. “It was to take the losses now rather than run the risk of having further losses if we continued to hold on to the positions.”

Opposing Regulation

Summers, along with Rubin and Greenspan opposed the U.S. Commodity Futures Trading Commission’s attempt in 1998 to regulate so-called over-the-counter derivatives, which included agreements like interest rate swaps. At the time, Summers was Rubin’s deputy secretary.

Now Summers is leading the Obama administration’s effort to write stricter rules for the derivatives market “to protect the American people,” he said in October at a conference in New York sponsored by The Economist magazine.

Harvard might have considered it a conservative step to lock in rates when they were low, said Shapiro, the New Jersey- based swap adviser.

You can be very big and very rich and very smart and still get things wrong,” Shapiro said.

Please don't miss the point here. Harvard's story is not part of the cause of the ongoing systemic collapse, but it is a visible symptom of the rot which has permeated the dollar's structural skeleton. Today's dollar is so brittle that it requires a hedging mega-structure so leveraged, so large, and so unstable that it must... MUST collapse under its own weight. Some of it will be replaced with titanium implants (monetized) in an effort to save the banks, much like AIG was "rescued". Other parts will be dumped into a market that wants nothing to do with them in an effort to extract pennies on the dollar. Net effect -- dollar disintegration.

A fiat system cannot exist without a functioning counterweight, and today's mountain of derivatives is failing at this task.

So where does gold fit into all of this?

Well, the gold market is part of this massive derivative complex that is currently counterbalancing and supporting the dollar.

Today, countless gold analysts around the world acknowledge that gold is a manipulated item. While being on the right track, they are still using the wrong perception to grasp the dynamics of these markets. This lack of perception is what keeps them from positioning themselves and other gold people correctly: positioned to gain wealth when a stake is finally driven through the heart of this paper beast.

The efforts of most goldbugs are focused in one direction; to once again make our paper gold markets reflect the true rarity and actual fundamental value of physical gold bullion. I borrow a line from Mr. Moldbug to describe this position: "They are aware that this system does not work at all, but this does not lead them to question the entire tradition. Indeed, since their mind exists inside that tradition, they interpret it as mere reality." In other words, the chances of "gold to the moon" on the COMEX are the same as the US government returning to a gold standard: exactly zero!

FOA: Lost in all the confusion is the distinction between investing in the price of gold and investing in gold itself. Perhaps 90% of all the investing in today's worldwide, dollar settled, gold market is done in this first way mentioned. Yes, the market is structured contractually, to settle in gold. However, in practice, in norm, and in past legal precedent, it is accepted that paper gold trading is meant to only capture the price movements in gold while ceding, what could be, controlling physical trades and their price setting function to other market areas.

Obviously, this is the way it all started years ago, with the physical trading and its fundamentals dominating the lesser paper trading. But the market evolved with the paper contractual trading becoming 100 or more times the size of the physical side. But everyone already knows all this, right?

What doesn't seem to be obvious is the "why for" the paper market grew so large. It grew to dominate because world wide dollar expansion reached its "non hedged" peak. In other words, the dollar's timeline was ending as its ability to produce non price inflationary economic gains came into sight.

In order to push dollar holdings further, international players needed and purchased "paper financial hedges" to balance their risk. Within their total mix of derivative hedges were found "paper gold price hedges"; modern gold derivatives. The important thing to remember is that these positions are not and never will be used to demand physical gold. They are held to buffer financial and currency risk associated with holding any form of dollar based asset. To work, these items don't need to really perform "dollar price movements" in the holders favor as much as they need to be present in the portfolio to act as insurance stickers. In that truth, these paper gold positions act like FDIC insurance at our banks.

While so many of our gold bulls salivate at the prospects of some player calling for delivery and driving the gold derivatives market to the moon; it ain't gonna happen! Our world of dollar based gold derivatives has grown so large and become so integrated into supporting (hedging) international dollar assets, the central banks will band together to crush any delivery drive.

This is in the ECBs interest as I will explain in a moment.

If some big player said he was going to take 100 million ozs out of the paper gold market, the Central Bank systems would just order him to trade out for liquidation only and go to the cash market to buy his gold. Don't think I'm confusing Comex positions and their rules as being different from the rest of the world gold market. What works on comex works everywhere when the system is at risk. The controlling governments, who's domain Bullion Banks reside in, would, could and will force those holders of bank busting positions to simply cash out for the good of their system.

How many postulated, even just a few years ago, that with the fed expanding the money supply by a year to date "one trillion"; that paper gold could not reflect this inflation? This only further confirms that this form of market "hedge" is failing to function for its owners.

Paper gold derivatives became a major force in allowing this last, end time demand for dollars and subsequent surge in its value. This is why Another said it would run way up, even while being inflated, before the end would come.

The leverage today will be in a physical gold position, not any other form of gold ownership. By accumulating physical gold today, we are truly walking in the footsteps of giants; advancing with them as they work thru this singular, long term political move.

You know, modern financial engineering incorporates all the physical factors of "just in time delivery" management, and labels it "just in time dispersion of risk". In other words: they try to take all the perfect workings of a mechanical operation and replicate it into financial dealings. But, financial instruments, while understood by us as being paper bonds, stocks and bank accounts, are actually completely organic! They are, like money, really just concepts of value we hold in our head; not oil filters or fuel pumps we hold in our hands. The "worth" of things is a "value" we mentally create thru countless interactions with each other as we go thru the day: interactions we call "the markets".

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

The record of derivative evolution meshes seamlessly with the recent need for supportive dollar currency measures; a strategy of maintaining a failing system that was ending earlier than expected. Truly, in 1990 no one was going to carry the dollar any further, waiting on the endless delays of Euro creation, without some way to hedge risk. We had hit the end of the dollar's timeline too early; we had missed the mark.

The US could not physically save the dollar then, neither with gold backing nor the production and sale of real goods. The only answer was to let the dollar kill itself while you create an illusion of risk dispersion in the form of derivative protection; a form of backing if you will. With this "illusion of risk dispersion" in hand, called a derivative hedge, the world currency system and its denominated assets, continued on. This "just in time risk management" was and is adopted into every present day currency that carried the dollar as reserve backing.

It's no wonder that Alan Greenspan has commented so often on the need to control derivatives yet has no workable plan to counter their function. Truly this dynamic was created to counter his function and few can understand this! In effect, the dollar was placed on a one way street that required it to be inflated into infinity. All as a means of protecting dollar originators; the US banking system. Dollar leverage, that is actually US liabilities, is now built up endlessly. This all points to a nonstop, end time need for an uncontrollable inflationary expansion by our fed.

In our first real test of "just in time risk management" our Fed is and will provide buying power to gobble up any and all risk, "just in time" and without end. It seems that when our "free market" created assets are threatened to be exposed as an illusion of value, Americans embrace any and every form of government socialistic bailout known to man. Perhaps, our much exampled form of a "free market driven economy" was little more than "free as long as derivative risk is covered with social money"... "just in time".

Now, we will follow this trend in an accelerated fashion, until all derivative process is exposed as nonfunctional outside a massive hyperinflationary policy. Our wealth is and was nothing but an illusion of safety and created in our own minds. Within this mix is contained all the various gold derivatives we have come to love so well. The future failure of a gold contract does not mean that the long holder gets his price or his underlying good; it means his derivative fails to shelter his exposure by matching his other loses. In terms closer to a gold bug's heart; paper gold in any form will not match up anywhere near the price of free traded physical gold.

We are on the road to high priced gold and under priced derivatives. The same thrust will be apparent in all financial derivatives. Further, we are on the road to a fully "cash settled" contract market for gold; here in the US and abroad. In the time ahead, just before serious real price inflation rears its head, look for most all dollar based contract commodities markets to be restructured into pure "undeliverable" cash settlement markets. Markets that, also, many gold producers will be forced to use. The day of big premiums on gold coins and bullion is coming and coming fast.

Implore your minds to hearken back to what is real and alive in our world. While standing here among the mountains and trees, our financial perceptions begin a change; recasting our thoughts of accounts and credits into hazy feelings of virtual wealth we never really knew. Suddenly, bonds, stocks and paper investments descend to lower levels of importance.

It was as true yesterday as it is today, and will again be so tomorrow; that the touchable things in life are what make us whole as much as they make us wealthy. Our bodies are real, so too is the earth and all upon it: is it such an unreason that our wealth should not be real also?

For myself and many others that hear our message, the answer is no. No, it is not unreasonable to clearly own and touch what our efforts in life have brought us. I suspect that during this era, within this moment in time, events will eventually define such logic more clearly and prove it to be sound beyond any doubt.

Times change, my friends, history moves on and so too will mankind's perception of wealth. Our perceptions will evolve, not in a forward matter, but rather in an ages old oscillation that returns us back to saving wealth itself; instead of a paper promise of wealth. With a regularity of seasons, as sure as the phases of moons, a changing of "political will" is once again about to redefine what our virtual written worth really is. In response to these changes, often made with little more than the stroke of a pen, mankind will seek a secure position. A position that will more so value an ancient wealth: a golden savings that no politicians could ever write the value of.

What "IS" firmly grasped by every major player in this market is: -- If at any time a majority in the market were to attempt to use these paper markets to extract a gross amount of physical product, the rules would not be changed! Rather, the rules would be enforced and the players would be cashed out and sent into the real physical markets to do their deals. Only then would fundamental supply and demand, based on gross dollar liquidity, create a "non virtual" real price for the product.

We wanted a free market and a free market is what we got: -- but it doesn't move the virtual price toward the gold bull's favor. Now they are mad because their bets are countered while physical gold advocates scoop up an almost free metal: -- using the liquidity that dollar inflation is producing. Truly, if ever there was a way to profit from gold mining, today, it's by buying this almost free physical gold the mines are producing; while mine players and paper gamblers pound their wealth into the dirt. This is what PGAs call benefiting from the leverage in mining (smile).

In a convoluted stretch of reason, "virtual" gold bulls wanted these markets to be regulated so the supply side of these paper creations would pay off on their bets. The bulls wanted to be able to create all the buying leverage they wanted while the bears would be locked into delivering a metal who's total world amounts are fixed. The bulls wanted free leverage without the using full amounts of real cash but wanted the bears to mark to the market with real gold buying power for every wager they made. If there is manipulation in our paper gold arena, it's in this area of investor understanding. What these markets "truly represent" is the misconception about gold in our time.

Western paper gold bulls fueled the creation of these markets by supplying the demand for such gold vehicles and governments helped their currencies by using these same as FDIC-like "insurance stickers" on their reserve positions. They all wanted a place where they could bet on gold, using maximum leverage, and not have to fully fund the physical delivery of bullion if it came to that.

Somehow in the process, everyone was thinking they were doing an end run around the slow thinking, stupid gold advocates the world over. Hoping that coin and bullion buyers, who were creating the physical demand, would one day feed the leveraged paper profits of paper players. Hoping that the rules would be changed just enough so gold could be kept in a nice tight range.

We are seeing the results today of this fraud of a paper game as it comes to an end. It's not nice to watch. Busting not only the dollar factions that played this sector for their best interest, but also denying any profits to the whole gold industry that chose to ignore the long term best interest of gold's market value. The same industry that decided to cater to the singular greed of a small group by sacrificing high gold prices so that leveraged plays would work. In the process they played a political game to limit gold prices from getting too high and will now suffer on the altar of a "gold price without a range".

They can call the outcome anything they want: "bullion at a premium to comex" or "comex at a discount to bullion". Either way the whole system is destined to split and leave the paper players holding an incredible bag as bullion runs away with the help of fundamental gold factions in Europe.

Many of you are just now having that "a-ha" moment, when the light bulb goes off and you finally realize just how the dollar is doomed and gold will be set free. But then many of you "newly enlightened" ones say "ahh, but this could take decades to unfold." What you don't understand is that it isn't beginning now simply because your understanding is. No, it began 40 years ago and more, and we are right now knee-deep in the final end game.

More from Wikipedia: "As the name implies, hedge funds often seek to hedge some of the risks inherent in their investments using a variety of methods, most notably short selling and derivatives. However, the term "hedge fund" has also come to be applied to certain funds that do not hedge their investments, and in particular to funds using "hedging" methods to increase rather than reduce risk, with the expectation of increasing the return on their investment.

Hedge funds are typically open only to a limited range of professional or wealthy investors."

But right now, for perhaps the first time in history, individuals can join central bankers and the true Giants of the world by participating in the ultimate hedge fund. One that, like modern hedge funds, focuses on the hedge itself as the key investment with the most leverage, with the expectation of life-changing returns. And the main differences between this and traditional hedge funds are 1) much less risk, and 2) it is open to ALL individuals, including you!

I'll leave you now with this poignant message from the Tower...
[article] ...Even in light of all of this shifting by central banks into other currencies, the dollar still comprises 2/3 of global reserves and attempts to shift away from the dollar would destroy the value of central banks’ portfolios.

Randy's Comment: Although I should be well used to it by now, it still amazes me every time I see comments like the final remark here regarding any significant shift from dollars will lead to the destruction of central banks’ portfolios. It’s almost as if the commentator is trying to help indoctrinate a paralyzing fear as a means to prevent any such attempt on the part of the CBs, and to also create enough grass-roots doubt against such an attempt ever being made that we the people won’t perceive any benefit in trying to front-run with our own flight out of dollars and into gold...

It is an error in thought or judgement, however, to believe that a “destruction” of the dollar portion of the portfolio would therefore proportionately destroy the portfolio as a whole. That would only be the case if all other things remained unchanged, but life seldom works out so neatly as that. Sometimes an action can set forth an immediate chain reaction that literally changes EVERYTHING you thought you knew about the situation!...

In the world of the “new normal,” it is indeed possible (and someday soon desirable) to let the fuse be lit and allow the CB store of dollars be consumed. And to be sure, it is singularly the latent potential energy of the gold component that allows us to make this analogy with gunpowder. The natural chain reaction in the tiny open market for physical gold would immediately bring to bear massive “heat” and “pressure” upon its price… **POW** thus swelling the “volume” of its value relative to all other things. So even without radical changes to the quantity of physical holdings, a simple expansion in golden value will more than compensate the average portfolio of the central banks against the destruction of the dollar component.

Still can’t wrap your head around it? Bear in mind that the gold price is not a simple one-to-one inverse relationship with the dollar. There is a great leverage lurking in there, but it has been largely masked by the artificial abundance of paper gold which weighs down upon the equilibrium price. And even so, since 2002 the dollar value has decline by just 20% on a trade-weighted basis, whereas the gold price has responded with a 300% gain. And the moreso that the public and private parties of the world rightly gravitate toward physical gold instead of the illusion of paper derivative gold as the solid foundation of their savings and diversifications, the moreso you will see this price leverage grow in favor of larger multiples of gold price gains against modest dollar losses....

Central bankers will increasingly prefer gold reserves over the paper reserves created by other countries. Not only for the reasons of reliability/trust as cited in this article, but moreso because in choosing predominantly gold over foreign paper for central banking reserves will give those various national monetary officials an improved degree of latitude in their pursuit of an independent monetary policy.

WITH gold reserves, a central banker in a vibrant national economy can choose to enjoy a strong currency relative to gold, but, importantly, it can still alternatively choose to exercise loose monetary policy (for economic or political reasons) in which its currency is made weak as measured relative to gold. But regardless of choice for the relative strength or weakness of the national currency, the abiding benefit of choosing gold reserves is the superior stability — the systemic strength against procyclicality — that gold offers to the asset side central banking balance sheet.

WITHOUT gold reserves, pursuit of a national currency policy that is (according to their preference) generally strong OR generally weak is made less expedient either way because the health of the central bank’s balance sheet is subordinated to the quality of its foreign paper reserves which are themselves subordinated to the particular monetary policies being pursued by those foreign governments. Generally this structure of foreign paper reserves offers only the option for national monetary weakness built upon other international weaknesses, and worst of all it exposes the national monetary balance sheet to procyclical systemic failure — a domino whose fate is written largely in the hand of its neighbors.

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.


Tuesday, January 5, 2010

I can feel it coming...

To our Socialist money changers:

Well, if you told me you were drowning,
I would not lend a hand,
I've seen your face before, my friend,
but I don't know if you know who I am.

Well I was there and I saw what you did,
I saw it with my own two eyes.
So you can wipe off that grin, I know where you've been,
it's all been a pack of lies.

And I can feel it comin' in the air tonight, oh Lord,
I've been waiting for this moment all my life, oh Lord.
And I can feel it comin' in the air tonight, oh Lord,
and I've been waiting for this moment all my life, oh Lord,
Oh Lord...

Yeah, I saw what you did, Ben.
And you too, Tim.

Glenn Beck talks about the Sprott report on TV today!

Friend of Another

FOA (08/09/01): "Clearly, the coming drastic constriction in dollar financial trade will trigger a super "print press" response from the Fed. They will not be pushing on a string; rather picking up the ball of twine and throwing it! All the while using the old 1980s "monetary control act" that opens their use of monetizing almost anything and everything. They won't be adding reserves to the banking system in the future; rather buying any and all debts from anyone that needs fresh cash. Believe it!"

Costata: FOFOA, isn't this exactly what is happening now? I ask myself, should a simpleton like me bet against someone capable of extrapolating so insightfully?

FOFOA: Yes Costata, it is jaw-dropping to read some of the things he wrote a decade ago. From which mountain top was he viewing the world with such clarity?...

FOA (10/5/01; 10:55:19 MT - msg#112)
Discussing the World with Michael Kosares

Hello MK

I wanted to come back to your last stop here on the GoldTrail to address your points and expose myself to the world. (smile)

I bet you and many hikers think I am tagging all Americans and gold thinkers with this "Hard Money Socialist" label. Ha,,,,, let me slowly turn around so everyone can take a good look what a HMS looks like. Yes, that's right,,,,, I fit the definition completely.

[Me: Hard Money Socialist was a term FOA used for those he viewed as typical Western "gold bugs". It referred to people who both promoted the return of gold into the transactional currency realm and also supported the status quo by investing in "leveraged" paper gold and mining stock.]

Most of my life I thought gold should be locked into any official currency system to act as a gauge and controlling factor against socialist tendencies in governments. I studied and in some cases talked to all the prominent thinkers on the subject.

In the late 60s, when Harry Browne was living in LA, his pre-book views took on quite a following. Me included! Oh, it all seemed so natural then; the eventual breakdown of our misguided economic policies had to, one day, kill the whole dollar printing game! We all thought that "the coming big failure" would drive every government back to using gold as money; or at least in some version of another gold exchange standard.

However, even then, I had some serious people pointing me in a different direction. You mentioned how people saw Harry's thoughts ----"considered him the lunatic fringe back then simply because most people never heard of such a thing"---! Ho ho, you should have seen my reaction to these other radical, foreign views I was hearing!

Truly, Harry's stuff seemed so much more real, so much more "The American Way", that it just had to work. Well, it did and we have whole libraries full of historical scrip and economic writer's papers to chronicle his correctness. But you know, I also looked back at these other guys explanation of things and they were every bit correct too,,,,, the effects were the same. Then as the 70s ended and the 80s ran on, their much more longer-term understanding really took hold and left all other gold / currency explanations in the dirt. True, all the rest of the hard money crowd gained a little with each gold cycle high, but were also shot down with each cycle drop. The trouble is that historic process is a time consuming affair (smile) and most of the younger boys and girls that come here don't have a full hands-on perspective of how we got here. Current dogma has a way of leaving out important turning points that are really needed to be factored in. Hell, a few decades of cycles became so regular in our mind-set that a whole industry was born, explaining why cycle investing works (smile). In time I came to understand that there really was a long term, singular move, evolving along as a political play at work here. The last decade only served to underscore it all.

The early 90s Gulf war spike in gold should have been the final revenge for us bugs. Can you imagine?,,,,,, war in the middle eastern oil fields,,,,,,, hundreds of oil wells burning and gold gets shot down?? I was already 80% in my associates camp of thinking by then and that spike down pulled my other 20% right in. I knew then that the whole story was changing on political grounds and was not going to follow the Mises path.

My typical hard money long-held belief, back then, was always:

----"Gold is the only official money of the world and will return to these roots one day"-------- and -----" some world wide financial dislocation will drive all governments back to this position"-----!!!!

It wasn't going to happen, no matter what, short of nuclear war. All we had to do was look around and see how people the world over were attached to using fiat currencies. The economic system itself was morphing into new ground as world trade learned to function very efficiently with fiat digital settlement. And that's something the 70s crowd said could never happen. That was how many years ago?

A lot of the Mises crowd tried to point out that ---- "hey, this is all very good but if you were on a gold system this economic game would be all the more better" ----! Ha, no one cared,,,,,, why risk what was already in process. Even the third world didn't want to hear it. They figured that any return to a hard money system would harken back to a time they remembered all too well. These guys suffered during the early century and no one was going to tell them that the gold standard wasn't to blame. The US is today, and was then, robbing them blind but the situation seemed, to them, that this new dollar standard was building them up. Looking at it all,,,,, we robbed the Japan life style standards the most. All to buy us an almost free standard of living, and they loved it!

When it came to using fiat money in our modern era, it made little difference what various inflation rates were in countries around the world; 50%, 100% 1,000%,,,,,, they went right on playing with the same pesos. There have been countless third world examples of this dynamic, if only we look around. Mike, look at what happened in Russia after they fell,,,, the Ruble stayed in use and function with 6,000% inflation. My god they still use it now.

No,,,,,,, my guys are dead-on-the-money with respect to the political dynamic that's playing out. The world is heading towards a huge financial/currency crack up, but it won't work out with gold coming back into the money game. This very long term transition is playing on a move away from dollar domination with Europe preparing to suffer less than us by pulling in as many other political trading blocks as they can.

When you look at who they are reaching out to; every one of these blocks wants gold moving higher to shelter their dollar trading losses. None of them expects to unload dollar reserves because our end time trade deficit won't permit it. They can't just send the dollars to each other, buying their own goods... that would never exhaust the external dollar float. Hell they now have their own money to do trade with, the Euro.

The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage (of dollars). This is more than enough to end the dollars timeline as we are already stretched to the leverage limit. They know that Greenspan has but one policy to use and that will be super printing. He is doing it now, right on que!

The ensuing domestic price inflation will waste away all buying power of dollars overseas. This is where they must install a free market in gold that ends international confidence in the current gold fractional reserve game. This is the "what for" of Britain moving itself and its gold operation into the Euro arena. Once safely there, or there in initiative, the ECB and BIS could cash out England's gold liabilities without crashing London's banks.

Mind you, this is all happening while Western style "Hard Money Socialists" are defending their stance by saying the Euro is just another fiat. Ha! These are the same guys that, throughout the 90s, put every dime in expensive gold stocks and watched dollar currency inflation drive the Dow up a trillion points while political actions killed their leveraged gold plays. Now they will refuse to buy physical when political will is about to impact this sector and they will most likely stand by while a Euro-based dynamic starts another economic surge later.

Truly, reasoning and logic is all about your point below: "it is", Mike.

MK, you mentioned:

------ Europe will be no more aggressive than it needs to be. As a casual political observer, I believe that this policy is a mistake that forces Europe to play the inflation game along with the United States, and that is not the way I would have played the game given the opportunity. However, I'm not the one calling the shots in Europe. I am an American businessman and investor and in that capacity I am not so much interested in the world as "I'd like it to be" but as "it is." I'm sure my European counterparts feel the same way.

Right Mike, your last part is like Another said about the forest growing anyway. The fact that it worked with fiat is the way it happened,,,,, "it is"!

To address your point: well, they are awfully doggone aggressive now. Note that they didn't make any attempt to match our post crash rates with a larger drop of their own. That has placed them in a very pro-active dollar warring position now. I'm sure Greenspan is steaming over this break away. It's built a major carry proposition against the dollar and the Euro has to gain on this. Here is an item from your News feed:

Currency Europe
10/05 13:06 Dollar May Fall vs Euro, Yen; U.S. Unemployment Seen Rising
By Chris Gothard

London, Oct. 5 (Bloomberg) -- The dollar, little changed, may decline against the euro and the yen on expectations a report will show U.S. unemployment climbed to the highest level in more than four years, more evidence the nation is headed for a recession...

``We expect unemployment to rise,'' said Rod Davidson, who helps oversee about $1 billion as head of fixed-income securities at Murray Johnstone Asset Management in Glasgow. ``Everyone is watching for the slowdown in consumer spending.'' He expects the dollar to decline to 96 cents per
euro by year-end, and recently sold U.S. Treasury bonds in favor of European government debt...

Since Sept. 11, U.S. Treasuries maturing in one year and more returned 2.05 percent in local currency terms, according to Bloomberg indexes that take into account reinvested interest. For a European investor, those returns are reduced to 1.79 percent because of the dollar's drop against the euro in that period.

Add a,,,,,,, solid rate difference on top of these figures,,,,,,,,, factor in a "beggar thy neighbor" who is going to survive this economic war between Japan and US ,,,,,,,,; and europe's thrust is major! I fully well expect Europe to sell [gold] into any dollar gold market spikes,,,, now,,,,, so as to hold the level steady,,,,,,, in an effort to inflate paper and discredit our gold market. Eventually they will move to create a rift between physical dollar gold prices and dollar derivatives prices. The call will go out that American gold does not reflect what's happening to our Greenspan dollar policy,,,,, real US inflation,,,,,,, and is a fraud.

You know, the US wants and needs a higher gold asset price now and I bet they are confounded to find a way to achieve it. We are stuck in a situation where we will ship a good portion at cheap prices first. We spent a decade or so playing this gold game for better oil pricing and economic dominance; now a higher dollar price of gold would hand our banks a trillion dollar derivatives loss if gold rises. It just kills them because the Euro banking establishment would simply cash out all their dollar based gold derivatives into euro settlement and gain as gold spikes and builds an ever larger asset base for all the ECBMBs.

[Me: ECBMB refers to the member banks of the ECB. He is saying that as the paper gold market implodes, they would settle all paper gold with fiat currency... THEIR euro fiat currency even though it was previously priced in dollars. They could simply PRINT the currency to settle the contracts. This would, of course, send gold to the moon and in the process send each ECBMB's asset base to the moon. See: Your Own, Personal, Freegold]

I have to laugh at all these jokers that keep trying to understand the ECB gold policy as some sort of currency backing similar to years past. It just flies right past them that the ECB wants gold as a dollar replacing asset, not local money backing. For your European clients, they would be in the best of all worlds if they buy gold now. Their system is almost making rising gold a law so as to buffer domestic dollar exchange rate loses.

MK, you also wrote:

-------- Of course, this is precisely what happened in the 1970s. Harry Browne made the same argument back then -- that the $35 gold price was both an institutional fixture and institutional fiction. Europe took advantage of that situation by reclaiming a substantial gold reserve. When the London gold pool (both de jure and overt) broke down at the $35 price, the devaluation (both de jure and and overt) quickly followed. Additional formal gold sales proceeded from there from both the International Monetary Fund and the U.S. Treasury.

Since today the gold price is both an institutional fixture and institutional fiction much the same process is in motion at present -- only de facto and covert. Are you suggesting a similar result? And with the euro present and accounted for, will it lead to a new world order? -----------

The difference today is that the whole global financial, economic and currency structure evolved to service a much more fast-paced dynamic. Simply put, we cannot go back to not using digital settlement again. If we are to use our trading efficiencies we must embrace fiat currency use,,,,,,,,, and all its evils. This is what was recognized as we were placed on the road to high priced gold. Kind of like high priced oil has been factored into our equation,,,,,, so too will a rising gold price be seen as the price we pay for modern operation. Of course, just as those that don't have oil must pay to play, and gladly do so,,,,,, those that don't have real gold when the tables turn will have to pay to keep up.

Back when Harry wrote his early views, gold was largely a physical market. Let's see, were there futures in the late 60s? Nope, didn't think so (smile). Gold was largely a government transfer thing with private players outside the US moving a relatively tiny amount of gold around. The real story in the 70s was in how much gold the truly big operators couldn't get, even at those oh-so-high prices. The little American bought his Krugerrands, gold stocks and post-1975 futures and thought he was doing something big. In retrospect, gold was dead in the water compared to where it should have gone. The dollar faction never really stopped controlling it.

Today, it's not the government pricing policy that is in jeopardy, it's the very market itself and this change will break not only the price fiction but the institution also.

Ok, guess I went on enough here. I sure hope everyone can overlook my english mistakes in those last two posts? More so in all my posts? (smile) Talk later my friend


Sir Topaz of ye olde

I'm not too clear whether THIS is the "last" year of the decade ('01 thru '10) ...or the "first" Year of the next one ('00 - '09)

What I AM unequivocally sure about is that 2010 will be the LAST Year "we the people" tolerate this unholy contrivance that is the monetary status-quo.

...either way ...Happy New Year!!

MY timeline on a strong Dollar would be (say) until the Ides of March.
One might declare then - 2010 - The WINTER of the Dollar. ...and in that manner being Right ...whatever transpires eh?
At least until March anyways!

Actually, for mine, el-Bucko is coming into 2010 in excellent shape.
All her guns that matter are firing in the right direction and she should keep this momentum going ...right until she runs off the Cliff ...(hopefully on or before mid-March)

Re: Bonds last year - I think the "reversal" ...and consequent run into the 140's, caught Mr Market off-guard to a large extent ...and they tended to accept it as a "normal" reaction.
It "wasn't" then ...and "isn't" NOW FOFOA...

The evidence is in, the Gun has been found ...and the Corpse IS Dead why not call it as such

I think if what we were discussing re: Negative Yield is to transpire, a BIG failure (maybe plural?) in the Banking sector will emerge EARLY in the New Year.
Not necessarily in the US either ...but sufficient to herd 'em into the short end of the curve, or above PAR"...and comfortable about being there whatsmore!
The Long end is GONE for all money I think FOFOA!
This is NOT late '08 - early '09 I'm afraid.