Sunday, October 24, 2010

Flow Addendum

The following is the essential companion to It's the Flow, Stupid, filling in gaps and answering questions. Whether or not you've read this masterpiece in the past, it is worth another look. If you are like me, you will find something new that you didn't see before.


Part 1 --- Stormclouds Gather...

The estimable economist Milton Friedman stated his forgettable opinion in 1974 that OPEC would collapse and oil would never get up to $10 per barrel. In all fairness to Professor Friedman, we must recognize his position as coming from a staunch monetarist, emphasizing money supply as the "true religion" for the Federal Reserve to keep the US Dollar as good as Gold. At times, he half-seriously argued for the abolition of the Federal Reserve in light of the simple monetary policy guidelines that could serve in its stead, with the economy returning to a state of self-regulation. (In the past sound-money days, economic hardships were far from unnatural, and they were not necessarily attributable to acts of government. However, modern attempts to centrally manage the economy ensures that any blame for systemic difficulties today may be clearly laid at government's feet.)

Milton's mistake was two-fold. First was his knowledge that Arabian oil could be produced for one dime of real money, and that inevitable competition among OPEC members would surely keep the price close to cost of production. Second, and most importantly, Milton failed to account for the possibility that the government would abandon such reasonable monetary management to keep the dollar nearly as good as Gold. This fact was NOT lost, however, on the oil producing countries. Ask yourself, what would YOU do if your business or trading partners suddenly started offering you payment with Monopoly money instead of "real" money? Would you shun real money as though it were the plague, and embrace Monopoly money as the greatest thing since sliced bread? If you would, then I have got a job for you!! Bring your shovel and some work-clothes, you have been hired for life...

Upon the 1971 declaration by the United States that redemption of dollars for Gold would be terminated, the entities in receipt of dollars for balance of trade settlements had no difficulty recognizing this as an outright default on payment contracts. The scramble was on to make sense of this new payment system in which the dollar was no longer a THING of value (a small amount of Gold), but was now reduced to a CONCEPT of value; an undefined unit with which the world would denominate the amount of value in contracts for goods and services. The problem ever since has been in coming to terms with the meaning of value for this shifting and undefined unit, and its vulnerability for mismanagement and abuse.

Jelle Zijlstra, who became head of the Bank for International Settlements, said while with the Bank of the Netherlands in regard to the 1971 severing of Gold from the dollar, "When we left the pound, we could go to the dollar. But where could we go from the dollar? To the moon?"

As I continue this tale, I hope it becomes clear that not only have we gone to the moon, but that Gold is going there also.

Part 2 --- A Transition: Things Are what they Are...

Do you see the world as it is? Or, do you see the world as you are? A tough obstacle, to be sure, as our experiences weigh heavily on our perceptions, and many people have no practical earthly experience with real money. There is hope..."the Truth is out there!" as a popular show is quick to proclaim. Albert Einstein puts an interesting slant on this theme: "My religion consists of a humble admiration of the illimitable superior spirit who reveals himself in the slight details we are able to perceive with our frail and feeble mind."

So with a ready admission our minds are frail and feeble, let's prepare to tackle something so ponderous it must hopelessly remain an abstraction to us mere mortals. I refer to the U.S. national debt, expressed in dollars, that stands at 5.6 trillion. Wow! What does that really mean? To put it in some perspective, we will revisit the 1970's, and try to get our arms (and feeble minds) around some much smaller numbers, and yet numbers that themselves are large enough to be abstractions. Let's examine the incredible and overwhelming wealth and economics of oil.

Imagine having claim to a sandy and barren land that reaches 120 degrees Fahrenheit in Summer, making your living through the ages on goats, dates and Pilgrims to Mecca. Not a posh existence when compared to America in the Roaring 1920's, but the passage of time reveals the fortunate few that were in the right place at the right time. When the Standard Oil Company of California was granted an exploration concession for Saudi Arabia in 1928, the 35,000 Gold sovereigns paid by Socal were reportedly counted by Sheik Abdullah Sulaiman himself. Wispy shades of things to come! This can be thought of similarly to how you might view a collection of skinny stock investors who found themselves heavily invested in penny internet stocks when the technology market exploded in the 1990, making them all millionaires. Except this: Oil is much, much bigger! We will soon examine what it means to be in the right place at the right time.

I will talk about pricing and balance of trade in the next part...stay tuned for the biggest transfer of wealth the world has ever seen. The key-currency gets debased in 1971, and Gresham's Law rules the land.

Part 3 --- It's Only (a mountain of) "Money"...

Having purchased this Saudi Arabian concession, in subsequent drilling Socal's Damman Number 7 struck oil in 1937 (I believe old Number Seven is still flowing.) Socal partnered with Exxon, Mobil, and Texaco to form the Arabian-American Oil Company. Over a thirty year period, Aramco discovered petroleum reserves in Saudi Arabia in excess of 180 billion barrels...a quarter of the known reserves of the planet at that time. And as the world aged and changed, the amount of oil consumed daily in world trade climbed dramatically, from 3.7 million barrels per day in 1950, to 9.0 mbpd in 1960, to 25.6 mbpd in 1970, to 34.2 million barrels per day in 1973 during the first Oil Crisis.

Consider this for better perspective: the average yield per well at the end of the 70's in the United States was 17 barrels per day per well, in Venezuela (one of the co-founders of OPEC) it was 186 barrels per day per well, and in Saudi Arabia (the other OPEC co-founder) it was 12,405 barrels each day per well. Wow! Just imagine if the internet companies today issued new, additional shares each day at this same rate as oil consumption...the stock price would plummet! But unlike internet stocks, because this oil is consumed, it must be replaced (and paid for) every single day.

But before I can move into the fascinating region of this miniseries that sheds light on how and why the Gold market is as it is today, this background is vital, so please bear with me, and I shall thank you for your patience. Oftentimes, understanding is its own reward, but in this case it may well prove essential for wealth preservation at a minimum. To begin, we must look at life in these United States (and in the process we will see a compelling reason that import barriers must be fought tooth and nail)...

What does the Texas Railroad Commission have to do with this story? Plenty. So much oil was being produced in Texas in the 1930's that engineers were concerned about depletion and wastage, and the owners would fret over the effects of oversupply that would at times bring the price per barrel down to ten cents. Tiny independent producers were often drilling side by side with the majors, but when the price slumped their profitability suffered more because they didn't have income from the downstream processes like the majors did. Because some of the individuals operating these independent companies happened to be multimillionaires, their complaining voices were heard thanks to their political contributions.

The state government responded by giving the Texas Railroad commission the power to regulate drilling. And while they didn't have the authority to set prices, they could regulate production levels. By setting an appropriate rate of production, oil would be conserved and this restricted supply would achieve price levels high enough to keep the independents in gravy. This Texas price became the American price, and also the world price (in the 1950's the U.S. was producing half of the world's oil.) This meant pure profit for the major companies with overseas production that cost only ten cents per barrel. To keep the price of oil up, what started as a gentlemen's agreement among the American oil companies to limit the imports of cheaper oil later became enforced by the U.S. government--known as the "invisible dike" against the outside world of cheap oil. Throughout the 1960's, the Persian Gulf offered the world oil at $1.80, while inside the "invisible dike" oil was being sold to the nation at the Texas price of $3.45 per barrel by the end of the decade.

The great irony is that a Venezuelan lawyer (and oil minister) named Juan Pablo Perez Alfonso studied and used the Texas Railroad Commission as his model for OPEC, which he co-founded with the Saudi Arabian director of the Office of Petroleum Affairs, Abdullah Tariki, in 1960. OPEC from the beginning maintained that oil was a depleting asset, and it had to be replaced by other assets to balance national budgets and fund developments.

Now that we know a bit about the producers and the price and cost of oil during the era of "real money," let us take a look at the dollar itself. The dollar and the world was pegged to Gold via the post-WWII Bretton Woods agreement in which $35 was convertible to one ounce--but for foreigners only, not U.S. citizens. The rate for international currency exchange was coordinated through the International Monetary Fund (IMF), with each currency pegged to each other through the dollar and Gold. The U.S. economy steamed along nicely in the 1950's, producing half of the world's oil as I've already stated, and half of the cars that burned up this oil. By the arrival of the 1960's, American industry was buying foreign factories, equipment and raw materials. In addition, the government was spending for its foreign bases and troops, and Vietnam was funded largely in the red.

An overhang of dollars was developing overseas--and while at first the foreigners were reassured that the Gold guarantee of the dollar was solid, as ever more dollars piled up, ever more of them cashed in the dollars for Gold. General de Gaulle summed up the sentiment, saying that America had "an exorbitant privilege" in ownership of the key-currency. By that he meant that the dollars America was able to issue via simple printing carried the same value in trade as the dollars that had to be earned by other nations through meaningful productivity. It quickly became clear that too many claims had been issued on the limited Gold, and President Nixon was prompted to close the Gold exchange window in the face of a certain run on the Treasury.

In a quick repeat from Part 1: " Upon the 1971 declaration by the United States that redemption of dollars for Gold would be terminated, the entities in receipt of dollars for balance of trade settlements had no difficulty recognizing this as an outright default on payment contracts. The scramble was on to make sense of this new payment system in which the dollar was no longer a THING of value (a small amount of Gold), but was now reduced to a CONCEPT of value; an undefined unit with which the world would denominate the amount of value in contracts for goods and services. The problem ever since has been in coming to terms with the meaning of value for this shifting and undefined unit, and its vulnerability for mismanagement and abuse."

With OPEC in place, and the dollar now rendered meaningless by traditional standards, the stage is adequately set to describe what followed. With OPEC now united and able to conserve, and threaten to cut back in the grand tradition of the Texas Railroad Commission, they were able to name their terms of payment, and decide essentially what value the dollar would have in oil terms. That is important enough to repeat: They were able to name their terms of payment, and decide essentially what value the dollar would have in oil terms. The increased world demand for oil ensured that the price would be met (Texas was pumping around the clock and still coming up short), and the printing presses essentially ensured that there would be no lack of dollars, so to speak.

It is important here to realize the attitude of OPEC, and notably the Middle East. In the mid 1970's, the finance ministers of both Kuwait and Saudi Arabia stressed that their needs were only to provide for the welfare of their citizens, and that oil in the ground is better than paper money. Who from the West can argue with that? They called our money's bluff, fair and square. So in 1971, while the Texas price of oil was $3.45, OPEC re-priced their Middle Eastern oil up from $1.80 to $2.20 (such audacity, don't you think?) only to see the market price due to demand in 1973 overtake the official posted price, at which point OPEC saw the writing on the wall, and in October raised the price per barrel to $5.12 while curbing production. By December, the Shah of Iran called a press conference to announce the official price would now be $11.65. Well, why not? It's only paper to you if you are not in NEED of this currency through a debt to someone else. And so began the First Oil Crisis of the 1970's.

The Shah of Iran (left) with President Nixon

Just as America had been issuing claim checks on the national Gold throughout the 1960's, its spending habits didn't change with the advent of the all-paper dollar. As a consequence, the world's greatest transfer of wealth was underway. Watching the rising cost of real estate became a national pastime in the 1970's--an odd distraction from the gas lines and cost of fuel. By raising the price of oil $10, from $1.80 to $11.65, at those current production levels OPEC raised its annual revenues by approximately 100 billion dollars. Now recall from Part 2 where I promised you we would tackle some large numbers, though nowhere near as incomprehensible as the $5.6 trillion U.S. debt. Here we go...

How much IS 100 billion dollars per year? It can't be much, because we all know the Middle East is heavily in debt with struggling economies even now at the end of the 1990's. Right? Well, I invite you to follow along, and judge for yourself. Let's try to spend that $100 billion, and is 1974. And let's not waste time on small stuff, we'll go right for the big ticket toys.

How about some F-14's? Fully equipped (minus missiles because we are a peaceful bunch) they are ours for $9 million each. Grumman on Long Island assembles 80 each year. Hell, let's take 'em all for $720 million. How about some F-15's too? At $12 million each, we conclude our visit to McDonnell Douglas with 100 under our arm for a cool $1.2 billion. Let's take home the biggest brute the U.S. has to offer--a top of the line nuclear-powered aircraft carrier for $1.4 billion. Better yet, make that two carriers. Throw in some destroyers, some submarines...let's see... We've spent a total of $2 billion on a kicking air force and a little more than that on a fine little navy. How much money is left in round figures? About $100 billion. And this amount comes in not only this year, but the next, and the next, and the next... [a side thanks to Mr. Goodman for these historical prices.] $100 billion is a large annual paycheck, and we haven't even touched the $30 and $40 dollar prices brought about in the Second Oil Crisis. Now consider again that America has written future claims on $5.6 trillion dollars. Can you imagine how such a figure might be settled? Ouch.

F-15 warplanes of the Saudi Air Force fly over the capital, Riyadh, during a graduation ceremony at King Faisal Air Force University on Sunday.
Hassan Ammar / AP

Where did all of this money come from? It would seem that America found an efficient means to issue claims on the country in exchange for something that goes up in smoke. Would OPEC own America lock, stock, and barrel? What would OPEC do with all of that cash? And would there be any end to it? How are the poorer countries that must EARN their dollars, as General de Gaulle indicated, going to fund their own oil needs? Banks are the answer. Buy banks, fill banks, and recycle the petrodollars. Oh, and let's not forget Gold. Straight from two ministers of finance, "We would rather keep the oil than have the paper money." We thank you for that insight.

Now that I have properly set the stage, in the next part I shall relate the really good stuff of Aragorn's tale suggesting where this money went, and how the system survived 20 years after the end was nigh, bringing cheap Gold crumbs for anyone mindful enough to pick them up. To quote that good knight, "With a payday reaching that magnitude, the question of destiny begs no answer. You set your own, and hope for nice weather."

Part 4 --- A 1970's History Lesson (without the disco)

One Oil Crisis down, one to go. We looked at some pretty incredible figures in Part 3. Where did this money go, and maybe more importantly, where does it come from? For the sake of brevity I will assume the reader is well acquainted with the process of money creation via modern banking. If not, then you have some important questions to ask and research to do. For now, accept on faith that new money is created (as a simple ledger entry at a bank) through the process of borrowing. A loan creates new money, and banks collectively may create money far in excess of what they hold on deposit. As a contract, the loan is quite real, but the dollar is not. A dollar is an undefined concept--an undefined unit of measurement for value, so to speak. You can see how such an arrangement favors those in a position to name their price.

As you can well imagine, for a country such as Saudi Arabia that had been subsisting on simple agriculture and the business of Pilgrims, a sudden infusion of such a magnitude of money can be seen as pure profit, and a fine opportunity for capital improvements to national infrastructure. Much of this money flowed back to the rest of the world to pay for international contractors and materials. But clearly, much more money was coming in than could possibly be spent. Vast sums of it found its way into the world's largest international banks--the five largest American, three largest Swiss, three biggest German, two biggest British, and then on to the next tier... Suddenly there were over one hundred banks that set up shop in tiny Bahrain: Citicorp, Chase Manhattan, Barclays, and Bank of Tokyo among them; all competing for surplus oil profit deposits. Paris suddenly found itself host to over 30 new Arab banks.

So much money flowed in, and so much was lent in turn to the poor countries that could scarcely afford to buy oil with their meager exports, that the financial system became a large game of musical chairs, and the biggest risk was that the music might stop. There were no chairs to sit on! To protect themselves from the unthinkable--that the Arabs might pull their deposits out of an individual bank--the banks developed a system. This system provided for the relatively smooth inter-lending of funds. Because even though a bank can create new money "out of thin air," they have to have deposits in the bank as a starting point. If these funds were to be withdrawn, the bank must locate other deposits to cover their outstanding loans. If the money were pulled, say from a British bank, it had to go somewhere; the amount of money was too great to "hide" for long. This British bank could call around, and arrange to borrow the funds back from a Swiss bank, or German bank, by paying a nominal interest rate on this inter-bank loan. The important concept to grasp here is this: as long as the petrodollars stayed in the banking system, the banking system would survive.

In fact, that is how the world weathered the storm of the First Oil Crisis. Such a grand scheme of inter-reliance was formalized by several central banks in a meeting in Switzerland to handle any event should money come up short in one area or another--the Basel Concordat. Have you ever heard of the LIBOR in any of your financial reading? Some credit card issuers make use of the LIBOR instead of the U.S. prime rate in their contracts. It is the London Inter-bank Offered Rate, and functions as the international bank borrowing rate, and it is the tie that binds the group together into a nearly seamless global financial System.

When the First Oil Crisis caused a global tightening of belts, only America, as the issuer of the key-currency, could shamelessly create new money with ease to pay its bills. Other countries had to balance their own books with productive output, or else turn to the banks to borrow the needed funds. And borrow they did! Let there be no doubt that these petrodollars were recycled through the banking system. Throughout the Oil Crisis and the distractions of the Nixon Watergate scandal, the former Secretary of Defense under the Johnson administration, and then president of the World Bank, Robert McNamara, was focused on one thing only--maintaining the good graces of OPEC. McNamara had to ensure continued access to OPEC's funds. During 1974, the World Bank had drawn on OPEC for $2.2 billion, for a total at the time of $3 billion--one quarter of all World Bank debt. For Euroland banks, business was booming because lending was their business. And the IMF had its hands full trying to hold together the international currency exchange system.

Some of the countries that quickly found themselves behind the eight-ball were: Brazil, Korea, Yugoslavia, the Philippines, Thailand, Kenya. (You can easily imagine that there aren't enough coffee drinkers in Saudi Arabia to achieve a meaningful balance of trade of coffee beans for oil for a country like Kenya.) So in a move driven more by politics than banking to ease the financial squeeze upon a nation's citizens and industry, the governments would turn to their central banks and to the international and multinational banks to secure the needed money. And the banks couldn't stop lending, because many countries relied on new loans to pay off the old loans in addition to their continued need for oil. Loans in default were simply rescheduled. There were no chairs, and the music could not be allowed to stop.

If a bank were to fail, what would the Arabs do with their remaining deposits, now clearly in jeopardy? Further, the inflationary impact of all of this borrowing was also a fact not lost on the OPEC nations. Many of the OPEC members' advisors and ministers held Ph.D.'s from prominent American colleges. They did not have their heads in the sand. The inflation would lead to a new price of oil just to recapture the value that was lost, and the cycle would intensify in the next round. OPEC knew the western currencies were depreciating faster they were compensating with price hikes. They were getting less "real" money as a result. Hopeless.

Remember Jelle Zijlstra with the "moon" comment earlier? As head of the BIS in 1980, he confidently predicted that the Second Oil Crisis could be worked through, slowly, but that the System (international financial system) could not survive a Third Oil Crisis--the inflation would make it impossible to recycle the petrodollars to the oil importing countries with any hope of repayment, trade would crumble, and the System would be brought to its knees. On that grim note, we need to take a quick look at how the world reacted to the Second Oil Crisis. It opens the door to everything that follows.

By now you are patiently awaiting mention of Gold. There it is. Now back to the story... No, seriously, pay attention here, and things will start to fall into place. I hope you have noticed the few references to oil prices throughout this series. In most cases, the oil was made available at a posted price. In the 1960's, OPEC's posted price was $1.80 (though sometimes the producers would undercut that to gain an advantage through additional volume), then it was $2.20, then $5.12, and within weeks it had been changed again to $11.65 (in late 1973). By May 14 of 1979 the posted OPEC price was $13.34 per barrel, but life was about to change. The key element to keep in mind is that oil was not priced directly by the market. It was mostly sold under long-term contracts at posted prices that were set by the producers after careful analysis of what the market could bear under self-determined production levels.

When the Ayatollah Khomeini's revolution deposed the Shah, Iran's 6 million barrel per day production fell off dramatically, and the resulting shortage sent the downstream processes scrambling for sources of oil anywhere to feed their refineries. Many turned to Rotterdam for oil, to fill their empty tanks. The deepwater port at Rotterdam was the principle harbor where huge tankers could be found to deliver oil on the spot, and hence the spot market for oil was often referred to as the Rotterdam market--but in truth, the spot market was available worldwide. This spot market was never meant to determine the price for oil, but was only supposed to supply day-to-day purchases.

Due to the stresses of low supply, the Rotterdam price sailed above the $13.34 posted OPEC price on Tuesday, May 15,1979 to $28, and two days later it reached $34. Iran immediately took what little production remained and sold on the Rotterdam market. OPEC then set a ceiling price for oil at $23.50 per barrel, but that was soon broken by Libya and Algeria. Obviously, Rotterdam was the place to sell oil at the best price, so many tankers with long-term contracts for oil stood empty waiting for delivery while ever more of OPEC-member production was diverted through Rotterdam. Countries and many companies looked at the low levels in their storage tanks, and soon they were rushing to support the Rotterdam market with their business. The "spot" price reached $40 per barrel as uncertainty about the future brought forth every empty tank or dilapidated tanker out of retirement to be filled.

Gresham's law can help explain this phenomenon-- bad money is spent and good money is saved. Oil was being bought and saved as a store of value, while paper money was spent. The flames of this Rotterdam inferno were eventually cooled as the last available storage tank was filled to capacity. This display of the spot value for oil reinforced OPEC's concept of value, and they had no qualms about raising the posted price to the spot value. Please recall, "We would rather keep the oil than have the paper money." Any student of history will also recall that the explosion in Gold prices also occurred in 1979 to early 1980, showing us Gold priced at $850 per ounce.

So what exactly has changed in the world since 1980? There haven't been any similar blowups in the pricing of important how was this wild tiger tamed? Is the money better than it once was? Or are the OPEC nations now suddenly and truly beggars upon the West's doorstep? What happened? Are the multinational banks (once scrambling to hold together the System) now calling the shots with nary a care in the world?

In Part 5, I put an end to this tale, and answer the biggest mysteries about Gold in the easiest of terms. The road will seem so straight and fair to travel, you will kick yourself for struggling through the brambles for so long, and wonder at your neighbors who STILL can't see the path, though it is truly a freeway.

Part 5 --- Gold, Money, and the Free Market

Before I conclude this commentary, let me first express my gratitude to USAGOLD for hosting this illuminating site, and for the tolerance I've been extended by so many here for my four long posts that up until this moment probably didn't seem germane to the topic of Gold.

On any journey, the first few steps are the most important, and in this case they were also the most difficult--to include enough for context without drifting off-topic. This last part is easy. The task at hand is to provide an explanation of Gold's pre-eminence as a monetary asset. Gold is, in fact, Money, while the dollar and others are merely currencies--an importance difference!

I am not claiming to be offering new findings of my own. The inspiration for this tale originated from many sources, comments Aragorn III offered to a small group last month, a knowledge of history, and keen perception. I have been challenged to render this tale into the clearest of terms suitable even for those not acquainted with Gold and worldly economics. If I have succeeded in my challenge, at the conclusion of this final part you will fully grasp how the free market has managed to provide a sophisticated asset (Gold) at a laughably minute fraction of its relative value. You will know that Gold is Money, and will gain new respect for its "price." Although this information isn't new, it might be new to you, and hopefully this explanation of financial operations with Gold, together with the background information of the 1970's Oil Crises, will help you anticipate and conclude for yourself an outlook for events ahead, and will also help you to better understand and evaluate the important messages being presented by ANOTHER and FOA, in addition to the other worthy knights of this Table round. Knowledge is power, and with it your destiny shall be yours to decide.

To start, I'm going to paraphrase some specific remarks made by Aragorn III that some people need to hear and think about, though most of the Forum posters are already in tune with this.

'The falling price of Gold has had various effects on people. The common person says, "Of course it is falling, because Gold has been demonetized." The Goldheart knows better, so the falling price has a more remarkable effect, bringing out insecurities and irrationalities of some. Though these people don't question that Gold is money, their insecurities start to question whether the world really needs money at all... that somehow this greatest device of mankind has been antiquated. Simply preposterous. If they knew the truth they would confidently buy today at triple the price and call it a bargain of a lifetime. People ask, "Why waste effort to dig up Gold from the ground, only to rebury it in vaults?" I say, "For the same reason the central banks toil to print millions of fancy notes that nobody reads. If you've read one, you've read them all." The effort is needed to prevent cheating, though we easily see the fancy cash does not stem the abusive tide of money from nothing. People also say, "Gold is a dead asset. It does not earn interest." What is the point of such a comment, to demonstrate their naiveté? Did banks not pay interest when coins were stamped from Gold?

You see, it is not the nature of money itself to earn interest, but rather, it is the investment risk that maybe earns a reward. A modern dollar in a shoebox is as a Gold coin beside it. No interest for either. You should know the interest paid by a bank savings account is not a product of the money itself, but instead it is the rewards on the risk the bank takes with the money you have provided for their investment use. Sometimes these banks choose poorly, and in those cases even the modern dollar earns no interest, and does not come back at all--lost with the closing of the bank doors. Money must be risked (invested) to expect a yield, and in this regard, the big players in the world risk Gold money as they do paper money (though often not as aggressively), while the small players are content with the shoebox yield. You are forced to be more aggressive (more risky) with paper because its value dies quickly, unlike Gold that stands forever even in a shoebox of no risk.'

With that, I will now conclude this tale that shows Gold functioning in its role as Money. And because preconceived notions of words often cloud a person's ability to see the case before them, I shall try to deliver this message with the slightest use of such terms as Gold loans, leases, shorts, etc. In fact, I will be so bold as to simply refer to Gold as Money (I will write it as "Money (Gold)" to ensure you know my meaning, but as you read, simply pronounce it as money). As far as what you might think is money (dollars, yen, pesos, etc.), I shall from this point forward not call them money, but refer to them by their given name (dollars, yen, pesos, etc.) or else will call them "fiat currency," or just "currency" for short. Fiat means "by decree, and fiat currency is currency because the government tells us it is.

Enough of the preamble. Let's pick up where we left off from Part 4. In days past, the oil exporters had been poor to modest countries scraping by when two things occurred. They discovered that they owned lots and lots of oil, and they also found that the rest of the world had developed a voracious appetite for oil. Think how different the world situation would be today if this supply of oil had simply never existed. We are certainly lucky to have its availability, and it is a reasonable expectation to pay fairly for all that we take.

We've already discussed much of the turmoil that resulted from consumption that outpaced ability to pay. Payment in Money (Gold) was terminated, and many payment scenarios were developed in addition to the ever rising prices in paper currency. While it can be suggested that currency is a reasonable means in which to track balance of trade accounts (equating oil exports with similar value of imports such as infrastructure improvements), it should be readily admitted that paper currency is an unacceptable means in which to pocket one's profits. Book the trade balances with paper currency, but pocket the profits (savings) with Money (Gold). That's what I do every month, too!

Paper currency was falling fast in value when it was no longer tied to Money (Gold), and this was causing international settlement difficulties on many fronts in addition to oil. It is instructive to investigate some of the tools of the international financial System, because what worked for Money (Gold) and currency back then, certainly works for Money (Gold) today. (Please reread the paraphrasing of Aragorn's money comments if you have forgotten them already.)

Back in the 1960's when dollars were still tied to Money (Gold) under the Bretton Woods agreement, the American penchant to spend for goods abroad led Kennedy's Undersecretary for Monetary Affairs, Robert Roosa, to fear a mass "cashing in" of these dollars in international hands for Money (Gold)--a run on the Treasury. Roosa created a new financial device, referred to as a "Roosa bond," which was a special issue of Treasury bonds that were denominated in Swiss francs. As the bonds were sold to the world, they would sop up excess U.S. dollars with the terms that repayment at a future date would be in a given quantity of Swiss francs. (Notice I said quantity, and not value.) While these Roosa bonds stemmed the tide of a possible run on the Treasury, they ended up costing America more because the Swiss currency appreciated versus the dollar during the life of the bond.

In 1978, the U.S. issued 10 billion dollars worth of bonds denominated in foreign currencies (marks or yen) to milk extra life out of a dying dollar system, and the fix lasted until the 1979 Oil Crisis made mincemeat of it. It was an acknowledgment that some foreign investors wouldn't hold U.S. government obligations that would be repaid in dollars worth less than originally spent on the bond. Further, it was at this time that the U.S. promised to sell Money (Gold) from the Fort Knox stockpile to foreign central banks unwilling to hold dollars. (On his last day of office, March 31, 1978, Federal Reserve chairman Arthur Burns suggested that the entire $50 billion of the nation's Gold stock be sold for foreign currency in defense of the dollar, at which time the foreign reserves could be used to buy up the collapsed dollar in international markets. While this plan was originally rejected, within three weeks the Treasury Department was forced to announce it would auction Money (Gold) on a regular basis.)

Treasury Secretary Michael Blumenthal pledged in a meeting two days later with top-level Arab businessmen that the integrity of the dollar would be defended vigorously, and asked them to do their part to stabilize the global economy by keeping a price freeze on oil in place at least through 1978. (You should have no questions now about where the dollar found its value after the 1971 delinking with Money (Gold). The asking price by oil--influenced by many factors--is what established the dollar's value.)

It is also important to realize that not all international arrangements are conducted on the open market. For example, to avoid the German mark from being bid up in strength with a result of ever more people bringing them dollars for an exchange, Germany's Bundesbank issued bonds directly to the Middle Eastern buyers, avoiding the marketplace impact altogether. This was at the time Saudi Arabia was swimming in cash and spreading the excess among the world's largest banks (as mentioned in Part 4). My point is this (which I shall expand on soon): don't be surprised that banks are far more creative in their operations than revealed in your common experience through savings and checking accounts and home loans.

Eliyahu Kanovsky, an oil economist, won renown by many for accurately forecasting long-term oil production and pricing trends by OPEC where all others had gotten it wrong. In the 1970's he maintained that economics, not politics, were the determining forces behind the decisions of OPEC. In 1986 he wrote in response to the prevailing notion that OPEC would eventually own the world as a result of its oil wealth: "It is, by now, abundantly clear that these forecasters committed gross errors not only in terms of magnitude of change, but, far more important, in terms of direction of change. Instead of increased dependence on OPEC and especially Middle East oil, there has been a very sharp diminution. ... Oil prices have been weakening almost steadily since 1981 and there has been a collapse since the end of 1985. Instead of rising 'petrodollar' surpluses, most OPEC countries, and Saudi Arabia in particular, are incurring large current account deficits in their balances of payments, and are rapidly drawing down their financial reserves."

In the 1990's, Kanovsky maintains that OPEC has lost its ability to raise income through raising prices, and that oil below $20 is virtually assured. (This should remind you of Milton Friedman's poor prognostication from Part 1.) Kanovsky claims competition among producers ensures an end to price fixing. They can only pump it and sell it for whatever the market will provide. He contends (rightfully so) that Iraq can be counted on to "pump like mad" upon lifting of UN sanctions. He also contends that with the current account deficits of many OPEC members, notably the Saudis, they have no option themselves but to add to the oil glut with overproduction to raise revenue.

Since it has been brought to our attention by Kanovsky, let's take a look at the Saudi budget, and the toll taken on it in the aftermath of the Gulf War. IMF data reveals that the Saudi deficit climbed from $4.3 billion in 1990 to $25.7 billion in 1991. Oil had been selling at around $14 per barrel until June 1990 when Saddam Hussein pressured OPEC to raise the price to about $20 to help repair Iraq's national budget (which had been wiped out and sent into the red by their 1980-88 war on Iran). Iraq's subsequent invasion of Kuwait in August 1990 temporarily spiked the price higher.

Here I must ask you to pause for a moment to reflect on those huge oil trade surplus figures we toyed with in Part 3, and recall that they were from early 1970's oil demand at a price of $11.65 which caused the First Oil Crisis. What happened to the vast amounts of petrodollar revenue that was being pumped into international banks, and recycled as fast as the loans could be written to borrowers throughout the 1970's? Further, what happened to the earnings that were surely being generated on these deposits through the activities of the lending institutions? As I noted at the end of Part 4, the System miraculously survived the Second Oil Crisis of 1979, and concurrently the skyrocketing price of Gold promptly abated in 1980. Further, Kanovsky points out that oil prices started weakening in 1981, and then plunged in 1985. Force yourself to make the connections. You will be one step ahead of Kanovsky, who has identified the effect, but no doubt has missed the cause entirely. Let us now tie together everything we know, and fill in the remaining pieces.

Historically, the price of oil had been simply posted by the producers for contracted delivery until it was unleashed to respond to daily supply/demand forces on the "spot" Rotterdam market, at which time the price exploded in 1979-80. Although the dollar had been historically fixed to Money (Gold), after it was unpegged in 1971, the currency price of Money (Gold) was determined by the daily supply and demand, similar to Rotterdam. Gold auctions began in May of 1978 because the U.S. had trouble getting international entities to accept its dollar currency. After "booking" their trade balances with dollars, the House of Saud, among others, wanted to "pocket" their profits with Money (Gold), and therefore competed with everyone in the world for Gold on the spot market. As the price shot right through $700 it was clear that every ounce purchased made it that much more difficult to purchase the next ounce. There was little trouble raising the price of oil as needed, except the financial structure of the world was coming apart at the seams. Each dollar withdrawn from international banks to buy Money (Gold) made life ever more difficult for the banks to square their books against outstanding loans or to write new loans. There had to be a better way...the return of Money!

The high price of Gold brought mining companies out of the woodwork. The Earth was suddenly crawling with geologists looking for the next jackpot Gold deposit. The mining companies needed capital to finance the construction of these numerous new mines. It's not strange to you to accept that banks can lend currency. It should not be difficult for you to accept that banks can lend Money (Gold) also. Struggling with that thought? Don't. They lent Money (Gold) in the days prior to Roosevelt's 1933 confiscation of Money (Gold) in exchange for currency, and they can lend Money (Gold) today. In fact, they can even create Money (Gold) out of thin air, in a manner of speaking, and I'll walk you through it.

Sometimes a parallel familiarity assists comprehension. Consider the existence of Government-Sponsored Enterprises (GSE's) such as the Federal National Mortgage Association (commonly known as Fannie Mae). Fannie Mae is in the business of creating financing for people to acquire a house. The government's involvement in this affair is that they underwrite the risk of a default on the repayment of the loan. Dollars are borrowed, dollars are lent, and dollars are repaid. It doesn't matter what happens to the exchange rate of the dollars versus other currencies. A certain amount of dollars are owed, plain and simple, under the terms of the loan contract. If a home mortgage loan is sold on the secondary market, the purchaser of the loan is effectively buying not the house that was financed by this loan, but rather the rights to receive the borrower's scheduled repayments over a span of time.

Think of a loan to a mining company in a similar fashion. Interest rates on Money (Gold) loans are often much less than on currency loans because the Money (Gold) holds its inherent value over time (despite its "price",) whereas the paper currency fails so fast you must return more for the lender to at least break even, not to mention show a profit for the risk. Because miners will be pulling Money (Gold) out of the ground, it makes the most sense to them to seek a loan of Money (Gold) rather than currency in order to finance their new mine construction. But because Caterpillar has its head in the sand, it requests dollar currency for the purchase of its mining equipment, so an exchange must be made for paper currency as an integral part of this Money (Gold) loan. These arrangements can take place in every conceivable fashion, but this following example will be representative.

As 1980 arrived, the Saudis naturally still wanted Money (Gold) for their oil, and the rest of the world was struggling with liquidity. Much currency "wealth" had already been transferred to OPEC, leaving many countries toiling to service their own debts--much of their credit existing as recycled petrodollars. Let the lending continue! Bullion banks would facilitate these deals, and central banks (CB's) would act in the same capacity as with the GSE Fannie Mae, guaranteeing ultimate repayment in the event of a borrower's default. In this simple example, the House of Saud could be looked at as the principle lender (although the borrower doesn't see this)...providing the currency equivalent of the Money (Gold) borrowed by the mining company to pay for Caterpillar's equipment to build the mine. Because this is contracted as a Money (Gold) loan, Money (Gold) must be repaid over time. In a sense, from the Saudis' viewpoint it is similar to the Roosa bonds where U.S. dollars are paid for the bond, with a fixed amount of another currency (in this case, Money (Gold)) expected to be returned upon maturity.

With the simple but vital central bank guarantee against the default of these Money (Gold) loans, the House of Saud, for example, would have no qualms about supplying the cash side, effectively buying not the Gold metal immediately, but rather the rights to receive the borrower's Gold repayments over a span of time. Just like buying a home loan on the secondary market. And the Money (Gold) of the central bank need not ever move or change ownership unless the borrower defaults on the loan, and the CB is obligated to deliver on its guarantee for the full repayment in Money(Gold).

There is nothing sinister in all of this. The price of Gold has fallen simply because anti-gold sentiment has been fostered throughout the common investment markets while the principle buyer at the Golden "Rotterdam market" had found another avenue in which to obtain the Money (Gold) desired in exchange for oil profits. This is very much like the off-market Bundesbank offerings that I mentioned about earlier. Please appreciate the patience in this approach, and the commitment it shows to Money (Gold), knowing full well that for many years it might be getting ever cheaper, while they would appear the fool for buying it from the top prices all the way down to the lowest. But the big payoff is in the end--which is near--and I'll get to that.

Now that you grasp the basics, let's take things up one level. So many Money (Gold) loans were written, that the House of Saud in our example spent down their past petrodollar surpluses. What now? It is time for banks to do what banks do best...create new money. This is the typical example I promised you earlier:

The miner approaches a bullion bank for a Money (Gold) loan. Let's assume the current dollar price of Money (Gold) is $400 per ounce, and the miner needs $20 million to pay Caterpillar for equipment. The bullion bank (such as can be found operating in the network of the London Bullion Market Association--LBMA) writes the Money (Gold) loan contract specifying the term of repayment of 50,000 ounces of Money (Gold) plus interest at 1% - 2%. The borrowing miner collateralizes this Money (Gold) loan with company stock, the deed to the mine, etc., and is sent down the road with $20 million in currency for Cat. Where did this cash come from? The bullion bank turned to the House of Saud, which is currently out of currency. However, using their oil in the ground as collateral, the bullion bank is able to write them a currency loan out of thin air (just like banks can do) with which the Saudis purchase the repayment rights on the Money (Gold) loan. They will be receiving future Gold for their future oil! As they sell oil, they will use their dollar revenue to repay their currency loans, and in the meanwhile, the miner's Gold loan repayments will be directed to the Saudis' account.

What does the bullion bank get for all this trouble? First, the central bank gets 1% - 2% for underwriting or guaranteeing the loan. (Just like the underwriting done with Fannie Mae.) The bullion bank had added on top of this low interest rate an applicable margin for its cost of funds to establish the final interest rate for the miner that borrowed the Money (Gold). This rate might run 3% - 5% (while currency loans would demand much more.) Each year the miner produces Gold, and after paying the required installment of Money (Gold) for the Loan, the remainder of his annual production can be sold on the spot market for currency used to meet business expenses.

There's one hitch. Because the biggest Gold buyer is no longer shopping on the spot market, the pricing pressure has come off, and prices could very well be expected to fall. To protect against this leading to the possible bankruptcy of the miner, and hence his default on the repayment of Gold, the terms of the Loan might also require that the miner lock-in a certain amount of future production at the current Gold prices at the hedging counter. (Economists first scrutinize the mining plan to ensure that it will in fact be viable at current prices before granting the Loan.)

As described so far, it should come as no surprise that the House of Saud would also step right up to purchase the delivery side of this hedged production. Enough must be hedged to ensure the mine will remain viable (even at lower prices) at least long enough to repay the Loan. Let's assume this mine is operating today with Money (Gold) at $260 per ounce, while their cost of production is actually $320. The current price of Money (Gold) is not a factor on the Loan repayment...they owe 50,000 (plus interest) ounces, regardless. Any additional production would be sold under the terms of their hedge, at $400 per ounce, and they can pay their bills comfortably and stay in business. Is the House of Saud a fool for paying $400 long ago for the Loaned ounces, and for paying $400 today to honor such hedged ounce agreements? You or I could pay $260 today for that same ounce on the spot market. Have you started to develop a new opinion of your currency, or at least a new opinion of Money(Gold)?

OK, so what else does the bullion bank get out of this, other than the applicable margin on the Money(Gold) loan mentioned above? It also collects the interest on the currency loan that was written to the Saudis using their oil as collateral. You can see how the mechanism that has brought us temporarily cheap Money (Gold) over the years has also given us cheap oil not subject to the same shocks witnessed in the Seventies. You can also see why the economists can look at the Saudi balance books and see tremendous currency debts and budget deficits where once there were surpluses that threatened to buy up the world. They have in fact bought up a significant portion of the Gold mined well into the future...through Loans and Hedges bought all the way down from the top. So who are we to question whether to exchange our currency for Gold now or tomorrow, and to gripe over a missed opportunity of $10? The equation is simple. If you have cash, buy Gold immediately, because the downward trend has become terribly unstable. Here's why...

The various financial Hedge Funds saw how easy it was for miners to raise low interest capital, and further appreciated the fact that even if they were not themselves a producer of Gold, the Gold itself needed for repayment could be purchased on the spot market at ever lower prices. The Hedge Funds could meanwhile invest the capital received through taking out this Loan and expect to have a double profit potential in the end. (The infamous Gold Carry Trade would invest the currency received through the 1-2% Gold Loan into U.S. bonds that yield over 5%.) And of course, with the proper central bank guarantees, the House of Saud would be there to buy up the repayment contracts expected on these Money (Gold) loans also.

The problem is that these speculating Hedge Funds have cumulatively driven the price so low (well beyond where mines would have long ago stopped seeking this type of Loan) that some unhedged mines are shutting down or going bankrupt. This aggravates the spot market with thin supplies of real metal reaching it (due to so much production already having delivery obligations) such that it becomes hypersensitive to any real effort to make substantial purchases there.

As a result, the Hedge Funds will be in for a rude awakening in their efforts to purchase the Gold needed to repay their Loans. And the bullion banks are sweating, because they stand next in line having facilitated the Money(Gold) loans and pledged to the CB's that they were credit worthy of the CB Gold guarantees. And the important Oil Producer sees that the big bucks paid long ago for future Gold delivery has actually purchased only uncertain arrival. And further, some miners, despite their hedges, have played fast and loose liquidating them for cash, and through general mismanagement have not been able to stay so viable as to ensure future operation and delivery of the repayment terms.

The CB's are fretting because their guarantees were used over and over again, and they are on the hook for a lot of Money (Gold) when the speculating Hedge Funds and bullion banks find it impossible to cover their Loan repayment obligations on the spot market as the price races away from them due to the hypersensitivity that low supply has caused. Shades of Rotterdam. Currently aggravating this spot market problem is the massive demand by individuals brought about by the low prices and concerns for Y2K. I hope this gives you new perspective on the push lately by some CB's to free up some Money (Gold) from the vaults, whether it is Bank of England, IMF, or maybe even Swiss. It should also give you perspective on the anti-gold propaganda delivered regularly by the media. Consider that a skyrocketing price of Gold would not only be viewed by the masses as a viable investment avenue, it would also tend to shake the confidence in paper currencies, and threaten the banking system and Wall Street in general.

It is this same currency, borrowed against oil collateral for the purchase of Gold that has added the massive liquidity to the world over the past decade and a half that many people have used in turn to fan the flames of the stock markets here and overseas. That's a lot of cash born unto Gold, and were it not for the prospects of receiving the real wealth of Gold metal, this supply of currency would have been stillborn, and oil would likely only come forth by way of brute force rather than by civil, economic means. I realize that I have left a lot out, but this should get you started along the clear road traveled by smart currency. Now, knowing what you know, what would you do with your dimes? Because this is really his tale, not mine, I'll leave you once again with perhaps my favorite statement made by Aragorn one evening last month among his old friends. "If I were given a dime for every time I cursed the market for providing easier gold, I'd have a dime...and that one was found on my way over here."

Everyone, your comments are welcome. And thanks again to MK for the USAGOLD forum and for the opportunity to obtain a world-class Money education and shiny yellow metal diplomas all at the same place!

Gold. Heading to the moon at a world near you. ---Aristotle


The above was written in 1999. The original can be found here.



Tyrone said...

Flow that FreeGold!


Desperado said...

Hello Fofoa,

I have a few comments concerning these posts on gold and oil flow:

1) Russia recently became the world's largest oil exporter

2) China has become the world's largest gold producer

3) The Russian and Chinese governments have been purchasing all their domestic gold production.

4) The major gold mining companies around the world have closed out their hedge books. They appear to be selling at "spot" price like OPEC did in Rotterdam in the 70's.

So at least the players have changed since Aristotle wrote this piece, if not the game. And Russia seems to be sitting in the catbird seat. They are not as sympathetic to US policy and US power as the Saudi's were.

The flow of gold is drying up, and the bullion banks are going to be desperate for gold. The IMF, the Swiss and the British governments already sold much of their stockpiles, so the avenues for a gold-bailout are far more limited. Roosevelt seized the private gold in 1933, Rickards says that the US may soon seize the foreign gold. He could be right.

miked said...

>> Rickards says that the US may soon seize the foreign gold. He could be right.

You mean the German 1700 tonnes that are supposed to be on deposit at Fort Knox? That would be a black swan catalyst throwing the world into total chaos. I doubt that would happen until Germany and the US were at the verge of war. World trade would cease to function immediately following such an event.

Desperado said...


Here is some more detail on Rickards gold seizure speculation.

Actually it could be over 2000 tons, of a total of 6000 tons, potentially held "ransom" by the US.

Rickards says: "In a way, the Fed could afford to trash the paper dollar, or at least experiment and risk trashing the paper dollar because if the paper dollar collapses, we could just go back to gold pretty easily. But the rest of the world can’t, especially if we take their gold."

If a gold-run does start, the US has a lot of leverage. Like a wounded and cornered preditor, she could lash out. GS and JPM have a lot of leverage in the Federal government, and if they were to face the choice of bankruptcy and dishonor or starting a gold war, which would they prefer?

miked said...

I read the link Desperado and it wasn't very convincing. Even though the US is an outlaw they attempt to preserve the impression they are doing things by the book. An outright seizure of gold could not be made to look anything but what it is.

costata said...


"...the Swiss and the British governments already sold much of their stockpiles.."

Says who? A/FOA explained that in a lot of these "sales" gold merely moved from one BIS account to another.

" the avenues for a gold-bailout are far more limited."

A gold bailout by who for whom? If you are pencilling in the bullion banks as the recipients of a bailout it is worth noting that Another said they would be sacrificed if necessary and FOA said they would be granted cash settlement by the CFTC in a delivery default.

"So at least the players have changed since Aristotle wrote this piece, if not the game."

"The players have changed" is a ludicrous thing to say. Russia suddenly appeared on the planet since Aristotle wrote that piece? Same game, same players. The GO pieces are still on the board and the game goes on.

IMO you are filtering too much through your own world view and not letting the verified and emerging data speak to you. It is limiting the scope of your intellect to interpret the game.

As an excercise, you and Fauvi should consider trying to disprove everything you believe to be true. The results might surprise you.

Desperado said...


The Swiss and British (Browns bottom where he sold 400 tons between 1999 and 2004) gold sales occured after A/FOA stopped posting, so I sincerely doubt that they "explained" it, at least in anything other than very general terms. I am also pretty certain that these were physical sales and not simply ledger item transfers.

You say:

"Another said they would be sacrificed if necessary and FOA said they would be granted cash settlement by the CFTC in a delivery default.".

They also thought that the freegold would be here ten years ago! Do you really want me to also start going through everything that they didn't predict?

""The players have changed" is a ludicrous thing to say."

Actually, Aristotle's article was focusing on the special, hidden flow of gold to compensate the "house of Saud". Not once does he mention the USSR or Russia. And as I recall, Russia was exporting both gold and oil during this period... Huh? I thought gold and oil never flow in the same direction??? Answer me that! But in any case, Russia is now THE LARGEST oil exporter, if not a new player, and that is definitely a major change in the game. What about the new players in Asia, Kazakstan, Uzbekistan, Kyrgistan? Do they constitute "new" players for you?

A/FOA/Aristotle's assertion that the Saudi's had double crossed the rest of OPEC and received gold kickbacks has also always bothered me. Are you saying that A/FOA would still assert that this is ongoing today? Do you honestly believe that Russia, Iran, Iraq and Venezuela would tolerate it's continuation for the last decade?

You say that I am "filtering too much through your own world view and not letting the verified and emerging data speak to you.". You are being very condescending to me here. I want to discuss this emerging data, but whenever I say anything that contradicts A/FOA's predictions I am fed some kind of doctrinaire response and treated like a idiot by the A/FOA religious police.

So my question to you is: Do you really want to us all to treat A/FOA like Nostradamus and play mental pretzel games in order to twist everything that happens around into a form that never contradicts what they wrote over 10 years ago? Do you expect us to avoid all discussion of any event that they failed to predict?

Now, as to whether GS, JPMorgan and HSBC will be "sacrificed" or offered cash settlement, I really don't know. I do know that they pull strings throughout the entire western ruling elite. I do know that for every Oz of gold or dollar of settlement, there will be a loser. I do know that the elite calling the shots across the west have repeatedly proven themselves ready to sacrifice the taxpayers in order to save the financial elite. I sincerely doubt that the Federal government will simply tell them to take a hike. I think a lot has happened in 10 years, and I am certain that A/FOA would NOT be predicting the exact same things now that they did back then.

S said...

Interesting article on Clusterstock today:

Recall this from 2009:

Where is the Saudi gold? Rumors abounded a year or so ago that some of the MCC union were recalling from bullions? Also Cheny was in the region as the MCC union was shelved on opposition to the location of the central bank. Blocking manuever in a move to saddle up to a harder currency. Citi bailout have anything to do with such (and the repeated interviews with the Prince on CNBC)

How would the oil producers actually collect this gold or enforce a move to a new standard in case of default? Would not a deal with China and Russia (Germany)have to be pre ordained? Developments re Venezuuela and Russia weapons deals (even Nukes/S-300s). If Iran were to be folded (attempted) would it provide a sufficient buffer for cheap oil development to extend the game?

littlepeople said...

Desperado, S, Costada:

Many things have changed since A/FOA wrote, as we have noted on several occasions. One thing that has not changed, and the Clusterstock article is a reminder:

There is much less gold in the world than has been sold (and bought), and when somebody wants oil at some point in the future from Russia, SA, Iran, etc., it will only be in exchange for real wealth--gold is one such item--paper gold will be rebuffed.

If the Sauds get stiffed out of their real gold, they will not be sending anymore oil in that direction. . . .

Anonymous said...

but whenever I say anything that contradicts A/FOA's predictions I am fed some kind of doctrinaire response and treated like a idiot by the A/FOA religious police.

I do agree that there is some sort of FO/A policing here..

Though the fundamentals remain the same, but I think that if FO/A may have been around they would have some different things to tell us today.

FO/A if you guys are reading FOFOA then please start writing again, this is indeed a good place to restart.

miked said...

>>And as I recall, Russia was exporting both gold and oil during this period... Huh? I thought gold and oil never flow in the same direction???

The Russians aren't the shrewdest in business. Anything for a quick buck ;)))

Desperado said...

Miked, I think the Russians were desperately clinging to empire at this point. The US could well get there too, desperately selling the remaining gold and little available oil in order to pay for a last hit of crack. That crack could be iphones, RE's or perhaps even to get the troops back home from the ME.

raptor said...

Third video ...
Dexter pyramid goes puff..towards the base. (as fofoa was explaining)

costata said...


Let me clarify a few points.

1. A/FOA responded to questions about "sales" of gold by states including Belgium. Their thrust was that these sales were not necessarily what they appeared to be when CBs and the BIS were involved.

2. Your offer "to also start going through everything that they didn't predict" is gratefully accepted by this simpleton once you have read the A/FOA archives AND provided the predictions "omitted" have some relevance to matters they attempted to predict. Otherwise it is a pointless excercise.

3. I am not buying into the "Nostradamus" and "A/FOA religious police" jibes. I'm sick of that kind of facile non-argument. A/FOA are quoted as primary sources on this blog whether you like it or not.

4. On the subject of the gold-for-oil-deal(s) look at the price of oil and gold over the past decade. Is there any evidence that there is a "continuing" deal to be "tolerated" by other oil producers?

5. The players in the game are the same. Their relative importance, strengths, weaknesses and prominence shift. Russia is a case in point. They were on their knees in the late 90s. Today they are a "player" again.

... and you finish your comment with this:

"I think a lot has happened in 10 years, and I am certain (certain??) that A/FOA would NOT be predicting the exact same things now that they did back then."

No kidding. Is it any wonder that some of your remarks are met with condescension?

Gabriel said...

I think that concentrating on the predictions of A/FOA is pointless. As they have probably realized how wrong was our way, they sensed the urgency of the situation, and the inevitability of a reversal.
They showed us a reality, they gave us the red pill if you want (it took me a lot of reading, headaches, and the full weight of FOFOA's articles). Now, we reach the same understanding, and feel the same urgency. We are lucky that the virtual world is shaking strongly as we reach closer to the tipping point, so it is easier for us to see.

But trying to keep track of every small bit of information, and linking it to the big picture and the predictions of A/FOA makes no real sense, and I feel that was not their intentions.
As I have posted in a comment to the previous article

once we understand the inevitability of the process, the rest is just a question of details, and the fourth dimension (time).

Now to the core: we can remark that in the last 20 years the western world is trying again and again to position a stronghold in the middle east, through various military operations. During each one the oil price in $ has jumped significantly, to ever higher levels.
My personal opinion is that they do not see the interest of pricing everything in real money. Rather, they will drive FEAR into the oil producing economies, forcing production against papier-mâché. How to drive fear: let's take one economy and destroy it (Iraq), and let's show the others how good we are at it.
This could have stopped the gold deal altogether, postponing judgment day. Again, anything that does not induce an immediate and instantaneous extinction of the currency, has the only effect of adding instability, bringing the abrupt cliff ever closer.

After many sleepless nights in the last 40 days, trying to put my head around all of this, I am now exhausted, but enlightened. I am off to sleep the first peaceful night since my exposure to the gold question. Good night.

Unknown said...

I think that the oil for gold deal worked well and that it resolved the West's problem of recycling the oil states export profits.

In fact, it worked so well that the West now had room left to recycle imports of other raw commodities and, with time, half-finished goods that ultimately led to completely outsourcing the production of finished goods as well. Smart people analysing this trend could not understand why, since the real reasons were hidden deep, and whoala: they came up with Globalization and Other Such Happy Stories.

The West has now only kept the financial industry in place, the $IMFS from which we admittedly all live from. Financials and marketing/PR/image building. Thats where the money is nowadays in the West. And oil of course.

Notice that A and FOA stated that the "deal" was figured out by some people in Asia. They saw the great volumes at the LBMA and soon realized what was going on. Ever since, the POG paper price has been rising but I doubt new "oil-for-gold" deals have been made. Miners closed hedge books and CBs no longer sell. IF there are new ones, we dont know the mechanics.

I believe the oil money is outright buying shit in the West nowadays. Withness soccer club Manchester City, the Good Colonel's antics with the illustrious Italian leader and, of course, All Sorts Of Shady Stuff going on with sposorship of "islamic" institutions here that I cant wrap my head around.

I think that the emerging economies also want a sweet oil-for-gold deal with the Arabs. Alas, they dont have the financial sophistication in place to broker that themselves nor indeed any gold to start with. They need the services of the modern-day Medici's: enter Goldman's and JPM's perpetual financial devices (also known as commodity derivatives). Nor do I think that there is anyone in the Arab world left to do such a deal with, modern Arab leaders dont really care anymore. Their wealth has made them decadent as well.

What happens next? Well, the gargantuan US debt remains. If not by the act of mere humans, the all-knowing (Math) will at some point put an end to the recycling profits problem. Also, we now are reduced to mere Images of People rather than Real Ones and are, on top of it, immersed in self-pity and think we are inherently a bad-bad-bad civilization because of all the attrocities and such.

What The Rest of The World finds a way to circumvent our sophisticated fin markets, then we will also de-facto be banckrupt and the Freegold will come. For us only, not the others.

Paul I said...

Great couple of articles, thanks FOFOA.

And lively debate too, what more could we ask for this Tuesday morning. Apart from a free gold market of course.

One thing that never changes, whether it’s now, 10 year ago or 1000 years ago; “The Great Game” continues, and it is as fascinating and terrifying as ever.

Bit too easy to view it as $IMF versus rest of the world for my liking. There are players, players within players, and players within players within players. Power struggles going on everywhere I suspect, and players will lie, deceive, form alliances, break alliances, betray and double cross for power and money. But I do believe that many if not most groups are also motivated by altruism to some degree. As Aleksandar said, the system put in place to swap bullion for oil actually worked to stabilize a pretty out of control world.

Worked for a while that is, and so the world goes fractal again. A period of chaos, where we transition from one strange attractor to the next. The players grope for the new paradigm, kicking, biting and scratching as they go. One thing that is becoming clearer to everyone, even pawns like us, is that gold will be at the heart of the loop. That vision alone will be enough to revalue it.

On a more specific note, I found the Jim Rickards piece very interesting. The US as a gold superpower, as if they would just forget they had 8K tonnes, and custody of another 6K. There's GS, JPM, Fed et al lobbying to sacrifice that 6K to buy another 5 years, and alluding to the threat to Germany and Saudi. Hostage negotiations. But who in the US will be working to keep old alliances strong? Who has less at stake in keeping Wall Street alive? Who got hit by a guided missile on 911? Will the Rubicon be crossed?

Stay tuned for the next exciting episode of FreeGold II – CrackWhoreGold, The March of the Generals.

costata said...


I think this observation is astute and admirably succinct.

"The losses of banks are pawned off on the taxpayer, and if the taxpayer can't cover it then the nation's balance sheet takes the bad debts on."

"This is why, ultimately, private credit risk (See Credit Risk Pollution, April 2006) expresses itself as currency risk, and why we bought gold in 2001."

Robert Mix said...

Brilliant, brilliant pair of articles FOFOA! What a pleasure to come back from vacation to read them as well as the above comments from your fans!

I think almost all of us here see the writing on the wall: physical gold only! I have but 7% of my net wealth in gold (some in platinum and silver as well), but it looks like the "The chickens are coming home to roost!"

Re comments about A/FOA imperfect predictions, yes of course the future is impossible to predict. So what. I am with most of you:

"It's all about the ounces."

dojufitz said...


please take a look at this....i think you will like it...

FOFOA said...

Hello dojufitz,

I cannot see your image because it requires a login.


dojufitz said...

OK try this - scroll down a little - the little pic on my channel -

FOFOA said...

I like it! :)

Desperado said...

@Costada, Touché. Did A/FOA predict the return of the Silverites with the charge being led by a Mexican?

@Paul, "“The Great Game” continues".

I think this is one key difference between now and 10 years ago. In 1999 Yeltsin was still president and Russia was broke. 11 years later a resurgent Russia is playing the great game all over the world, providing US enemies Venezuela and Iran with nuclear technology while binding them to Russia. Forming the Shanghai Cooperation Organization to keep the US out of asia and to bind the 'stans to her is right out of the great game. Russia has been making major investments in oil and gas (Sakhalin and Nordstream) infrastructure. Meanwhile the US imports 65% of it's oil while Obama is suffocating the US energy industry with CapNTrade, the EPA and drilling moratoriums.

Anyone who discusses freegold without considering how Russia and her satellites (which may possibly soon include Germany) will react is ignoring a major variable. I certainly hope Ft. Knox isn't filled with tungsten.

S said...

Note the early skirmishes already emerging within the ECB itself. FT is all over the evil Weber and Sarkozy is out saying he supports the Lira I mean Drahgi. Perhaps the danger of calling the german bluff is that they "walk" - whatever that means. Contrary to the the Martin Wolf insitutional arrogance about the rest of the world simply negotaitng its terms of surrender to the USA't printing machine - they (world) do vote and if recent history is to be trusted expect blanket declarations and financial insurgency

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

Sorry, no gold here, move on.
Perhaps you wish to try the line around the corner at the other bank.

Where can we find 20,000 tonnes of gold?

"Investors may have been unaware of this, and while wheeling and dealing in these derivatives, they will be unaware that the truly wise long-term players have been quietly hoarding the physical, upon which this house of cards rests. In the ‘80s and ‘90s, central banks leased gold to the market that was then bought and accumulated by oil producers in the Middle East, and when it was ridiculously cheap large amounts were converted into jewellery. In this last decade the central banks themselves in aggregate have begun to accumulate bullion. It is important to understand that none of these earlier buyers will resupply much to the markets at higher prices."

Mike said...

this is why another said that the players in the comex/lbma will leave their long positions because they know they can't get any gold. most gold bugs think it is the shorts that will be caught but its the longs that will pay the ultimate price and get nothing near the value of physical. this of course will cause the price to go to 0 as credibility is lost. all they had to do was the give the illusion to some that if you wanted gold then this was the exchange to get it from.

Paul I said...

Hi Desperado

I agree, Russia does look to be in a great position now. What a turn around from a decade ago, largest oil producer/exporter, 4th largest gold producer, plus the nukes that ME lacks.

My question, what is stopping them doing what FOA suggested Saudi planned? Offering oil for gold, revaluing gold massively upward, destroying the dollar in the process. At what point will they have enough gold out of the ground, and do they need it out of the ground when they can pull a China and nationlise the mines?

Why haven't they done this already? What advantage do they gain by allowing the dollar to die naturally? Is it purely diplomatic? Foreign reserves? Do you know who owns Russia's gold in the ground currently?


Unknown said...

The players may change but the game largely remains the same, until it doesn't. And that is where A/FOA come into the picture. I'm not concerned that this is taking a long time to play out, in fact, I am grateful. A few days back, it was my time to make that anxiously anticipated trip to the coin store. And what did I find; very few ounces available. I took what I could leaving them near empty. Until I reach my goal, I would like this game to continue. Please don't rush. :-)

costata said...


I felt exactly the same way when we started accumulating gold. There's an old Irish blessing that I like:

"May you be in heaven half an hour before the Devil knows you're dead."

Paul and Desperado,

I agree that Russia is a player who cannot be discounted. As Jim Rickards pointed out Germany and Russia are natural economic allies.

Russia's far east and China's far west are a natural fit as well. China has 100 million people there vs Russia's 4-6 million and huge untapped resources on the Russian side of the border. If they can strike a deal, just on demographics alone, it would be an immense win-win for both countries.


Another described the ECB politics as a "sideshow".

Paul I said...

Just been reading up in the Shanghai Cooperation Organization.

"At the 2007 SCO summit Iranian Vice President Parviz Davudi addressed an initiative that has been garnering greater interest and assuming a heightened sense of urgency when he said, “The Shanghai Cooperation Organization is a good venue for designing a new banking system which is independent from international banking systems.”

The address by Russia’s Putin also included these comments: “We now clearly see the defectiveness of the monopoly in world finance and the policy of economic selfishness. To solve the current problem Russia will to take part in changing the global financial structure so that it will be able to guarantee stability and prosperity in the world and to ensure progress.”

“The world is seeing the emergence of a qualitatively different geo-political situation, with the emergence of new centers of economic growth and political influence.

“We will witness and take part in the transformation of the global and regional security and development architectures adapted to new realities of the 21st century, when stability and prosperity are becoming inseparable notions.”

Now how do you go about guaranteeing the stability of a financial system?

Incidentally it was no suprise to find out how little the western media has reported on SCO. I'm embarrased to say I had never heard of them until Desperado highlighted them. You'd think a political alliance that represents half of humanity would get a bit more air time.

Jenn said...

The big leg up before the big leg down?

Commissioner Chilton's statement on silver market rigging

Statement of Commissioner Bart Chilton
U.S. Commodity Futures Trading Commission
Public Hearing on Anti-Manipulation and Disruptive Trading Practices
Washington, D.C.
Tuesday, October 26, 2010

"I take this opportunity to comment on the precious metals markets and in particular the silver markets."

"I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told by members of the public and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act have taken place in silver markets and that any such violation of the law in this regard should be prosecuted."


I'll say one thing -- you are very dependable.


Paul I said...

This is a must read.

I would bet dollars (not gold) that A/FOA would now be looking to SCO and the ex-communists to usher in freegold, not the sideshow Europe.

The banks must be crapping themselves. And when you hear Bart Chilton and that CFTC Judge making such public statements, it just looks like positions are being taken to deflect the inevitable recriminations. Rats and ships etc.

Paul I said...

Last post today, I promise.

Link to the Russian central bank reserve statement. Interestingly until 1/1/2006 they were valuing their gold at a fixed $US300/oz. Since that date it's been floating, just like the ECB.

Anyone know how China values their gold?

Edwardo said...

What is the purpose of The Chinese encouraging their population to own both silver and gold if not to allow the way for a relatively smooth transition into a new monetary regime that utilizes both precious metals.

I am, of course, aware of FOFOA's well stated view that gold is the "it" metal, not silver. But there it is.

costata said...


Thanks for the info about the Russians marking their gold to market. That was news to me.


I don't think FOFOA has suggested that silver cannot or will not go up significantly in price. The question is: does it have a much, much lower ceiling than gold?

Silver is a crucial industrial metal as well as being categorised as a PM. That would be reason enough to pull in as much silver as possible into China. Encouraging your citizen's to do it would be a clever way to do so without running the price up.

If in the future they want their citizens to hand in their silver all they need to do is offer a higher currency price or if that doesn't work an irresistible gold/silver exchange ratio should do it.

Being China, as an added incentive they could offer to shoot anyone who refused. said...

I enjoyed these two posts very much (Flow, and Flow Addendum). They very much brought to mind the theories of Harold Hotelling, who wrote about the need for a resource extractor to have good prospects for their capital proceeds from resource sales--otherwise, it would be better to let the resource appreciate in the ground at a faster rate of appreciation. I wrote about Gold, Energy, and the Problem of Capital Storage today at my site. You might enjoy the treatment of these same issues:

I was not aware at how steadily gold production had fallen in the last decade. Nor was I aware that the CAGR of global gold production the past 100+ years comes in at just over 1.00% per annum.

Thanks for the writing, FOFOA.



Michael H said...


You ask, "what is stopping them doing what FOA suggested Saudi planned?"

There is always the danger of retaliation when one acts overtly. Remember 'mutually assured destruction'?

Goldilocks said...

Ive read many posts on this blog after discovering it recently, truly one of the best gold commentaries on the web, thanks FOFOA.

I dont know if a post has been made on this but I thought it would be interesting to look at the price of gold vs oil for the last 40 years. I found a chart on James Turks site, the one right at the bottom with this commentary.

Note how the price of crude oil has risen in terms of these national currencies, but remains essentially unchanged in terms of gold.In fact, the price of crude oil has remained essentially unchanged for decades, when measured in terms of gold. Had the gold standard not been abandoned in 1971, nobody today would be talking about the rising price of crude oil simply because the price of crude oil would not be rising.

And then this on

The Link Between Gold and Oil

Gold and crude oil prices tend to rise and fall in sympathy with one another. There are two reasons for this:

1. Historically, oil purchases were paid for in gold. Even today, a sizable percentage of oil revenue ends up invested in gold. As oil prices rise, much of the increased revenue is invested as it is surplus to current needs -- and much of this surplus is invested in gold or other hard assets.

Mike said...

the ratios of the gold vs oil is irrelevant because if gold is given along with xx amount of dollars in oil then then the paper ratio's are lying.

if oil is $80 but xxxx amount of gold is needed and before say 40 years ago say oil was at $1 and x of gold were needed then how can you properly calculate the real ratio of this trade.

fofoa also pointed this out with the paper gold chart, the price of it is useless because it represents a paper market not a physical one.

littlepeople said...

Re: your finding that oil and gold ratios have remained the same . . . anecdotally, silver has risen vs. oil since 1960's.

For example, when I was 12 years old in 1964, you could buy a gallon of gasoline for 30 cents (three silver dimes). Today, gas costs about $2.79/gallon and 3 silver dimes are worth about $5.00

So, since 1964 silver is close to a double vs. oil . . .

Edwardo said...

Costada wrote:

"I don't think FOFOA has suggested that silver cannot or will not go up significantly in price. The question is: does it have a much, much lower ceiling than gold?"

I didn't suggest that he suggested otherwise. However, for all intents and purposes I have never gotten the feeling from the site's proprietor that he thought silver worth owning.

miked said...

"However, for all intents and purposes I have never gotten the feeling from the site's proprietor that he thought silver worth owning."

What they say and what they do are different. FOFOA recently said he owns some silver.

g. said...

@ mike October 27, 2010 9:09 AM

I understand that trying to calculate a goldprice of oil through a fiat-currency is in essence useless.

So, If I were to look up Sheik Lut-o-foil in 1913, how many grams would I have to pay him for a barrel, and how many grams would I have to pay today?

Or more to the point, forget the fiatdollars in the formula XX$ + xxgoldgrams = xxoil.

Desperado said...

Concerns over Geneva’s new luxury villa owners

"At the beginning of 2010 Dinara Kulibayeva, the daughter of the Kazakh president, Nursultan Nazarbayev, and wife of oil magnate Timur Kulibayev, bought a huge property in Anières worth SFr74.7 million – up from SFr8million ten years ago.

In July Timur Tillyaev, the husband of Lola Karimova-Tillyaev (daughter of the Ouzbek president, Islam Karimov) purchased a house at Vandoeuvres for SFr43.4 million, which was allegedly valued at SFr14 million just four years earlier. They join Kazakhs, Russians and citizens from other former Soviet states who have moved to the area.

Money is no object to the newcomers, said Murith.

“They say, ‘I’ll take it. How much does it cost?’ And if you add a zero they still buy it,” he commented."

Could it be that the ultra-rich are in the process of finding real property to park their fiat-wealth?

@g: How are the developing countries around the world going to find the gold to buy oil, especially when China is looking to purchase 10,000 tons: China is key to next rally in gold prices

"As with the US 100 years ago, China will probably regard large gold holdings as a way to project financial power. In 1913, before the dollar had emerged as a global currency, the US had 2,293 tonnes of gold compared with 248 tonnes for Britain, 439 tonnes for Germany, 1,030 tonnes for France and 1,233 tonnes for Russia. The Americans’ large gold reserves made the dollar a natural replacement for sterling when the first world war crippled Britain’s financial position. The US is now running a fiscal policy that has parallels with Britain during wartime, which could undermine the dollar’s global role at some point.

Some Chinese officials have publicly called for the central bank to purchase 10,000 tonnes of gold. The central bank has declined to comment on these proposals, but they will become increasingly attractive if the US pursues a policy of dollar devaluation while the renminbi emerges as a global currency."

I sure hope Mauritius, Thailand, Bangladesh and Sri Lanka took physical possession of the IMF gold they bought, otherwise they might as well have GLD!

littlepeople said...


"I sure hope Mauritius, Thailand, Bangladesh and Sri Lanka took physical possession of the IMF gold they bought, otherwise they might as well have GLD!"

Well said, and my sentiments exactly. We hear about all these IMF gold sales--but are they real gold, or paper gold? The only way to know is through pysical inventories of every nation's gold depositories, along with an audit of the books that indicate ownership.

My opinion is similar to GATA's in that maybe half the gold many countries say they have, they really have. Leased gold (which will never come back) was sold by the bullion banks at much-lower-than-current prices--yet, the rules say they can count the leased-out gold as still in their inventory! So, the promise to repay has replaced the real gold, yet is still reported as real gold. Apparently, many CBs across Europe and the world engaged in this shenanigan to suppress the gold price.

GATA also wonders if the U.S. Treasury still has the 8000 tons+ of gold it says it has--no audit has been done of the Treasury/Fed since Eisenhower was POTUS. Or, if suspectd, it engaged in gold swaps with other CBs, which likely cannot be reversed at anything close to prices as they were when the swaps originated.

There is also much conjecture about the true physical holdings of GLD and SLV. Are they simply another "fractional reserving" machine that holds in physical only 50% or maybe 10% of what it claims to have?

At the rate things are moving, we should have some answers pretty soon--the statements by Bart Chilton at CFTC may be an indication of COMEX silver defaults by JPM coming to a theatre near you . . .

Diamond Jack said...

Yo Silver bugs, under the regime of crackwhore gold silver is to be wampum.

"When Europeans came to the Americas, they realized the importance of wampum to Native people. While the Native people did not use it as money, the New England colonies used it as a medium of exchange. Soon, they were trading with the native peoples of New England and New York using wampum. The New England colonies demonetized wampum in 1663.[7] Meanwhile it continued as currency in New York at the rate of eight white or four black wampum equalling one stuiver until 1673. The colonial government issued a proclamation setting the rate at six white or three black to one penny. This proclamation also applied in New Jersey and Delaware.[8] The black shells were considered worth more than the white shells, which led people to dye the latter, and diluted the value of the shells. The ultimate basis for their value was their redeemability for pelts from the Native Americans. As Native Americans became reluctant to exchange pelts for the shells, the shells lost value.[9]"

That is, to the extent that crackwhore gold savers wish to exchange cwg for silver, silver shall find its value.

Desperado said...


You said: "The only way to know is through pysical inventories of every nation's gold depositories, along with an audit of the books that indicate ownership."

I have been thinking about this a lot lately, and FOFOA has said the same before, but here goes....

It seems to me that the first country that floats its gold reserves at market and truly sells its gold at spot will be very quickly plundered and depleted. Every CB knows this. The question is if this is a recent occurrence, or if the Washington Agreement on Gold was made specifically for this purpose, that is to postpone that moment as long as possible instead of ostensibly being created to prevent gold dumping.

As FOFOA says, flow must be sustained. It looks to me like the gold flow is currently moderately or completely constipated. Regardless of what the true purpose of the Washington Agreement on Gold was, the current situation has completely changed, and what we have is an inverse mexican standoff where the first CB who goes to freegold is screwed as everyone else tries to pick up his assets at the old price before the adjustment. This kind of equilibrium is inherently unstable.

FOFOA said that the EU has a better record for transparency than the FED/Treasury. In this game of cb-gold-poker not letting the other players know how much gold you have at the table could be a big advantage, especially if you have already lost most of your fortune gambling and everyone else still thinks you are rich.

But the real question is: who is going to shoot first when that dreaded crackwhoregold steps into the bar?

costata said...


You said:
"... the current situation has completely changed, and what we have is an inverse mexican standoff where the first CB who goes to freegold is screwed as everyone else tries to pick up his assets at the old price before the adjustment..."

Mon amis, this is assbackwards. The first CB with large gold holdings who offers to BUY and SELL their gold in their OWN currency unit at a much higher exchange rate than the current one will not be screwed.

This is one way that Freegold could be launched. This is precisely what Jim Rickards has been talking about lately as a possible solution for the USA. A huge devaluation of the US$ in GOLD by the USA.

Edwardo said...

"Regardless of what the true purpose of the Washington Agreement on Gold was, the current situation has completely changed, and what we have is an inverse mexican standoff where the first CB who goes to freegold is screwed as everyone else tries to pick up his assets at the old price before the adjustment. This kind of equilibrium is inherently unstable."

It's hard to imagine, not impossible mind you, just hard, that if, if mind you, all the relevant players know that being first means winding up last, that there would not be some concerted action taken to allow for a new regime to come into being without having a sacrificial lamb (with all the attendant gore) as part of the festivities. Perhaps that sort of international civility is too much to ask for, let alone expect, at this time.

Paul I said...

Regarding flow. What little physical flow there is, where is it originating from right now?

CBs? No.

Giants? God no.

Scrap Jewellery? It might have been a meaningful source a few months ago. The cash for gold rip off merchants seem to have packed up and gone home where I am, so I suspect most of that source has been fleeced dry for now.

Miners? Yes.

I think we overlook the miners. For whatever reason the miners seem to be quite happy to sell as much as they can get out of the ground as fast as possible. Although not enough to satisfy demand, even with 99% of that demand buying paper, this mine flow does seem to be sufficient to keep the paper game dragging on.

Why is it that the industry closest to the whole game can’t see the big picture? Most of their hedge books are closed now, so they must be expecting the price to rise. Many of them are sitting on piles of cash. Why don’t they bank a proportion of their profits in gold? Here in Oz you just have to look at the main shareholders to get an idea:

Newcrest: HSBC 33%, JP Morgan 10%, Citicorp 9%
KingsGate: HSBC 21%, JP Morgan 5%, Citicorp 5%
BHP: HSBC 13%, JP Morgan 10%, Citicorp 5%

I’m sure it’s the same for most Western Gold producers. So there won’t be any shareholder pressure from that lot to change policy. Some of the smaller ones are starting to get it. Hill End Gold offers shareholders the option to buy gold at spot, and there’s plenty of Chinese money quietly moving into some of the smaller Australian gold producers.

But at what point will the big gold miners start exercising the sort of influence the big oil producers always have, and start turning the screw on the flow?

One more thought about SCO and freegold. ASEAN is a guest member of SCO (denied the US). Australia is a member of ASEAN. Australian govt. is currently attempting to implement a "super profits tax" on resource companies, including gold producers.

Paul I said...


Disagree on the "first will be screwed" proposition. They won't sell at the current price, that's the point. Just publicly announcing the fact that they won't sell at the current price would be enough to crack the facade.

Paul I said...

Does anyone remember playing Grandmothers Footsteps as a kid? That’s what we called it in England. The rules are:

One player is IT and stands at base (a wall or line). IT must have their back to the other players who stand in a line facing IT about 10 metres away. The players try to sneak up on IT and touch their back without IT turning around and seeing them move. When IT turns round, the other players must “freeze”. If IT spots any player moving, they have to go back to the start again.

That’s what we’re all playing with the gold price. Everyone who believes the paper price is IT. Everyone else is slowly buying physical at the cheap price, trying not got get seen. Whenever IT turns around, we all freeze, and COMEX bombs the price.

That’s why no CB will go first. IT will see them.

Actually maybe we’re playing Hungry Hippos.

costata said...


Interesting statistics on the big Australian gold miners. Thanks.

Everywhere you look the same players turn up strategically placed to manipulate the situation to their advantage.

If it isn't too much trouble, are the same players represented on the share registers of the silver producers?

Angel Eyes said...

Paul said:
"One more thought about SCO and freegold. ASEAN is a guest member of SCO (denied the US). Australia is a member of ASEAN. Australian govt. is currently attempting to implement a "super profits tax" on resource companies, including gold producers."

As is New Zealand, where the govt has been trying to open up conservation land to mining. Gold prospects, all of the proposed areas.

costata said...

Paul and Angel Eyes,

Australia and New Zealand are not members of ASEAN. (My emphasis)

Established in 1967, the Association of Southeast Asian Nations (ASEAN) aims to accelerate economic growth, social progress and cultural development in the region and to promote regional peace and stability through the rule of law and adherence to the principles of the United Nations Charter. The ASEAN Charter, which entered into force on 15 December 2008, provides a legal and institutional framework to support the realisation of ASEAN’s objectives, including regional integration.

ASEAN comprises ten countries: Burma, Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam.

ASEAN has ten Dialogue Partners: Australia, Canada, China, EU, India, Japan, New Zealand, ROK, Russia and the United States. The United Nations Development Program (UNDP) also has dialogue status. Australia became ASEAN's first Dialogue Partner in 1974.

Paul I said...

Hi Costata

Well there you go, thought we were a member. Kevin Rudd must have heard some Chinese whispers in the Men's room.

Virtually no pure silver plays in Australia. I'm guessing the biggest producers would be BHP and RIO. RIO's shareholders include:

HSBC 14%, JPMorgan 10%, Citicorp 9%

To be specific, all these holdings are as nominees, so probably for pension funds etc, but it's the influence that matters.

costata said...

Thanks Paul.

Desperado said...

The issue here really is how to restore a "free market" in gold. A transparent market where price discovery happens with minimal influence from cartels and big players. The bullion banks and hedge funds have completely ruined the current system with their leased, leveraged and reserve backed paper gold and derivatives.

The original 1999 Washington Agreement on Gold came in response to concerns in the gold market after the United Kingdom treasury announced that it was proposing to sell 58% of UK gold reserves through Bank of England auctions, coupled with the prospect of significant sales by the Swiss National Bank and the possibility of on-going sales by Austria and the Netherlands, plus proposals of sales by the IMF. The UK announcement, in particular, had greatly unsettled the market because, unlike most other European sales by central banks in recent years, it was announced in advance. Sales by such countries as Belgium and the Netherlands had always been discreet and announced after the event. So the Washington/European Agreement was at least perceived as putting a cap on European sales."

2009 Agreement

In August 2009, 19 banks extended the agreement and committed to selling no more than a combined 400 millions ounces of gold through September 2014. The International Monetary Fund did not sign this agreement.

If one credible CB, say SNB, left the WAG and announced that they would buy gold at, say 2000 CHF per oz and sell at, say 2100 CHF, what would happen? They would be forced to buy a tons of gold.

If they announced that they would buy at somewhere close to market (currently 1320), say 1310 and sell at 1330, then either immediately or shortly after the next price rise, some other CB would come and hoover up all their gold. Since the "official" market price is determined by the LBMA and Comex, the SNB would be forced to peg their price to that price that is highly manipulated through derivatives in a market largely controlled by the bullion banks. This would serve little purpose.

Price discovery is the real issue here. I find this statement from the WAG interesting, especially since the US is not a signatory: "The Washington Agreement on Gold was signed of 26 September 1999 in Washington DC during the IMF annual meeting, and the US Secretary of the Treasury, Lawrence Summers, and the Chairman of the Federal Reserve, Alan Greenspan, were present"

This is why I say that the first CB to simply set an arbitrary price higher than that determined at the LBMA/Comex will be screwed, unless they are really willing to buy up all the gold offered. China, or possibly Russia, could play this role in an effort to simultaneously increase the level of their gold reserves and to break the back of the market rigged by western bullion banks, but the renimbi doesn't float. So China would lose their dollar peg and would risk losing their trade advantage. Certainly no western CB has the excess liquidity lying around to accomplish this task.

FOFOA, can you jump in here and provide some needed clarity?

Pete said...

@ Desperado (and others)

This is beginning to hurt mate.

Can't you all see that you are trying to price gold in fiat?

The whole point is that FreeGold is NOT a gold standard.

The first country to use freegold will be the winner, not the loser.

Why? Because all other currencies will depreciate exponentially relative to the country that uses FreeGold.

It is a 'floating' amount. They don't set it and forget it. As soon as a certain currency becomes in demand (eg the one backed by FreeGold), then the price of that currency will rise. Supply and demand, pretty simple right? The price will rise as demand does, until it levels out.

Right now, if you could have your savings in fiat, or a currency backed by FreeGold, which would it be?
(Hint: One is backed by nothing)

That's my 2grams.

Pete said...

Oh and if they need to be concerned about an initial buyup of gold before the rest of the world catches on, all they have to do is limit the flow.

"Yes you can have your gold. We're releasing it at the rate of 1 tonne per week".

FOFOA said...

Hello Desperado,

"FOFOA, can you jump in here and provide some needed clarity?"

For you, certainly!

The first CB that prints currency to simply set an arbitrary price higher than that determined at the LBMA/Comex will usher in Freegold. They will not be screwed. They print the money to buy the gold at their stated price and they sell their gold at a price far higher than anyone else. How can they possibly be screwed?

I have explained this in detail in the past. If the Fed were to announce a FIXED price of $20,000 per ounce and it would print to buy this gold, would it get a bunch of gold? Or would it lose a bunch of gold? Answer: It would lose all of its gold if it was foolish enough to stick to such a low price.

However, if the Fed were to announce a FLOATING price starting at $20,000, it would get some gold at the beginning, but a lot less than you would think.

Gold is fungible which means its price is imputed globally, and today, instantly.

The BIS or the ECB could do this easily. The Fed could not. The reason the Fed could not do it easily is the paper gold market. An offer of $20,000 per ounce would have to be for physical gold only. This would kill the paper gold market instantly. Of course all paper gold could be settled at $20,000 per ounce if they decided to do this. They could just print it up. What price do you think physical would be at then?

As for the WAG, here's the real story. First of all, it's not 400 million ounces, it's 400 million grams. The BOE announcement in May, 1999 and subsequent auctions bailed out the LBMA. I don't know the exact mechanism of the bailout, but this was the reason behind Brown's Bottom.

The WAG was a message from the rest of the European CB's to the commercial bullion banks that they were ceasing their services as PHYSICAL GOLD lender of last resort. They would still be lender of last resort, just not for physical gold. The US didn't sign on because it doesn't engage in gold sales like the Euro CB's and the BOE. It would have been ridiculous for the US to sign the WAG.

The LBMA exposed a secret in early 1997. This was shortly after the Asians discovered what was going on with the Saudis which put stress on the entire paper gold arena. ANOTHER showed up in late 1997 to explain what was happening. He posted *THROUGH* FOA for four years, from late 1997 until late 2001. Most of these posts are not in the main archive. You have to read the 1,200 pages of forum archives to find them all. And yes, they covered all of these events: Brown's Bottom, the WAG, the day the $IMFS almost died in Sept. 1999, etc...

ANOTHER's message was not only telegraphed from the highest echelons of international finances, it was also watched closely and received at those same levels. The fact that the medium of delivery was an obscure internet gold forum is merely a detail. To assume ANOTHER's remarkable postings had no impact on the above events is simply naive, in my humble opinion.


littlepeople said...

You said, "The US didn't sign on because it doesn't engage in gold sales like the Euro CB's and the BOE. It would have been ridiculous for the US to sign the WAG."

In previous writings you expressed your opinion that the U.S. Treasury still owns all the gold it says it has (8000+ tons).

Do you follow GATA's research? GATA sued the Fed for access to records regarding its gold actions. In a letter from a Fed official, the official essentially admitted to engaging in gold swaps. GATA indicates that it is reasonable to assume that some of the gold sold by the europeans either through the WAG, or before, may have been replaced by the U.S. gold in exchange for currency, or something else. The reason for this activity would be to "spread the pain" necessary to keep gold suppressed, without anyone knowing it.

It was some time ago, possibly around the time when it entered into swap arrangemnents, that some portion of the U.S. gold was renamed "deep storage" gold. Did this mean gold not yet mined, but promised to be returned when the swap is to be reversed?

I believe the Treasury gold has been comprised. Why else would the Fed fight tooth and nail to keep secret the files GATA wants released?

FOFOA said...

Hello Littlepeople,

It is true that GATA stuck with the Howe/Turk interpretation of the West Point reclassification and ESF gold swaps all these years. That the US Treasury deployed actual physical official US gold in Europe to bail out the bullion banks and suppress the price of gold (which incidentally left the launch pad and never looked back less than a year later). But that was never FOA's interpretation.

We are dealing with two different paradigmatic views of the world of gold and central banking. One says that it's all the CB's versus gold and the gold investor. The other is the paradigm explained by Another. Try to view each in its own light. Confusing, mixing and jumbling them together to create some sort of reconciliation may lead to a confused, mixed up and jumbled analysis.

"It is the mark of an educated mind to be able to entertain a thought without accepting it."
-Aristotle (384 BC – 322 BC)

elevator guy (04/23/01; 00:07:49MT - msg#: 52371)
second thoughts
------ I seem to be caught in an internally conflicted spiral of wealth logic, due to my having grown up in Dollar Land. When some prominent poster here said that GATA was "barking up the wrong tree", I felt GATA had been given short shrift for their efforts. Now ----------------

Hello Elevator guy,

Thanks for attempting to understand it all. If you follow our lead, we will not change your mind about anything. Rather, you will have the "luxury" of seeing things in a different context from the usual Western Gold Bug fixation. With that perception becoming part of your "Total" overall understanding, as events occur, you may choose to interpret their impact differently.

Trail Guide

Mr Gresham (4/22/01; 14:01:22MT - msg#: 52345)
Book 'em, Dan-o!
BH (4/22/01; 13:53:50MT - msg#: 52343)
TRAIL GUIDE---ESF/Bundesbank-----

Hello Gentlemen,

I suspect the gold in West Point was reclassified in a show of good faith to those that own some international gold paper. I'm talking about people whose reasonably priced product you cannot live without. I doubt the gold has outright swaps written against it or was swapped into the enemy's camp (so to speak). While the ESF has the right to trade currency swaps against other's gold (and they do do this). Our gold has yet to be possessed by others. Just as in 1971, when many dollar holders thought US gold was "in custody" for them, so too does the current world dollar gold markets. However, this open certification shows just how tight the system has become.

We have said for some time that the dollar faction has inflated paper gold and done so with very limited actual bullion of their own. We maintain that most of the leverage created in this arena has been done with the gold of private Western owners. Modern GoldBug owners that once held physical gold but now seek gold leverage and gold industry investment instead of gold wealth. That gold has now been leveraged for all its worth as it filled the use void. Today, we are reaching the mathematical end that that game can be played. Others know this and the West Point business is an attempt to counter this perception. Even if it was only a political move. We are getting close though (smile).


FOFOA said...

FOA continuing...

There is no logic in that the Bundesbank would risk its gold. They were major supports of the Washington Agreement. Counter to perception, the entire EuroZone CB system awaits the day when they can convert failed paper gold borrowers into Euro borrows. As our paper gold market fails to function, shuts down and physical gold soars, there will be no bookkeeping market to offload these paper positions into. The conversion ratio into Euros will then be something to behold. Along with the demand for currency Euros and physical gold! The BIS/ECB is delighted that the dollar faction is lending all the "gold on paper" the dollar market can stand. Eventually, the US will walk right up to the gold window with the intentions of selling, only to fall away as they stare at a mountain of foreign CB dollars.

"""We watch this new gold market together, yes?"""


Some of you may never have "caught" that Pierre and Henri in FOA's analogy were James Turk and Reg Howe. And the mysterious fish was their "catch" regarding the ESF swap and US gold reclassification. This catch was named by GATA and that name has stuck. But someday (when Freegold arrives) we may find that we were using the wrong name all along.

FOA (04/23/01; 20:30:04MT - msg#67)
Replies and Custodial Gold

,,,,,,,Two French men were fishing in a boat, just off of Nice. Several other boats were within close sight, always watching to see if these guys found anything. All of a sudden Henri hooks a huge one and brings it to the surface while Pierre nets it. Both of them look at the fish in the net and hesitate, not wanting to bring it onboard. "What is it", Henri asks? "I don't know, can't make it out, but it's a good one, I'm sure" says Pierre. By god, whatever you do, don't haul it in. If we can't name it the other boats will laugh at us. Let's just keep the net in the water, pointing at it and talking loud while we circle the boat. Eventually, one of the other boats will get a look and blurt out its name,,,,,,,,,,,,,

,,,,,,, Eventually, the ruckus attracted hundreds of other boats (the miracle of marine radio and the internet) and they stormed in close to see the news. During all this action, none of the other boats saw the fish very well, therefore no identifying name was mentioned. Eventually, tired from throwing out various possibilities of the significance of the catch, Perre and Henri pulled the thing in for all to see.,,,,,,

,,,,,, To their amazement, no one else knew the exact name or significance of this exceptionally fine fish! You see, there just wasn't enough details about it, "floating around" (smile) to know its purpose. But still, all hailed the duo as superior fishermen and brought them drinks and dinner in port!,,,,,,,,

The moral of this story: In this game of life, we all fish from time to time. But, to a sportsman, the size or type doesn't matter because it's the art of catching that counts. Besides, every catch has a name and we will eventually find its "namer". (bigger smile)


oldinvestor said...


"The first country to use freegold will be the winner, not the loser.

Why? Because all other currencies will depreciate exponentially relative to the country that uses FreeGold."

OK, but today all countries strive to depreciate their currency against all others because it will stimulate exports and thus increase domestic employment.

If a nation has a currency that will be stronger against all others, and thus discourages exports and job creation, why would they see that as a benefit?

FOFOA said...

Littlepeople, the take home lesson here is to separate the "evidence" from the "interpretation". If you can do this, then you can analyze the evidence yourself under differing paradigms. When we view the gold market actions since the 1-1-99 launch of the euro as a unit of account and the 1-1-02 launch of the euro as a medium of exchange in the light of "ANOTHER's paradigm", it fits. Yet I struggle to make it fit the "all CB's are against gold paradigm."

Here is some of the evidence…

Tuesday, January 1, 2002 - ***"E-Day" Launch of euro notes***
Friday, February 8, 2002 - *** GOLD ABOVE $300 ***
Monday, December 1, 2003 - *** GOLD ABOVE $400 ***
Thursday December 1, 2005 - *** GOLD ABOVE $500 ***
Monday, April 17, 2006 - *** GOLD ABOVE $600 ***
Tuesday, May 9, 2006 - *** GOLD ABOVE $700 ***
Friday, November 2, 2007 - *** GOLD ABOVE $800 ***
Monday, January 14, 2008 - *** GOLD ABOVE $900 ***
Monday, March 17, 2008 - *** GOLD ABOVE $1000 ***
Monday, November 9, 2009 - *** GOLD ABOVE $1100 ***
Tuesday, December 1, 2009 - *** GOLD ABOVE $1200 ***
Tuesday, September 28, 2010 - *** GOLD ABOVE $1300 ***
Thursday, October 14, 2010 - *** GOLD ABOVE $1375 ***

And here are a few more snips from the regular forum archive following what I posted above…

Trail Guide (04/24/01; 06:53:27MT - msg#: 52448)

Sir Belgian,

We have partial evidence that a gold swap between the US and the Bundesbank is considered legal. But no evidence the event occurred.

We have evidence that the Bundesbank has lent and sold some gold. But, their accounting over time does not show any drop of gold stocks larger than expected. Further, their gold lending could have been (and probably was mostly) in "nominee" form for the BIS.

We have evidence that the ESF can do swaps of their currency assets for other's gold. But no evidence that they have attached the West Point gold in exchange for other's gold.

The only "big fish" that was caught (and it is a very big one GATA should be proud of for sure!!) was the actual reclassification at West Point. Truly, this "event" is right in line with our view of current "political actions".

We shall see.


FOFOA said...

Randy (@ The Tower) (04/24/01; 12:17:45MT - msg#: 52461)
Trail Guide, you in particular may get a smile out of this...
since it coincides with the latest discussion regarding subtle changes to verbiage of official gold reporting.

Naturally, you remember we discussed the IMF's late-1999 through early-2000 off-market gold operations conducted with Mexico and Brazil. It seems the IMF, in small degree, capitulated to the better "international practice" of recognizing gold's market value rather than maintaining the arbitrary fictional valuation of SDR35 per ounce.

It now seems that the IMF is *****smoothing the way**** for other future steps in this direction toward recognizing the free gold market value. In March, the IMF changed the language on its website regarding the balance sheet valuation of its gold holdings. Instead of the old proclamation that the majority of its gold was held at SDR35 on the balance sheet, the IMF now states its gold holdings are valued on the balance sheet "on the basis of historical cost".

While this is valuation remains numerically consistent with the prior method due to the original arrival of much of this gold at the SDR35 equivalent "cost", it certainly cracks the door a bit further toward easily and openingly recognizing the higher free market value for gold, and might thus signal full capitulation in this regard all the sooner.

[FOFOA: If you visit that IMF link today, 9 ½ years later, you'll notice they've also taken the additional step of reporting IMF gold's value at current $ market price (MTM!). See the first paragraph.]

Trail Guide (04/24/01; 20:23:14MT - msg#: 52494)
Replies that help articulate

Sir, We need to remember that most of this "showing off of gold stores, from this point forward will employ a lot of political gamesmanship. Not unlike the BOE auctions. In that case they aren't really selling that much gold into the market. The BIS could have taken it all real easy, but England wanted to drag it out for effect. That way they got the most exposure and time. Allowing some of their favorite BBs to escape.

In the same light, most of the real gold that has left the CBs ended up in other CBs as statistics show. Political gamesmanship! Same thing is in process with our West Point business. Political jockeying for more mileage. As an example; watch a newcomer ride into town pulling an open trailer of cash. Every real estate broker from miles around will be at his feet. Now. that cash isn't in their possession, is it? Yet, it sure looks like it's been put on a trailer format for easy spending (grin). Custodial gold has the same effect in international gold paper players. Like these real estate agents, gold players now think they have USA bullion in the bank just because it's been placed in a trailer! (big smile)

costata said...


Martin Armstrong's latest essay focuses on currencies, the mistaken beliefs of those who seek to manipulate currencies and the false interpretations that are often placed on the behaviour of a currency.

For example he cites the prospect of a rising Yen during an economic death spiral for Japan.

Martin provides some very interesting figures on the level of imports as a percentage of GDP in the USA and China.

All in all he makes a good case for the argument that you cannot rescue your economy by devaluing (debasing?) your currency.

Well, well worth your reading time Sir, IMVHO.

Unknown said...


I have read quite a bit of Armstrong and respect much of what he has written. However, it appears that he looks at gold more through the lens of a trader than the lifeline or wealth preserver that we might. He takes the same view with currencies (some will be stronger, some will be weaker, etc...). And until I started following the FreeGold path, I was okay with that. Now I'm not. What's your take?

FOFOA said...


GATA does a great job accumulating "evidence". But they always make the evidence fit the same story through grafted "interpretation" favoring GATA's paradigm that "all CB's are against gold." "It's us against the banksters." You know the story.

Of course we all owe GATA our sincerest gratitude for their tireless efforts. But equally, we owe ourselves an honest and unbiased interpretation. Especially if it could have an impact on our personal financial wellbeing. And some of the conclusions that can be drawn from GATA's paradigm are antithetical to ANOTHER's story. I suppose, if you are unable to see the difference, the safest bet is that which intersects: physical gold in your possession.

But I really don't care if you buy physical gold, or silver, or electronic credits for a split of gold, silver and platinum, as long as you buy what brings you peace of mind. I am here to help you fish on your own, not to hand out pieces of fish like some kind of thought-based welfare window.

The thing is, I found this really great fishing hole!! And I'm here to share it with all of you. If you don't like the taste of what you catch in this hole, there are plenty of others. But so far, this hole has been nothing short of a "goose that lays golden eggs" for me. I'm just trying to share.


Desperado said...


I agree that the key issue is the paper market and when and how it collapses.

Assuming the Fed were to "announce a floating price", likely they would not do that directly over the LBMA, but would also set up their own market in competition to the LBMA. Where would the "real" price be set? There would be a competition for control of price discovery, probably with bifurcation. Eventually the price of LBMA gold would rise to that set by the US while the dollar would fall towards $20000=1300CHF (the market price of gold in Francs). I can see that.

You said: "The first CB that prints currency to simply set an arbitrary price higher than that determined at the LBMA/Comex will usher in Freegold. They will not be screwed. They print the money to buy the gold at their stated price and they sell their gold at a price far higher than anyone else. How can they possibly be screwed?"

But in Red Barons article, he details how the 300 tons sold by the Netherlands was inconsequential. This 300 tons wouldn't kill the paper market (or it didn't 10 years ago).

If a smaller country tried to set up a private exchange, likely they would be considered trivial, and mostly sidelined (ie. Dubai) and they would not affect price discovery or the paper gold market.

In the end though, when a CB does this are they not really just pegging their currency? And if a small countries currency is pegged at a massively incorrect price, doesn't their currency usually collapse (ie. Argentina's dollar peg in 2001)? Sure, Switzerland could devalue the CHF this way but all the other CB's would be screaming bloody murder.

So as I said earlier, perhaps one of the biggest players (China, US or possibly Russia or the Saudis) could break the paper market and start crackwhoregold, but the rest of the players are really just "following in the footsteps of giants" and would end up getting crushed, especially if they really pissed off the Fed.

At this point it appears that really we are just waiting for the either the Comex or LBMA to collapse.



FOFOA said...

Hello Desperado,

If your argument is that small players like Zimbabwe, Argentina or Iceland could not usher in Freegold, I'll concede. But I fear that you fail to realize the power of gold to absorb credit inflation while ignoring necessary consumer products.

I was never suggesting those scenarios would ever play out. They won't. They won't need to. But the fact that they are potentialities is what matters. Comparing a sale at market in the 90's to this potentiality is remarkably ignorant. No currencies are pegged to gold today, so (hypothetically) declaring an arbitrary price for gold is not pegging a currency.

You seem to be hyper-focused on the probability of the most fragile thing in history breaking. I assure you, it cannot last. But I suppose you are just one of those who will not believe it until they see it, when it is too late to profit from it.


Desperado said...

Yoohoo, MR. FOFOA,

The paper gold market will collapse, I completely agree. Timing is important.

I have a scenario for you:

It is May, 2011. UBS has been bailed out by the Swiss government once again to the tune of 50B CHF. They were made a scape goat for the housing fraud, and Obama has nationalized their US subsidiaries and revoked their US banking license. Credit Suisse is also on the verge of bankruptcy. The Franc has collapsed to 2:1 to the dollar, and there has been a panic and flight out of the CHF. The Swiss people in a pique of rage pass an initiative to force the SNB to open windows where they can buy gold with their francs. Parliment agrees. What does the SNB do next?



FOFOA said...

Sell gold for euros?

costata said...


I agree with your assessment of Armstrong on gold. He is a trader and it colours his analysis. Nothing wrong with that but non-traders can find his menu of solutions difficult to comprehend.

One of his frequently repeated criticisms of the gold exchange standard is that politicians will not let gold float because it exposes their economic mismanagement. If he was aware of the Euro Freegold architecture he might actually support it as part of the solution.

Also under the new system fiat currencies are not going away. So they matter on many levels, now and in the future. This is especially true under a floating exchange rate regime as currencies are often the conduit for transmitting the effect of one country's economic policies to others.

costata said...

Hi Desperado,

I have an acquaintance who has strong connections into the gold trade in Dubai. Don't underestimate how large and important that physical gold market is already.

There are a number of centres who could host a Freegold exchange of international scale.


Desperado said...


But isn't the "spot" price determined in LBMA and Comex? So in this sense they are "following" the gold price determined in NY and London.

It would take a run or a failure to deliver to steal this away for Dubai or anywhere else.

costata said...


I'm tired so forgive me if this doesn't make sense. I will happily explain the thinking later on.

Desperado, what makes you think they deal gold in Dubai at the "spot" price "determined" by the LBMA and Comex?

There are no taxes on gold in Dubai. No records are required by the Government of the identity of buyer and seller.

If you sell gold in the USA how much tax do you pay on the "capital gains"? Twenty-eight per cent? Can you see the tax arbitrage? The incentive to sell US privately owned gold below the spot market market price elsewhere. US taxes on gold are a downward bias on the US$ price of gold everywhere that taxes on gold are lower if there is gold available from private US holders.

What then is the "price" of gold? The spot price, the "tax" price, the location tax/price?

To paraphrase Another, the price isn't what your money says it is.

lsiwkei said...

Are you a freemason?

Unknown said...

I have been reading the commentaries. I will comment on a few things. All are my views and my views only.

Desperado, I agree with you fully and excellent analysis. Its bcs of posters like you that I come back to this site checking the commentaries only.

Andrew, Armstrong is correct.

Paul, very funny post thanks. Also excellent question and I think I have the answer. I may be wrong of course but I think the reason why Russia is not tightening the screws on the USD is because the same players that are the string pullers in Russia are the same ones for the rest of the world US included. Its all a farce, a big theatrical display of power. While the true power holders are the same old gang, here, there and everywhere.

Costata, After insulting Desperado, it would be nice if you responded to the excellent rebuttal of his.

And Fofoa, No offense in the least but as someone who is "at the highest echelons of international finance" thanks for the laugh... So funny. HAHAAHAHA

"ANOTHER's message was not only telegraphed from the highest echelons of international finances, it was also watched closely and received at those same levels. The fact that the medium of delivery was an obscure internet gold forum is merely a detail. To assume ANOTHER's remarkable postings had no impact on the above events is simply naive, in my humble opinion."

Lastly, "freegold" will never come to be. Im sorry to be so candid but never will you be free. Just because bars are not around you does not mean in prison your not.

oldinvestor said...


Pardon me as I am not well versed in currencies, but this is my take on them.

I do see that Martin Armstrong has some interesting ideas, although the whole thing is somewhat disorganized and hard to understand. I do also see that he says our imports are recently up to 15 % of GDP, much of it probably oil.

This means that a depreciated $ hurts us when it comes to imports. We have to pony up more $ to buy our imports.

But the basic point is still true I think, countries that depreciate their currencies will be more competitive in exports, thus stimulating domestic job growth, the thing politicians live and die by today.

If country A, say the US, were to suddenly make a market in gold at $10,000, what would be the result? We would have instantly inflated our dollars. Not only would it take much more of them to buy the asset gold, but presumably it would take more of them to buy the other assets necessary to life. Plus it would attract a flood of $ from overseas to our shores to buy gold, probably increasing both the money supply and velocity.

It is true that we would be able to purchase more of what we import, but if other countries do not also follow the gold revaluation, we would instantly be at a trade disadvantage for our exports. This is what would be the big job killer, and politically problematic.

So again I wonder, what would be the political advantage for any politician looking to get reelected to vote for this?

I do of course realize that the market may step in and force the freegold solution whether we want to or not.

Desperado said...

Costada, when I buy/sell gold in Switzerland there are also no capital gains tax and no VAT. I buy within a percent of the official spot price plus whatever premium is being demanded for the type of coin/bar.

The price discovery for gold in Switzerland is completely outside of the country. UBS dropped out of the LBMA at about the same time as Switzerland wrapped up its gold sales (2004). I wonder what happened behind the curtains, but apparently they lost all control of the gold pricing mechanism and had to sell 50% of their gold. Someone must have had them over the barrel.

When we start hearing gold price quotes in Dubai varying significantly from London, then Dubai will have more credibility of being independent of the western markets. Perhaps if the Saudi's were to break away from their dollar peg and go freegold, then Dubai would get they kick they needed to become the leading market and price discoverer instead of the follower.

David said...

@Max: Yes, it's apparent you're only reading the commentaries. You might want to start reading the blog as well.

littlepeople said...

Thanks for your answers to my questions. I agree that no matter which view of the CB/gold world is correct (Another vs. GATA), physical gold in one's possession is a way to future wealth.

You said, "And some of the conclusions that can be drawn from GATA's paradigm are antithetical to ANOTHER's story. I suppose, if you are unable to see the difference, the safest bet is that which intersects: physical gold in your possession."

I think your statement is so very key for all readers here. It seems to me most readers have followed GATA/Turk/Howe and others prior to coming across your blog. I have had a hard time assembling the two paradigms in my head, and trying to decipher which is correct. CBs are very secretive, and want/need to maintain opaqueness in their financial/gold dealings.

IMHO, CBs control governments, and not the other way around, though they work hand-in-glove, CBs being the hand.

Now, on to my take of the main difference between Another's and GATA's views--in novice layman's terms:
--GATA believes that CBs have leased/sold their gold into the marketplace, so that they now have half or less of the gold claimed in reserves.
--Another maintained that CBs did sell off some gold (to oil producers?) through leases, swaps, etc., but that most "sales" went to other CBs so that the totals remained about the same. I'm sure that CBs also bought mine production through surrogates, especially when gold was considered a "relic" by most.
--GATA believes that CBs are now net buyers of gold, after years of selling.
--Another maintained that the majority of gold sold was in exchange for oil, and that CBs, on the whole, maintained their levels of reserves.

Have I hit on the essence of the differences?

Question: who is taking physical off the market now? Guys like me are doing so in relatively small dribs and drabs, a few ounces at a time--who are the big accumulators today?

My belief is that when LBMA/COMEX can no longer deliver real gold and silver, trading will be halted in those "commodities." HSBC and JPM, the big shorts in gold and silver, respectively, will not be able to deliver physical to the yearning longs, but it will not technically be considered a default. Reason being, they can be allowed to pay the longs in fiat, and/or shares of ETFs. NYMEX provided for this method when nickel longs couldn't get delivery a couple years ago. If
the ETFs do not have the gold or silver to back shares, and ETF shareowners scramble to sell, the early ones out may get some fiat dollars--maybe all of them will. Only very large shareholders will be able to convert shares to whatever physical might actually belong to the ETFs. Therefore, those expecting to become rich taking delivery from LBMA/COMEX, or by selling ETF shares at the top, are in for a rude awakening.

Anyway, while the details of above are great, I expect the above net result--paper burns and gold will shine.

Unknown said...


Thanks for the reply. Armstrong is an interesting fellow though too tied to the street, imho. He also feels that a gold standard isn't possible due to the lack of physical to support an expanding population. No problem there, but as we know, both will exist and the first proverbial 'blink' will be our FreeGold. I have become comfortable with that and can't see changing that view now.

I still believe he is purely a trader and thus limited in the broader context. That is odd since he espouses the demise of the Socialist system the West is currently under. Then what? Then FreeGold, otherwise, there will not be the "Enlightenment" that Armstrong sees on the other side of the chasm (Nice Try But No Cigar).

Desperado said...

@littlepeople, you wrote: "when LBMA/COMEX can no longer deliver real gold and silver, trading will be halted in those "commodities." HSBC and JPM, the big shorts in gold and silver, respectively, will not be able to deliver physical to the yearning longs, but it will not technically be considered a default. Reason being, they can be allowed to pay the longs in fiat, and/or shares of ETFs."

If the current gold price is to a high degree determined by futures prices representing a balance between gold longs and shorts who are shorting without physical possession of the gold that they are commited to delivering, collapses, then where does the after the crash gold price discovery happen? At this point in time markets that are still liquid and able to deliver physical gold will have their moment in the sun as the LBMA/Comex lose their market leadership due to default.

ETF's like GLD that do not deliver phyisical will be in a state of limbo. As you say, some will get out, but not with physical. How can one value GLD at this point? Finally transparency and clarity will be the deciding factor. Most of the paper gold will be sent "on holiday" until the dust has settled, and at that point the fiat payout will look puny in comparison to the physical spot price that is determined wherever the price setting function has moved.

Desperado said...

@max, thanks for the support. Playing Colombo is often a lonely job...

oldinvestor said...

An interesting piece by Edwin Vieira entitled “Cross of Gold” at the GATA site.

See also a review of his monumental history of the US legal and constitutional issues relating to money, “Pieces of Eight” by James Turk.

Excerpt from Cross of Gold,

“Which brings this survey to the third plan for monetary reform—the adoption on a State-by-State basis of a new, sound, honest, and constitutional alternative currency consisting of actual gold as an—and ultimately the only—currency officially recognized by the State.

• First and foremost, adoption of such an alternative currency would be an act of foresight. It would recognize that resuscitation of the Federal Reserve System is impossible, and that acceptance of a new global fiat currency and central bank to replace that System would be intolerable.

• Second, and no less important, adoption of an alternative gold currency would be an act of scientific insight, because it would introduce a currency the objective value of which could always be verified or falsified immediately upon inspection. That objective value would be a fixed weight of gold. It would be an objective value, because an ounce of gold is an ounce of gold is an ounce of gold—everywhere throughout the world, no matter what economic, political, or social conditions prevailed. Under this plan, a specific weight of gold, and only that weight of gold, would become the State’s official monetary unit. Thus, the holder of the currency himself would not only own but would actually possess the gold, because gold would be the currency.

Contrast this with a Federal Reserve Note. Even when such a note was “redeemable” in gold, some Federal Reserve regional bank or the United States Government actually owned and possessed the gold that “backed” the note; and the holder of the note had no more than a claim to redemption. Only upon actual redemption did actual title to and possession of the gold change hands. And that
right of redemption was eventually cancelled, both domestically and internationally. As to gold, then, Federal Reserve Notes proved to be, as John Exter so well put it, “an I.O.U. nothing currency”, made possible because the “currency” and the gold were separate things, under the control of different
people. But with gold as money, nothing is owed, so no debt of redemption can ever be repudiated.

• Third, also in the scientific spirit, an alternative gold currency would allow for more than
one experiment to be conducted—indeed, as many as fifty separate experiments in each of the several States would be possible. If any single experiment should fail, it would do so only locally, not nationally. If it succeeded, it could be expanded quickly and easily enough elsewhere. And by the process of judicious trial and error, constant improvements on any initial success would be possible.
Moreover, even if politically influential factions could succeed in stopping the adoption of an alternative currency in one State, they would be at pains to suppress it in every other State as well. And if they did not stop it everywhere, the market would prove the theory somewhere.”

dojufitz said...

Eurogoldexchange on youtube talking about Gold and Silver

Unknown said...

@David, by now Im sure you've heard the news. Even a broken clock is right twice a day.

@Andrew, "Then what?" Then nothing, a new currency will be ushered in which will perform from a quasi-gold standard and we reset from there. There is no "enlightenment", gold will never be free and, sorry to oblige, but neither will any of you. Get used to it, free gold ain't happeneing today or never. There are tons of arrows in the masters quiver to never allow a truly free anything, gold included.

@Ciro, Good question

Unknown said...
This comment has been removed by the author.
costata said...


you wrote:
"Costata, After insulting Desperado, it would be nice if you responded to the excellent rebuttal of his.

Is insulting Desperado mandatory or can I just I respond to his rebuttal?

David said...


"Even a broken clock is right twice a day."

How ironic that you posted this twice...

Unknown said...

@Costata, English is my 5th language so please pardon my lame attempt to be coherent. What I meant was, since you insulted Desperado with some lame rhetoric why don't you adress his Mexican Silveretes post?

@David, I have corrected the irony, does it help?.

costata said...


"why don't you adress his Mexican Silveretes post?

Which post are you referring to?

(BTW the opportunity to insult Desperado is one of the biggest drawcards for this blog. My estimate is that it accounts for at least 50% of the total traffic.)

Hi Desperado,

I wasn't suggesting that Dubai will lead on price discovery. I think many people are thrilled to be able to get gold at prices near Comex spot prices.

The points I was trying to make (clumsily) were:

1. Taxation of physical gold leads to regulatory and jurisdictional arbitrage.

2. There is no "official" price of gold in the private market in Dubai. All transactions are negotiated.

I might add that according to my acquaintance the volumes they are trading are huge. Suitcases of cash huge.

dojufitz said...

Dubai Gold shop.....!!!

come to papa...

costata said...


I think I understand your perspective. One of the points Martin Armstrong is trying to make is that attempting to manipulate your currency is a waste of time. The huge Forex market will eventually overwhelm you.

We have to use stats such as GDP but if you look into its composition it is a poor indicator of productive economic activity. As Professor Michael Hudson points out banking transactions are counted in these figures but they are largely extractive rather than additive, more like an extra tax on the productive economy.

The government also counts its own expenditure in the GDP figures. Effectively this spending is double counted in the GDP figure.

Exports can also be a crude indicator of economic well being. Professor Michael Pettis does a great job of explaining how the emphasis on exports and capital investment in China is subsidised by the household sector.

Warren James said...

@Max, You're right, this is about Liberty versus Oppression. The memes which will shred the financial matrix you serve, are already intersecting. It was always to be. Good luck with that.

Anonymous said...

Freegold or a system that has its reflection, may be inevitable when the current economic system fails.

But personally I think that a safe, sound and honest system will be when we return to unlimited gold/silver coinage, that is when we shall truly be free.

Also freegold or system that has its reflection will never happen before the powers that are try to somehow hold up the present system in a last ditch attempt through war, yemen seems to be on the radar next.

David said...

This seriously could be the greatest blog ever. Thanks to everyone for their comments, and especially thanks to FOFOA for making us think!
No matter what language one may speak, weather it's one or five or twelve different ones, gold is a universal language. Gold is the only true form of wealth. If/when one understands this, things will become much clearer....

costata said...

Hi All,

No joking, this could be one of the most important articles that Tyler Durden has ever posted.

Q. Are the US external creditors and issuers of the currencies affected by these policies going to stand for this?

Desperado said...

This is how it might happen.

Other events would be happening around the world too. For example, as the UBS crisis unfolded, the Swiss would make a run on gold, and retail gold outlets would run out of stock. Germany would soon follow as all the Swiss neighbors would also be in severe difficulty. You see, Switzerland would not be the only country in dire straights, and as such a small country they would look for support within the neighboring countries. But the flight from Francs would seek another avenue, and SNB gold sales would be a logical source.

The SNB would announce the reminting of the Gold Helvetias' and Vreneli's in an initial issue of 50 tons at a floating price to be announced at a later date. Sales would only be in small quantities to Swiss citizens. The Cantonal banks would demand to be the primary source for these sales, to the outrage of the other banks. Meanwhile, at the national level the Swiss government would look south to the PIGS who would in the process of being forced to drop out of the Euro due to the demands of the socialist welfare state. When Switzerland, with her 1200 tons, presents a plan to reform the Latin Montetary Union, and for all members to float their new currencies against gold at a tranparent rate, it is instantly siezed upon by the people. Since these gold coins been standardized accross the enire LMU and were widely held and easily recognizable, there was already the foundations of a multinational LMU gold market with settlement in Geneva.

"One of the lesser known consequences of the First World War was the official collapse of the Latin Monetary Union (LMU). By a convention dated 23 December 1865,[1] France, Belgium, Italy, and Switzerland formed the Latin Monetary Union and agreed to change their national currencies to a standard of 4.5 grams of silver or 0.290322 gram of gold (a ratio of 15.5 to 1) and make them freely interchangeable. The agreement came into force on 1 August 1866.[2] The four nations were joined by Spain and Greece in 1868, and Romania, Bulgaria, Venezuela, Serbia, San Marino and the Papal States in 1889. In 1904, the Danish West Indies were also placed on this standard but did not join the Union itself. When Albania emerged from the Ottoman Empire as an independent nation in 1912, coins of the Latin Monetary Union from France, Italy, Greece, and Austria-Hungary began to circulate in place of the Ottoman Lira. Albania did not however mint its own coins, or issue its own paper money until it adopted an independent monetary system in 1925."


Desperado said...

... continued

As trade and GDP slows down rapidly through the summer, the PIGS are forced to exit the Euro completely and the Nord Euro is created. The Neuro formation brings to a crisis the issue of gold custody. While the PIGS are demanding return of their gold from Brussels, the Germans are demanding the return of their gold from the US. The price of gold in most currencies doubles in a month.

All the new EMU members promise to mint these standardized gold pieces and start selling them in September 2011. At first, the hint of gold exchangeability privides a boost to the exchange rates of the Drachma, the Lira, the Peseta and the Real. But as the custody battles intensify Portugal finally has to admit that she has insufficient gold to perform the promised reminting of 10 tons of gold. Then the Greek gas stations run dry and the countries only refiner shuts down. The Greek government announces that it will pay gold for Saudi oil and the oil starts flowing. In July the Saudis anounce that they have discovered tungsten bars amoung the gold received from the Greeks and the oil is shut off again.

This announcement causes an immediate spike in gold prices and the shutdown of the LBMA by military police as the price of gold spikes to $5000. Within hours the Comex is also shut down before it even opens. GLD is down 20% in the premarket, and trading is halted after a 40% drop in the first minute of trading, then trading on the NYSE and other markets is halted as they register drops of more that 25% in less than an hour after open. Obama comes on TV and tries to calm the country while saying "See, you never should have given the Republicans the keys back!".

costata said...
This comment has been removed by the author.
Bright aurum said...

FOFOA, others thank you for your thoughts.
Here are mine (and I am sorry that my English is not up to the high standard set by ANOTHER, FOA, FOFOA and others).
Gold and Silver proponents rejoice, your long waiting will be vindicated! And yes, it is gold and silver (other PM included for what they are - PRECIOUS) .“This speaks to a much higher monetary demand for gold than for silver, because much more gold is held tightly as a wealth reserve by the really big money, including Central Banks. - See FOFOA/FOA @ – Is this true anymore or should it be true for all of us sake?
Here are some expectations of mine.
1. Gold will be CORNERED after freegold happens.
a. the flow of “new”gold will still be cornered by fossil fuel exporters as today - see ANOTHER/FOA
b. the stock of gold will be cornered (absent Fekete`s real bills clearing system) by the commodities banks – copperbanks; tinbanks; rhodiumbanks, wheatbanks at al. (for the paper and bullion(?) banks will be long extinct) as a collateral in exchange for resources needed in production. This will be the next big boys` play – their share (in the form of interest on commodities) of the “real world” so to speak but only after –>
c. Governments impose strict regulation on gold circulation in order to secure that all important flow of oil (to prevent society from imploding). Especially as it is in my case, when the country cannot supply directly the oil exporting countries (the monopoly of supplying food for the Arabs will be hotly contended issue – it may well be reserved for the US and its big nuclear guns) – see Miked. A self defeating strategy I would agree but one of many none the less. It might prevent the freegold system from self organizing fast enough and so comes the case for silver….


Bright aurum said...

…for silver to take its place as a monetary metal.
2. Silver will be UNLEASHED in a kind of a FREEgoldandsilver.
a. If given enough time (in a strictly regulated world where gold will be used as a collateral for obtaining resources; a guarantee of trade balance in a national/international clearing system) silver may assume its role as a monetary metal and organize relative value system around itself just fast enough to create positive feedback loops within the local community. (Using silver locally and gold for longer distances was a feature well explained by FOFOA in previous posts).
b. Silver is not a giants` play (it was tossed long ago from their small coins jar) and as such it is more of a rebellious metal that can create low entropy environment for the little guy too (a way to escape servitude to the government and its lackeys) - see Shelby Moore. I am a proponent of peak oil theory and probably FOFOA and I will agree to disagree on this one but I digress.
c. The silver:gold ration being 5:1 or 500:1 is unimportant as long as trust and floating interchangeability is established. And if using, even possessing gold might put you to jail (and yes FOFOA I have read your articles on that issue – it is the end of 2010 and we still do not have freegold so my worries are it might have been a premeditated postponement in order to keep the low entropy world for the elite class and their stooges only. Peak oil/resources again, I cannot help it. And in doing so – high entropy for the ordinary, almost useless overpopulation that must “in their elitist thoughts” stop exporting entropy to the biosphere = no consumption for the worthless f…).


Bright aurum said...

f. What is money? Alan Greenspan couldn`t answer that question. For me it is the ability to liquefy (into a medium of exchange/media of exchange) one`s assets, labour, trustworthiness, special rights etc. And I don`t care what the giants might think that medium/ a of exchange should be, because this depression (just like the previous one) should reset everybody`s position in this world I think, clearing much of the existing wealth disparity by means of settling the social scores in due process. So, may be, it is the giants that should worry what the medium or media (e.g. floating comparative ratios of the resources between the commodity banks) of exchange should be. This is the “crucifixion on golden cross” story told anew. It is a plea for redemption from eternal debt slavery through means of general acknowledgement of such a medium of exchange that expands and contracts with the economy – silver and other PM (see the writings of ORO somewhere around here! Lean years tend to “eat up” PM stock (save gold), whereas fat years increase it as a byproduct of the base metals` production along with the propensity to consume energy.


You may try to follow the giants, or act according to the perception of doing it. Still the jury is out there and the verdict may well be against the giants and their predilection for gold.


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