Friday, June 18, 2010


I would like to thank Karl Denninger and Gordon Gekko for providing the backdrop I was looking for in order to present a few concepts and Thoughts.

Karl to Gordon Gekko: You can no more provide evidence that "gold is the only real money" any more than I can prove there is a Christian God.

What I can provide is evidence that gold is the only real wealth reserve accepted by those that create our money. Debt instruments, like Treasury Bonds, have a strange parity relationship with the value of the currency. They don't quite float, making them a poor wealth reserve. If/when the dollar collapses, so does the debt denominated in it. Gold, on the other hand, when marked to market, floats quite well, even in a currency collapse.

As for gold being the only one with this specific characteristic, just have a look.

Karl to Gekko: But to believe that gold will offer you sanctity, you must believe several things:

1. The currency you have now (dollars, in the case of the US) will collapse. Again, if you're going to predict this, you must both predict an event and a time or your prediction is not actionable.

Not true. In some cases throughout history it was best to prepare for the normal event of currency collapse as soon as its possibility became apparent. Currency collapse is a normal event, even if it is extremely rare. Just like death, it only comes once; but it does come once to everybody. And the logical implications and extremely high impact of this event are great enough that it is well worth preparing for without knowing an "actionable time".

In fact, those that took Another's and FOA's advice "too early", back between 1997 and 2001, have had to "suffer" through a 500% increase in the marked to market value of their wealth reserves while waiting. Sometimes it is best to be early.

2. Gold (or whatever) must maintain it's value in real terms. That is, I must continue to be able to buy and sell it in exchange for other things. But you already claimed there would be none on the market at any price - that is, there would be no trade in it at all. If this is the case then it is worthless, not priceless.

What is referred to here is the chaotic transition period between the failure of the fractionally reserved paper gold markets and the emergence of a physical-only free gold market. During this rocky transition any former parity between "the price of gold" and the price of actual physical pieces will be broken. This is when no physical will be available at the published price.

As for the physical price, it will be unknown as it rockets in the background to new heights. So yes, any paper gold will be worthless during this time, and any physical gold will be priceless. Congratulations, you are both right!

3. Government cannot steal it, or you won't have it. But history says that government will steal it. And they don't have to do so by outright confiscation either - they can whack you with a 90% tax on it at the point of sale and demand that all dealers register and report. Oops - they already did the latter after 9/11!

What Karl says here is technically possible as long as continuity is maintained in the official pricing of gold. But what I write about here is a functional change for physical gold. And in this new function governments will find it in their best interest to encourage citizens to hold gold for the purpose of decentralized clearing. This will be preferable to the alternative which will be holding your trading partner's currency.

Gold will not be a transactional currency. That will be the dollar or other fiat currencies around the world. But gold will replace the centralized function of the US Treasury bond and other debt instruments, in a decentralized way.

We will transition from this:

Into this [1]:

I will not go into great detail here, but logical deduction is the best proof that it will not be plausible for governments to track and tax the capital gains realized by physical gold holders who ride out the fire of change. I am talking about discrete, disconnected and discontinuous pricing before and after.

And I am warning of the chaos that paper gold holders and paper gold price-trackers will realize as their price goes to zero. This is the price governments track for capital gains purposes. Most Western gold investors will be wiped out when this price ultimately proceeds from $1,250 today to $0 at some point in the future.

I have also collected logical evidence and arguments as to why a physical gold confiscation is nothing to worry about this time around. Please see: Confiscation Anatomy - A Different View

And lastly, on this subject of confiscation through taxes, the governments of the world will find their softest and most sensible target in the mining operations that they license. Not in the small percentage of Western gold bugs that had the foresight to buy physical coins instead of shares.

Costata put it succinctly in a recent comment:
1. The gold miners will be the targets for high taxes. For political and practical reasons they are the soft option.

2. Anyone holding paper gold when the transition to Freegold comes will be burned.

3. Personal holdings of physical gold will be encouraged by governments for practical reasons.

Here is where Costata gets his direction. There is a lot of wisdom, understanding and foresight in the following words. Nothing religious. Just advice you can take or leave. But you only do yourself a disservice by dismissing it without consideration:

Date: Sun Dec 07 1997 18:45

Try to live in this outcome and see how different the world will be. It will not be the end of all things, only the changing of most things in "western thought". The "Digital Currencies" will still trade, but we will value them as not before.

Anyone who has sold gold they do not have will not be allowed to cover that position. Anyone who has bought gold they do not have will not be allowed to cover that position. Many will lose all they have in a world without honor!

Looking back, one will ask, "how could I have thought that noone wanted gold, when more of it was being bought than existed"? Indeed, more gold than exists or will be produced in the next ten years! And some say, "only a fool would say the market was cornered".

During that time, a gold stock in the hand will not trade on an open market! And the government of the country, of the land, of the mine, will no doubt speak with you of new taxes on GOLD!

Date: Sat Mar 07 1998 23:37

Mr. Mozel,
The USA placed a special "windfall profits" tax on domestic oil during the last major rise in prices. I do think the oil stocks would have shown a greater value had this tax not been in place. Because gold will soon become a currency, mines will be taxed in a much greater way. Also, domestic mines will be asked to sell directly to the treasury at the "perceived commodity value" value of gold, plus an operating margin. As no private company will be allowed to do your treasury's job, "produce money". Gold in the hands of the public will be thought of as a good thing, as citizens are asked to "pull own weight" as the government is much under.

Date: Sun Apr 19 1998 15:09


Date: Sun Apr 19 1998 03:38
Drifter ( ANOTHER'S Thoughts ) ID#270447

Date: Sun Apr 19 1998 14:18
OLD GOLD ( ) ID#238295:
There will be ample time for holders of gold bullion and gold shares to sell their holdings for huge profits. Drifter was right on target here. Let's worry about getting POG to $350 this year. We have a long way to go on the upside before confiscation and/or taxation becomes a realistic concern.

Mr. Drifter and Mr. Old Gold,
If you search the "thoughts" posts provided by Mr. Sharfin, many of your conclusions are addressed. Many do feel that if "the gold mines were safe in the past", "they will be safe in the future". I submit this persons thinking for your consideration:

"The Western public has always thought of gold as money. Even after the 70s and 80s, most private investors held a small side thought, that gold was still, somehow dollar money. It was only during the late 80s and 90s that people started to completely lose the connection of paper spending money and gold.

Clearly, all evidence shows that prior to the 90s and particularly prior to the 50s, the push was to change the publics thinking away from gold money, to paper currency as money. In this political climate, gold mine investments were the correct move, as the business of gold was encouraged over the usage of gold as money! That is why the metal was called in and the mines were untouched.

However, today, the change will be counter to the prevailing public opinion, that gold "is not money". The world debt system and currency exchange, as we have known it will implode and leave little room for political maneuvering.

The governments will revalue gold and "demand" that the public carry it and use it! It will be the source of all gold, the mines, that will be controlled! That's Controlled, with a capitol "C", not confiscated!"

Mr. Old Gold,
Sir, I do read your writings and consider your thoughts! Thank You

8/10/98 Friend of ANOTHER

Michael Kosares,

Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold. Michael, you are absolutely correct in that the USA will see a hyper inflation of its currency and a gold price in dollars that reflects it.

Unfortunately, for most investors, the gold price rise will be sudden and also hyper fast, as it will occur just after a rapid plunge in dollar based assets including, stocks, debt and the entire banking system. This action will destroy virtually all gold based paper assets as they are also dependent on a functioning economic system. A local gold mine, in any country, must sell production to realize a profit. The contract system they deal with will not be functioning during this time. Contrary to many hopeful investors, local treasury officials will not allow miners to pay employees or buy equipment with physical gold. When the dust does clear for mining to continue, gold will be recognized worldwide as real money, and the mining of money will, no doubt, carry Extreme taxation. Stock prices of these operations, after being priced to zero, will then double or triple in price. Zero times three equals?


Replies (9/3/98):

However, never before in history has gold been cornered in currency terms. Not physical terms. Never before in history, has a world reserve currency, the dollar, been forced from a high gold valuation to a low gold valuation, along with a destruction of world gold market. Because gold is traded today, worldwide in dollar terms, the transition will destroy the capital assets of 99% of all mines. Please place yourself in "the context of future events". Physical gold will not reach $30,000/oz because noone is buying it! It will come to this level because the dollar, today, is already inflated to the level that will bring this price.

The perception that this dollar is "no longer a good reserve", it will bring the flood of buying. This "already printed and in circulation today" currency will seek gold!

Governments will tax mines for the right to produce money and force them to sell production in terms of whatever the new world reserve currency" is at that time. Euro? Because gold mines are the "unique" circumstance in world of investments, their owners will suffer a "unique" problem of defining what they really own!

Also, remember, gold will rise soon as world trading continues this course of change. However, at some point, when the dollar market is destroyed, noone will know the currency value of gold thru an official market. Paper gold will not do well as the currency world is at war! The true surge of gold in dollar terms will not show until perhaps a year has gone by. During this time of trouble, physical gold will prove to be "the investment and holding for a lifetime".

ANOTHER: Gw, I would say, all forms of physical gold is good to own. Even the rare ones offer the "art form", yes? Even in war, the art work is looted first, then the jewels, and always food. I prepare for not the war of men, but the war of currencies! This conflict will bring forth a new concept for many: "western governments will encourage people to hold physical gold "! When the Euro has defeated the Dollar, citizens will be asked to use gold as a savings, for holding the Euro will be frowned on. Gold will not bring your "capital gains tax" as the mines will be taxed to compensate.

Yes, rare gold will be good, but not as liquid as "bullion type" gold.

Thank You

Karl to Gekko: Then your base claim - that gold is a inflation hedge - that is, it will hold value - is false.

This is true under today's semi-free gold trade. The paper market automatically suppresses the price of physical gold through physical parity with inflating paper gold. The same as gold was suppressed at $35 in 1970. This is true even if you don't believe GATA that the Fed actively suppresses it.

It was also true under the fixed parity of the gold exchange standard. But just like physical gold holders in 1933 and 1971 profited from revaluation, so today physical holders will profit when parity is broken between paper contract gold and physical gold in hand.

And once this separation is complete and physical gold finds its natural equilibrium as a wealth asset parallel to fiat currencies, then and only then will gold be the inflation hedge par excellence. This future stasis is what I call Free Gold. [2]

Karl to Gekko: Indeed, your position is nothing other than a speculative bet - a gamble.

What isn't a gamble today? We are on the brink of a major discontinuity. Are stocks not a gamble? Perhaps they are the best gamble if you expect normal inflation and economic recovery. Are bonds not a gamble? Perhaps they are the best gamble if you expect deflation of the type that perpetually increases the value of the dollar, even in the face of unsustainable debt.

But how do each of these investments fare in the opposite situation? How are stocks in a deflation? How are bonds when the dollar is falling? How do derivatives fare when counterparties cop to insolvency?

And what happens to all of the above when the currency collapses? No, it's not the dollar bills in your wallet nor the quarters in your pants pocket that threaten the system. It is all the contractual debt that requires payment in those things. If that debt can't be paid to the satisfaction of the creditors that earned what they loaned with real labor, then that dollar in your wallet will fail. The mountain of debt is inextricably linked to the currency itself.

Sure, foreign debt can cause a currency collapse quickly. But what about domestic debt? What about the biggest debt in the world being owed by the biggest printer in the world? How long does that take to collapse? 30 years? 40 years? And when should we start counting?

So which is the bigger gamble with your life's savings, your family nest egg, you children's inheritance at this particular time in history? Is it a bigger gamble to keep it denominated in a precarious piece of paper printed by the global debtor par excellence? Or is it the solid, private, physical wealth reserve with a 6,000 year track record that, incidentally, the central banks and sovereign wealth funds hold as their wealth reserve?

The health of your nest egg is a very private matter, just like the health of your body. Do not entrust it to the opinion of others who will not lose a penny if you lose. Do not blindly follow the advice of anyone. Answer the questions above yourself. Think it through. Understand! Then decide for yourself.

(from Chris Martenson's Crash Course video Chapter 20)

This is no cult as Karl thinks it is. Some people here lost a lot of money in stocks, bonds and real estate before they started thinking it all through. Others here made a lot of money in these same schemes, and then went in search of the best way to consolidate that wealth before the coming discontinuity that anyone with eyes can see coming. Yet others, some that I have received generous support from, have family money, old money, and they thank me for sharing publicly what they already understand.

Here is the big picture historical context. When it comes to hard money and easy money history records a story of struggle between two classes of men. It is always the same two classes. Those who worked hard to save for the future and want hard money to protect the purchasing power of their efforts, and those who prefer easy money that always inflates away value making the repayment of their debts easier as time goes by. The savers and the debtors.

Sometimes the debtors rebel against the savers, as in the French Revolution. And sometimes the savers flee the debtors as in the American Revolution. Sometimes the conservative saving class makes monumental errors, as when the Regent of France put John Law in charge of their money. And sometimes the easy money crowd takes it all too far, as with the dollar today.

I know you all perceive the banker as the opposition. But just know that the banker is merely the middleman between these two classes of men. The banker facilitates the loans from the savers to the debtors, and the repayment back again.

The banker makes his largest profits during times in history when the liberal easy money crowd is in power both politically and monetarily. And he makes his most absurd profits when the debtor class allows its debt to go too far... to the very mathematical limit. But don't worry. This unstoppable avalanche will reduce banking and central banking to what it should be; a utility for the public good. [3]

As money has evolved since the time of John Law, we have always had one or the other, hard money or easy money. And this always leads to conflict or currency collapse. With hard money you get conflict when the debtors revolt against hard payment terms. Look at Greece today, or France in 1790. And with easy money you always get currency collapse.

So if you are waiting for "the people" to rise up and demand silver currency to defeat the enemy bankers, you may just be looking in the wrong direction. "The people" today don't want hard money. They are deep in debt. They want easy money. So do the Western governments and politicians. They all want to inflate away the debt in which they are drowning.

No, what is happening today is a little more complicated than in the past. Today, as in the past, we are staring directly at a currency collapse of monumental proportions. The global reserve currency now has a mountain of debt denominated in itself, at its very limit. It can no longer be rolled over on the backs of new savers.

But at the same time we are all interconnected electronically today. Never before in all of history has an easy currency been so amazingly efficient and fast in long distance transactions.

So what will happen? How will it all shake out?

If you can understand that the savers' savings today is tied up in the debtors' repayment, then you can understand that savers will be burned because full repayment today is impossible. And they will ultimately turn to a different wealth reserve than paper representing someone else's debt.

And if you can understand how the debt is inextricably linked to the value of the currency, then you can pretty clearly see the currency collapse coming.

But our modern easy currency excels at one thing greater than any easy currency in all of history, or any hard currency for that matter. It lubricates a healthy economy with greater speed and efficiency than anything else ever has. So where is the flaw? I'll get to that in a moment.

Everyone wants an easy currency today. The politicians do. The central banks do. The G20 nations do. The debtors do. Even "the people" do, because they are debtors too. And today we have the best easy currencies the world has ever seen! Since the computer came on line in the 1970's thing have never been faster.

This is probably money's most important function, transactional medium or medium of exchange. But in this function, in this transactional role the specific value of a currency does not matter at all. All that matters is stability, or relative stability since perfect stability is impossible.

The reason I bring this up is to point out that the dollar could devalue "Zimbabwe-style", then gain stability once again, lop off a dozen zeros, and get right back to performing its most important function, lubricating trade at the speed of light.

Can't picture this? That may be because I haven't gotten to the flaw yet, and the natural solution to that flaw.

Ever since John Law's time and even before, money has had three roles to play. And they were always played by the same money. This "shared functionality" always led to conflict in times of hard money or currency collapse in times of easy money. The three roles are 1. transactional medium (the physical currency), 2. unit of account (the denominator of debt), and 3. store of value (the wealth reserve).

The flaw in the dollar is that it was brought up with gold tied at the hip. Gold was always fixed to the dollar at a specific parity. So gold was no obvious alternative store of value to dollar debt. So for 100 years now the savers have found dollar-denominated debt to their liking. That was until the debt slaves rebelled and the savers' savings became worthless. I believe that was back in 2010. Or was it 2011? But I'm getting ahead of myself.

We can and will live with a modern, electronic super-efficient fiat currency. In this Karl Denninger is correct. But when the debt mountain collapses and the present value of our super-efficient fiat currencies find their new equilibrium, something will have to emerge as a parallel money to serve the store of value function that failed in the collapse. That something is gold, and gold alone!

In this, Gordon Gekko is correct. Gold is money and only money! But I don't think we will go back to shipping pallets of gold to China on Walmart Supertanker return trips. Nor do I think we will go back to gold and silver coins in our pocket on the weekly trip to the general store like Little House on the Prairie.

Gold need only perform in the savings function and the clearing of net imbalances. And not necessarily in a centralized clearinghouse. Gold’s clearing function will likely be decentralized but it will not be a currency for everyday trade.

What I see so clearly coming right at us is a separation of the traditional monetary functions into two separate mediums! The transactional role will go to the winner in that department, modern electronic fiat. And the wealth reserve role will go to the winner in that department, gold. But what about the unit of account?

Well, I have a few ideas about this, but they are all equal probabilities. Maybe this role will be split between the two mediums depending on risk appetite, time preference and knowledge or profession. In other words, carpenters won't dabble in fiat debt investing. With a golden alternative there will be no incentive to take such risks. Or maybe we'll switch from a debt-based system to an equity-based system. [4] I think this possibility is highly likely even though it seems completely alien right now.

Anyway, this is what Freegold is all about. It is about deducing the inevitable implications of an unstoppable avalanche. And it is about fiat currency finally finding its natural equilibrium with a parallel physical gold wealth reserve. And trust me, fractional paper gold promises won't work in this new world, so equilibrium will likely be somewhere north of $50,000 per ounce (and that's from just the functional change, don't even ask me about the inflation-adjusted price).


[1] Please see: Bondage or Freegold?
[2] Please see: Evolution! for more on stasis and "punctuated equilibrium"
[3] Please see: Say Goodbye to Wall Street
[4] Please see: Metamorphosis

Michael Maloney on Confiscation and Hyperinflation
h/t to Raptor for this one:


Jim Nasium said...

Only just stumbled across your blog via a link on zerohedge, was up late last night trying to get up to date.

This might not be the right place to ask this question, but you advocate the holding of physical gold, what about something like Bullion Vault which is an interent gold exchange and physical storage provider?

I don't expect that I will ever actually be paying for goods and services in physical gold so why not have it stored in a vault in Zurich rather than under your pillow?

The Sim said...

And the POG just spiked above $1258 just a few minutes ago... Good morning, FOFOA! PS: do you have any thoughts on the canadian gold trust GTU?

miked said...

Hello Big :)

I have been asking myself the same question. I have a portion of Gold stored within immediate reach (for emergency use) but the bulk in custody in Zurich. Just a note here - it's in my custody, in my own safe deposit inside a bank. I don't trust anyone else to hold it for me.

When you buy gold at Bullionvault or any other custodian they tell you your serial number they have stored the gold under but you never see the gold unless you take delivery. It works out even more convenient for them with silver as you will need to pay the VAT to see it. Is it all really there? Who knows?

However, I am beginning to doubt whether it's even a good idea to keep it in safe deposit. After all in a meltdown, would you sleep at night knowing your gold was thousands of miles away in the trust of people you don't really know? But keeping that much gold locally would be a real problem so I am in two minds about what to do.

Bullionvault use Via Mat to store their gold. Buillionvalut has have their own storage area inside Via Mat, but who knows what's there at any one time? I think it's a better idea to take your own gold to Via Mat and put it on deposit there. They are fully insured (which bank safe deposit boxes are not) and they have to give you back the same gold bars or coins you gave them in the first place.

The only downside to Via Mat is the cost: 175 CHF per month for up to CHF 1 million worth of gold and 0.161% thereafter. Which is fine if you want to store over a million dollars worth, but pricey for smaller amounts.

Jeff said...

Nice one FOFOA.

As I understand it, you see the rising price of paper gold breaking the connection between paper and physical? And then the paper price plunges while physical rockets. That will be a heartstopping ride, even for gold bugs.

Jim Nasium said...

Not a plug by the way

Anonymous said...

Big Johnson:

How do you know that the bullion valt has as much gold as it claims ?

How do you make sure that your order is not balanced against a future promise of a third party to pay ?

How do you know that the gold that the bullion valt has, has not been over leveraged, coz they feel that not all will ask for delivery at once ?

And, finally in case of a collapse of the system or war how can you be sure that the bullion valt will keep it's promise and deliver the gold to you ?

All that you will be left with is a future promise by the bullion valt to deliver you the said amount of gold, thus your investment won't be any better than paper

GG said...

Glad I could help! Again, an extremely eloquent and well written post; but I reckon the level of intelligence and sophistication required to understand the concepts you present here is way too high for buffoons like Karl Denninger to understand.

GG said...

Bernanke must be again very confused today with Gold reaching new highs. Even the paper Gold market has started giving lie to all the propaganda.

Anonymous said...

I read more writings by Martin Armstrong, but the guy seems pretty adverse towards Gold, He even claims that Gold in not suppressed by the central banks etc.

I am surprised that inspite of being such a good analyst how and why he views gold the way he does ?

GoldSubject said...

Convincing, inspiring and so uplifting -- thank you, FOFOA!

"With hard money you get conflict when the debtors revolt against hard payment terms. (...) And with soft money you always get currency collapse."

Those two lines really do it for me -- they shed so much light on the issue.

It is exceptionally exciting to be living in these times. A pain in some ways, and a real treat in others.

Unknown said...


The latest report on official gold holdings is quite intriguing, especially in regards to Saudi Arabia. This courtesy of Zero Hedge:

"Yet most interesting was the surge in Saudi Arabia holdings which increased its official holdings from 143 to 323 tonnes. It appears, at least on the surface, that this was not incremental purchasing, or at least that is how the Saudi Arabian Monetary Authority is trying to spin it: 'gold data have been modified from First Quarter 2008 as a result of the adjustment of the SAMA’s gold accounts.' We wonder just how a country can 'reclassify' 180 tonnes, or more than double existing holdings, in gold. Of course, if would not be good to see the country which lies on a sea of the world's biggest non-gold, yet $-denominated commodity to be in the market, diversifying its dollar holdings into hold. If SA had in fact purchased the gold, it would be equivalent to roughly $7.5 billion worth of purchases in the open market."

What's your take on this monstrous "reclassification/adjustment"?

raptor said...

@FOFOA you posted the ECB foreign reserves link and there the Total is : 521,595 is this ~500B euro

How this compare with USA ?

1.618 said...

@Big Johnson,

Get up to date via "It's The Debt, Stupid" and Reflection, and follow FOFOA's recommended reading list in Refection.
Other useful links are listed on the right hand side of FOFOA.
Buy physical gold, not a contract with anyone. By the time you have got 'up to date', you will appreciate why you need to.
The approaching dislocation is unprecedented in many regards, and people should prepare accordingly.

Jim Nasium said...

Samix and miked, thanks that all makes too much sense, given me lots to think about.

Dave Narby said...


Thank you for weighing in on this. You settled many of the questions for me.

Re: Denniger, I think that he is afraid of the ramifications of freegold. He continually points to the fact (rightly so) that if the law had been enforced on the Fed, that none of this would have happened.

Of course, if we had followed The Constitution, we would have never handed over control of the money to the Fed, and none of this would have happened...

I cannot say for certain, but I think he believes the lie that "A little bit of inflation is a good thing". That would help to explain his attitude.

His one legitimate argument is that the price of gold can be manipulated by bankers, and it doesn't allow for inflating the currency, which is what the Fed needs in order to continue with the fractional reserve/inflationary system we have.

I thought that if the US went back to a bi-metallic standard, that any PM reserve notes would have to be subject to complete transparency and auditing at any time by any reason by anybody in order to work, but the mechanism you outlined in this post seems like it would work - Assuming we know every byte of data on the Fed's books.

If there's anything you can add to this, it's always tremendously appreciated.

Best regards,

Dave Narby

GG said...

You make a lot of very good points here, but I have been thinking and there are a few that I don't completely agree with:

"I know you all perceive the banker as the opposition. But just know that the banker is merely the middleman between these two classes of men. The banker facilitates the loans from the savers to the debtors, and the repayment back again."

I doubt it is as innocent or simple as that.

"Everyone wants a soft currency today. The politicians do. The central banks do. The G20 nations do. The debtors do. Even "the people" do, because they are debtors too."

People are not debtors today simply of their own volition. The system has been deliberately DESIGNED that way starting with the creation of the Fed in 1913. When money is created as debt and the money required to pay off the interest on that debt is NOT created what is the logical outcome? At any given time, there will be a majority of people in debt who can't pay off their loans. So it is not as straightforward as simply natural cycles of hard and soft money preferring people "ruling the roost", so to speak, IMHO.

"So if you are waiting for "the people" to rise up and demand silver currency to defeat the enemy bankers, you may just be looking in the wrong direction. "The people" today don't want hard money. They are deep in debt. They want soft money. So do the Western governments and politicians. They all want to inflate away the debt in which they are drowning."

The people will/may not demand it explicitly, but many are voting with their feet, and they will increasingly continue to do so. By refusing to participate in the present paper money system they "starve the beast" and at some point will literally cause it to collapse and it is this collapse of the fiat money system that will rid them of the debts. It is just nature at work.

costata said...


Brilliant exposition. IMHO one of the crucial tests of expertise is the ability to simplify the key issues for others. You pass this test with flying colours.

Savers vs Debtors. Hard money vs Soft money. By inference you go straight to the heart of the Marxian fallacy that this is a battle between the Aristocrat and the labourer.

How can a system be sustainable that champions the rights of the labourer who squanders their pay over co-workers who are thrifty and responsible?

A system that grants the privilege to the rentier, through political patronage, to extract unearned income from producers is equally unsustainable.

IMHO the Euro template as a currency for transactions (stripped of the false promises) with Freegold as the store of value represents our best chance to escape this unholy mess of the $IMFS without a world war. Precisely the intentions of the Euro Freegold system designers as described by Another. If it has to be done one ounce at a time, so be it.


GG said...

"The people will/may not demand it explicitly, but many are voting with their feet, and they will increasingly continue to do so. By refusing to participate in the present paper money system they "starve the beast" and at some point will literally cause it to collapse and it is this collapse of the fiat money system that will rid them of the debts. It is just nature at work."

Many won't even be conscious that they are engaging in this sort of "a protest" - they will simply be acting in their own best interest - but that will be the net effect. I simply view it as the beauty of "the market" :-)

Anonymous said...

Have been doing a bit of math:

Total world wealth in 2007 in 2000 US$ = 125.25 Trillion [1]
Equivalent 2010 dollars = 125.25 TUS$ * 1.25 [2] = 156.56 TUS$
Total above ground gold = 158'000 metric tons [3]

Theoretical maximum gold value assuming ALL wealth flows into gold = 156.56 TUS$ / 158'000 tons = 30'816.55 USD / oz

Comments: this assumes that all the value of all other assets (silver, commodities, stocks, gems, houses, currency, land, etc) drops to zero. Assuming that only half the value of all other assets flows to gold then we are looking at a rationally defensible 15'000 USD / oz in 2010 dollars.

Considering that since 2007 total wealth dropped significantly due to the stock market correction this figure will have to be corrected downward 25% again. So we are looking at a realist maximum 2010 dollar gold price of around 10'000 USD / oz.

Projecting a 50'000 2010 USD gold price assumes world gold wealth alone (50'000 USD / oz x 158'000 tons of gold = 254 TUS$) eclipsing total 2007 world wealth (all assets) by about 2/3.

Conclusion: A future gold price of 50'000 USD / oz in 2010 dollars without an accompanying global total wealth increase by about an order of magnitude is grossly unrealistic.

[1] Estimating the Level and Distribution of Global Household Wealth, United Nations University, 2007

Greyfox "It's the Debt, Stupid" said...

Where there's smoke, there's usually fire. See below quote from the Jim Willie, June 2010 Golden JackAss newsletter. Unable to give link as it is for paid subscribers only.

"JPM was nailed for a record fine in the UK for commingling cash accounts. Anyone who thinks it does not happen in bullion accounts at these big banks is either naive, an idiot, or both. You better think again if you think your investment in GLD, SLV, IAU, or any of these bullion investment products sold by the likes of Kitco, Monex et al is really an investment in bonafide physically allocated bullion."

costata said...

Stefan Pernar,

This about debt not wealth. The other stores of value such as productive agricultural land don't need to be "absorbed" into the gold price.

FOFOA has several posts about these issues including his recent "It's The Debt, Stupid". In suggesting that post to you I'm not implying that you are stupid. The title is a paraphrase of Bill Clinton's remark from one of his Presidential campaigns.

Wendy said...

@Stefan Pernar

You might find some further explanations re debt vs asset if you read Jan 09 - Fun with Numbers


Dave Narby said...

GG makes a point regarding the masses demanding sound money. I've been talking to an awful lot of people who both want to end the Fed and return to a hard money standard.

I make the point that if that happens the accounting of said needs to be 100% transparent, and they nod their heads, although I can see that most are puzzled.

Dave Narby said...


Total amount of 'wealth instruments' in existence (derivatives) is ~1,440T, however I have heard the interest bearing derivatives are a mere 600T.

Could be as low as 200T however, so add that to world wealth total and we get 356T.

Assuming those numbers are accurate...

Quite a few unknowns here.

As the fellow in the video said, it will ether be stunning or breathtaking.

Unknown said...

a good post on The Daily Bell:

Russia kicks dollar dominance

stibot said...

So you count derivatives into wealth? I believe it is only illusion of wealth. If you insure house against fire, did you create additional wealth? I don't think so. How derivative can produce wealth? Derivatives will be defaulted therefore they will disappear because the wealth behind them never existed (or Ben will print them away which is the same).

I've a debtor: he has my money, i have his debt. Not good for me. Do i believe i will obtain money back? To tell you the truth: No. But if i'm a bank i will consider this debt as good as money so inner circle of money creation (wealth illusion) to insanity will continue. My understanding money today is yet another derivative. There is no real wealth behind money, only promises to pay mass of debts, which will be (or can be) defaulted like other derivatives.

Derivatives and money represent no wealth IMO. If I promise i will give you 10 thousands USD, do you feel any wealth was created? You can create as much derivatives/money you decide but you do not create any wealth. But at the same time you are adding money/derivatives to count total world wealth in order to find price of gold. I'm in doubt it makes any sense.

Flore said...

Saw Ron Paul on CNBC telling Cramerito not to buy GLD but to buy coins and bars... Ron rocks... but he can still learn a couple of things reading here...

Saul said...

A very interesting post, and a lot of good discussion. I agree that the link between hard/soft currency and debt revolt/currency collapse makes perfect sense. You reasoned this point well. I find FOFOA posts always rich food for my brain.

Unknown said...

Important sentences (from my last post: "Russia kicks dollar dominance"):

1) Only three, five years ago it seemed like a fantasy" to create a new reserve currency, Medvedev said yesterday in a speech in St. Petersburg, Russia. "Now we are seriously discussing it."

2)We don't think that the IMF is much of a central bank, by the way, nor an inevitable one. We don't even think SDRs are going to prove much of a substitute for the dollar except perhaps in special circumstances. The dollar became the world's reserve currency (a strange nomenclature) after World War II basically because the US was able to enforce its will worldwide. By linking the dollar to purchases of oil, the US was apparently able to ensure that the rest of the world would use the King of currencies.

3) SDRs have been around for 40 years, but they are not really money. Money, as economists understand it, is a means of exchange, a store of value, and a unit of account. SDRs are not a means of exchange. As a basket of already existing currencies, it might appear more stable and hence a better store of value, but what is the metric? The purchasing power of fiat currencies individually and collectively has generally been eroded by inflation. The SDR is not a fiat currency, but a basket of fiat currencies. For the most part SDRs are relegated to a unit of account for (no surprise) the IMF and a few other international organizations. Some observers suggest that SDRs are the IMF's money (sometimes they are referred oxymoronically as paper gold), but that reflects a misunderstanding. Issuing SDRs is not the same as the IMF printing money. The IMF doesn't do that. An increase in SDRs simply boosts each member's claims on the composite currencies. The IMF is not a central bank.

4) In the first quarter of 2010, Russia's central bank increased its gold reserves by 26.6 metric tonnes, or about $1.2 billion at today's price, according to World Gold Council data. That's in addition to the 117.63 tonnes that Russia added in 2009.

5) China is considered a stealth buyer of gold, said Boris Schlossberg, director of currency research at Global Forex Trading. As the world's largest producer of the metal, China often buys gold from its own mines and doesn't report those sales publicly.

Greyfox "It's the Debt, Stupid" said...

Per earlier link posted by Jimmy, "Russia Kicks Dollar Dominance" confirms many of the principals acknowledged by FOFOA/FOA/A about historic role of gold by "old money", central bankers, giants, etc.

"Conclusion: What is actually happening is that gold is likely becoming a defacto, secondary reserve currency. Reserve currencies have to be recognized universally and buyers and sellers have to have confidence in them. Gold fits the bill. Not only that, but we would argue that gold has never ceased to be the "real" reserve currency for the world's wealthiest families and individuals and even for central bankers. Of course the powers-that-be will never admit this, which is one reason why there are continual statements regarding other reserve currencies, regional currencies, etc. Those who want to figure out what is really going on ought to simply "follow the money." And money is gold."

Saul said...

One (perhaps naive) comment - When I first read the term "Freegold" here, I briefly took it the wrong way. I took "Free" as in, an ounce in every cornflakes box. Not "Free" as defined as freedom. Years of advertising do that to you. This ambiguity could lead to some confusion, so it's worth mentioning I think.

Perhaps "Liberated Gold" is a clearer term? Hmmmmmm. Sounds a bit too much like the codename for some future US military adventure.

Unknown said...

n the reality, I’m very doubting between different monetary worlds, because I simply don’t know and am not an insider. After reading too many books (yet 312 books, now I’m taking pause for a month or so, because it is bad for my eyes…), it’s very difficult to conclude what would happen. But it’s possible to predict different ways of our possible futures.

One thing is certain: hyperinflation at the end of the game.

First, I believe in a new world currency, backed by gold, to resolve our mother of all financial crises. Why ‘gold-backed world currency’? When the dollar falls, the current world currency, it would wipe out all of international trades (oil, food,…) and then there is no trade, that’s not possible for many people and big multinationals. So they must replace the dollar with another currency, whose could create trust for the international trade between superpowers, like China, Russia, Europe,… Only gold is a reliable currency for the international trade. So we’re caught in these ‘golden monetary trap’, there is no another option. So physical gold could be very valuable for the international trade, I don't dare to paste a price on physical gold in the future.

But I don’t believe in a freegold-theory, because it wouldn’t be acceptable for, let me say: ‘the Elite’ (with good or bad intentions, I don't know, because I don't believe in conspiracies, to be clear), so they couldn’t manipulate the new currency in their advance for expansionism (look how far we are now evolued in technology and science, grace to the moneyprinting and financing big projects to ensure our evolution in knowledge. But one problem of our expansionism-politics is the finitude of commodities against infinity of money creation. So we are caught in the end of the game: Too many dollars printed…). In the short term, they would accept a ‘gold-backed’ currency, paid in digital or paper money. So they could decouple it again in the future, like Nixon did it, because the people are short-term minded and not really clever to understand the power of the currency manipulating and ‘the counterfeinter-effect’. Then the Elite, could manipulate the currency again in the advance of expansionism in the future. Who knows they could finance new technology who could change the world and the politics around it (I really hope for it, it's my greatest wish). With freegold is it difficult to finance expansionism, because it would evolute too slow (caused by hoarding gold and low consumption) and then the people are concentrated to make war or to do other bad shit.

So I think, the Elite would introduce a new currency with many propaganda (better world, stronger currency (like propaganda of our 'Euro'), new economy, work,...) and boobs of beautiful wifes to mislead "the sheeps", the unaware people. They, the unaware people, will accept easier the introduce of a new currency under pressure than accepting a new language or religion or immigrants under pressure. Unbelievable, but it's the mass psychology.

If you think, it’s impossible what I’m telling you what would happen: take a look in the history of Argentina, Mexico, Ukraine,… After their monstrous suffering hyperinflation, are their monetary regime now paid in physical gold or again in fiat currency?

Unknown said...

And demographics are also important economic and social indicator.

Now, the population is declining in Europe (and it's creating deflation, by lowering the power of the 'ask-side', look to the demographics of Japan since 1980), they must flood the continent with new immigrants to stabilize the economy and the power of the 'ask-side' (=consumption).

So we opened our borders for our neighbors: muslim-nations, to enlarge the European population (and the 'ask-side' of our economy). So it could create a BIG culture clash between different ideologies (as I already said, it’s difficult to accept other religion or mentality under pressure). The future outlook could be very dark for Europe and his declining autochthony population. Eurabia is becoming REAL. I hope, it wouldn't turn into war and we could find a solution to live together peaceful, in the interest of our coming generations... Or take a look in Bosnia-Herzegnovia (most cruel war of our recent history, related with hyperinflation) or Kirgizia (now they're fighting, maybe it would become a new war) or our two world wars.

After regarding the history of the rise of Hitler and creating the triggers of wars: There is only 10% of the fool, racist and low IQ’s people needed to create one. It’s the perception to generate it to a population or race, like to say: “All Muslims are violent, because they rape women and children.” Related to the nazi’s, our perception was the same: only 10% of the Germans were real nazi’s, the rest of the people not, only too silence or cowardly to protest against the real nazi’s.

Now, we see the same evolution with the muslims, on internet, we find much negative information about criminality, rapings,… and no any muslim is protesting against it (or few, like Wafa Sultan, Ayaan Hirsi Ali,…).

But the statistical proportion of these infidel fools are marginal in equation with good, silent muslims, it’s only our perception of the amount negative information (it’s sensation to write about it for the newspapers, because “fear sells”…). Let’s say in the proportions: 10% of the 100.000 muslim-migrants are nuts and bad, so we become an amount of 10.000 bad and angry muslims. It looks much, but it’s marginal in equation with the 90.000 good muslims. So we could generate our negative perception to the other 90.000 good muslims and discriminate them, for example: the rise of PVV (Partij van de Vrijheid, Geert Wilders, now 10% of the Dutch population has voted for him, 1.5 million peoples). It could trigger a clash between ideologies and perceptions…

Thus, I’m afraid to repeat our cruel history. What would happen if hyperinflation becomes real and we seek a black sheep…

So I hope in a good and orderly default of the dollar-hegemony with the BIS and IMF-supervision, to avoid clashes. It’s not good for us all, also for the Elite and our next generations…

Unknown said...

Maybe is China accepts to appreciate the Yuan

Dave Narby said...

@ stibot

"So you count derivatives into wealth?"

(Assuming I understand everything) Not into wealth (that is gold and other tangibles). It represents the amount of dollars that have been created through various back-door fractional borrowing schemes (CDOs, MBS, etc.).

"I believe it is only illusion of wealth."


"If you insure house against fire, did you create additional wealth? I don't think so. How derivative can produce wealth?"

It does no create wealth than directly printing fiat does.

"Derivatives will be defaulted therefore they will disappear because the wealth behind them never existed"

Here we differ. I think the majority of them will be revalued against gold (and to a lesser extent silver, and every other tangible).

"(or Ben will print them away which is the same)."

...And what would that do to prices?

"I've a debtor: he has my money, i have his debt. Not good for me. Do i believe i will obtain money back? To tell you the truth: No. But if i'm a bank i will consider this debt as good as money so inner circle of money creation (wealth illusion) to insanity will continue. My understanding money today is yet another derivative. There is no real wealth behind money, only promises to pay mass of debts, which will be (or can be) defaulted like other derivatives."

I am going to assume that much of that fiat will flow into gold, and then those that default will run off with it, totally screwing the debtor.

Contract law is only as good as it is enforceable.

At this point it seems more of guessing about the numbers than the endgame.

...FOFOA? This is your forum, would you do us a favor and play Socrates on this dialog for us?

@mortymer001 said...

So, If the Yuan is now unpegged that means there is a new race in competitive debasement :o)
I wander how are they gonna to achieve that... :o)
Hint from what is happening in Vietnam. Correct?

@mortymer001 said...

Another (speculative) thought: CHina feels that dollar has some serious problem and gets ready.

carpenter said...

Thank you for Another enlightening article. I especially liked this part because I can relate to it so well.

You said:
“carpenters won't dabble in fiat debt investing. With a golden alternative there will be no incentive to take such risks. Or maybe we'll switch from a debt-based system to an equity-based system. [3] I think this possibility is highly likely even though it seems completely alien right now.”

But I must disagree it’s not as completely alien as you think.

Best regards

Ivo Cerckel said...

No, Mortymer,
the fact the Yuan is now unpegged does not mean there is a new race in competitive debasement.
It means the People’s Bank of China will let the yuan’s value be determined by its soon-to-be free-floating gold reserves.

But, yes, China rules out a one-time revaluation. (1)
Gold, on the other hand, will be revalued once.


Ivo Cerckel said...

A friend reminds me that:
Gold as a wealth reserve exists independently of currencies and of exchange rates.
Gold is the universally exchangeable wealth consolidator.
Gold’s purchasing power must represent this wealth which has been accumulated all over the planet.
But gold’s purchasing power can only represent wealth which was accumulated through entrepreneurship/investment.
To demand that gold represents wealth accumulated through debt, as it has been accumulated by the Financial Industry with its fiat units of account, is a contradiction.

stibot said...

@Dave: "And what would that [using Ben's equipment to print debt away] do to prices?"

In technical view nothing, because no new wealth was created. We are talking in here always in real terms, ie. in today's dollars. (But one should count psychological event of high inflation, which can bring some attention of masses towards metals.)

"Here we differ. I think the majority of them [ie. derivatives] will be revalued against gold (and to a lesser extent silver, and every other tangible)."

If they represent no wealth and they can be rolled over simply by revaluing so why to bother with them? They live in their parallel universe to provide some illusions like Hollywood does.

"I am going to assume that much of that fiat will flow into gold, and then those that default will run off with it, totally screwing the debtor."

I was quite impressed by this idea, because it shows illusion can be transformed into wealth. Then I realized it is not possible, because when only a fraction of people will start pull money out of bank to buy gold, bank will default, debts will default and only fraction of money holders will be satisfied. It is run on bank.

Then I realized if I buy gold, someone else (miner, coin shop) receives my money and pushes them back to bank so no threat of bank default. However it is not like that. First, if such redemptions occure there is not enough gold from miners, it is mostly provided by central banks, so you have bank run again and default imminent. Second, since we are all debtors, most of money are in hand of debtors. If debtors buy gold instead of paying debts you have defaults again.

It is all illusion, no real wealth behind money.

You say debtors are screwed but i believe creditor is who is screwed. Since debtor has money from creditor he can buy gold against money borrowed and then default.

Dave Narby said...


'"Here we differ. I think the majority of them [ie. derivatives] will be revalued against gold (and to a lesser extent silver, and every other tangible)."

If they represent no wealth and they can be rolled over simply by revaluing so why to bother with them? They live in their parallel universe to provide some illusions like Hollywood does." '

All paper assets are ultimately a claim on a physical asset.

McBryde said...

I have a few thoughts about the original posts on this topic - namely about the safe-keeping of the physical gold.

I too use Bullionvault, but I doubt that they do actually have, at the close of each day, a matched amount in their inventory,

Anecdotal [yet, I consider, reliable] evidence last year suggested it was extremely difficult for many to get hold of gold bars. So how did Bullionvault get hold of them every day?

Also, if you want to go there and collect your gold, you can't get it below 12.4Kg; and even then you'll be paying 2.5% above the competition.

I just asked them their position and they responded:
"BullionVault deals only in investment gold - we are not set up to provide delivery of gold. Our position is that we will do it if requested, but it will be expensive, and there may be other companies better suited if this is the service you are looking for."

So what if you wait till things are very rough in the financial world, after everyone and their dogs are talking gold, and the govts are demanding compulsory purchase, and mining companies pay 95% tax .... and banks instigate limits to the amount of money you can withdraw?

You'll have tons of notional wealth, but it'll be stuck in Switzerland - or in your bank at home in your inflated currency which you might not be able to translate into some other asset .... eg farm land.

I also would not trust safe deposit boxes at banks in a future full of propaganda against terrorists, money laundering, etc etc....

I imagine that what I would do - if I got the timing right - would be to sell Bullionvault holding, ETF's, etc before it gets too hot, buy physical and hold it till govt intervention [if there is any]. Then buy something else!

Post a Comment

Comments are set on moderate, so they may or may not get through.