Saturday, May 7, 2011

Costata's Silver Open Forum


Listen up all you brave silver warriors. Uncle Costata has a story to tell you. In our first-ever guest post written exclusively for this blog, Costata lays it all out in stunning detail. And he invites you all to hit him back with your very best shot. Enjoy! -FOFOA
Smiley

Has the silver market been cornered.... AGAIN?
by Costata

This open forum has one main purpose. To place a narrative before you, a story of a market cornered, to discuss, dissect and critique. If you read on you will see that I’m not without competition in the weaving of stories about silver and the silver market.

All works of fiction require “a willing suspension of disbelief”. As Samuel Taylor Coleridge suggested, if a writer could inject "human interest and a semblance of truth" into a tall tale, the reader would suspend their skepticism concerning the implausibility of the story.

So, in order to make my narrative worthy of your indulgence I have to present a sound case that it is possible. Otherwise why would anyone “willingly suspend disbelief”? At the same time I must cast doubt on the tales of the other storytellers. You see, my story is based on a view of the silver market that is diametrically opposed to theirs. To suspend disbelief in my story requires that you disbelieve theirs entirely.

But before we proceed, I want to make something crystal clear. This is a story about a corner of the flow of silver, not the aboveground stock.

The comments are open and un-moderated. All are welcome to discuss this story and, if you wish to do so, the other storytellers offerings.

What is a corner?

I have made a few changes to the definition offered by Wikipedia in order to make it more directly applicable to physical silver. You can see their original wording here.

To “corner the market” is to control enough of a particular commodity to allow the price to be manipulated…..The corner operator hopes to gain control of enough of the flow of the commodity to be able to set the price for it.

If you are looking to corner the flow in a market one of the risks that needs to be evaluated is the possibility that any existing stockpiles could be mobilized against you. Obviously it would be very helpful if any stock was highly immobile. More on this below.

A quick review of the history of attempted market corners offers two lessons. Most attempts at a corner fail and those that were successful lasted for a short period of time. Let’s take a brief look at a recent, reportedly successful commodity market corner. Again from Wikipedia (with my edit in bold):

On July 17, 2010, Armajaro purchased 240,100 tonnes of cocoa. The buyout caused cocoa prices to rise to their highest level since 1977. The purchase was valued at £658 million and accounted for 7 per cent of annual global cocoa production. The transaction, the largest single cocoa trade in 14 years, was carried out by Armajaro Holdings, a hedge fund co-founded by Mr Anthony Ward…… This example demonstrates that 7 per cent of a perishable good is enough to allow profit taking via cornering a market provided demand is inelastic and the need for the commodity is time sensitive.

Obviously this hedgie with the sweet tooth was targeting industrial cocoa users to deliver his profit either directly or indirectly (from other speculators). Presumably the industrial users could not pull their bids and wait him out. They had to accept higher prices.

This too is a story about a corner of a physical commodity. "Paper silver" plays a part in the price manipulation strategy and in booking profits, but the corner itself is in the physical metal.

The Hunt Brothers

Let’s stroll down memory lane and revisit the Hunt brothers' silver market corner. I won’t recount that fascinating tale just now but you can read about it here.

Instead I want to focus on how it ended for the Hunts. So let’s ask someone who was there, an expert trader, the one and only Jim Sinclair. (My emphasis)

(Posted: Jan 16 2011 at jsmineset.com)
"The Comex board of directors unilaterally declared their written silver contract null and void. That is exactly what occurred when the Comex went to "sellers only" on Silver at a $53 bid, offered at $55 (Yes, that was the floor spread). With no transactions accepted that were buyers and sellers orders only, it left the Comex members to make the bids. Silver simply collapsed and platinum started its $1000 daily limit moves on the downside. It was that which collapsed gold…

Position limits are a joke compared to "sellers only," meaning nothing to any commodity traded worldwide. All position limits will do is reduce the volume on US exchanges. It is so easy to get around that with non-US subsidiaries. The international non-US exchanges will celebrate this development.


Ouch! The rules are already on the CFTC books that empower them to protect the Comex members, and the exchange itself, from any would-be manipulator let alone someone operating a full blown corner. All they would need is the will to use them.

(Incidentally, many people seem to forget that Comex is not a major physical silver exchange. It’s a paper price discovery mechanism that handles less than 5 per cent of the physical silver traded annually.)

In this narrative the Comex paper silver contracts are one of the “legs” in the strategy to manipulate prices and book profits. The LBMA is also an important part of this story in both a paper and physical silver context. More on the LBMA below.

Back to the Hunts. So, the moral of the Hunts’ travails is that if you are going to include the Comex in your plans to corner a market you had better make sure the regulators aren’t going to intervene.

Regulatory capture?

Is it possible that regulators in some markets could be under the thumb of the operators they are supposed to regulate? While you ponder this question, a few links to pass the time.

>> Ex-Advisor To GS’ Charitable Giving Unit To Direct TARP Funds
>> Congress Shares Secret With America, Goldman At Fault In GFC
>> JP Morgan Finances Jefferson County Into A Sewer
>> Wachovia Joins Mile High Club
>> Bank Of America Does Laundry On Mexican Housekeeper’s Day Off
>> Morgan Stanley Stores Silver - In Parallel Universe
>> Goldman Sub-Primate
>> Abacus Adds Up Losses, For Some
>> New Volcker Rule, Don’t Allow Yourself To Be Used As Stage Prop
>> Bear Stearns Wishes It Had Made Bigger Campaign Donations
>> 50 US AGs Prepare To Robo-sign Settlement Agreement
>> MERS Reduces Banks’ Costs, Economizes On Truth Too Judge Finds
>> Bernie Madoff Goes To Jail, Wall Street Doesn’t
>> AIG Begins To Resemble Insurance Company Again
>> ENRON Auditors To Spend More Time With Family
>> Ratings Agencies’ Verdict: “Pirates Of The Caribbean” AAA
>> Lehman Brothers Fulds Despite Repo 105
>> JP Morgan Asks “Bernie Who?”
>> JP Morgan Visits Milan, Milan Wishes It Hadn’t
>> Bush, Clinton, Bush Deny ’Revolving Door’ In Washington Jobs
>> Obama Promises Change – Teleprompter Fired For Lying

The Silver Market – Stock and Flow

When I offered a definition of a corner I mentioned that “it would be very helpful if the stock was highly immobile”. If the silver stock is immobile all the aspiring operator of the corner has to worry about is the flow of physical silver.

There is heated argument about the correct estimate for the total amount of aboveground silver. Bob Moriarty of 321gold.com weighs in here with his estimates which are similar to the conclusions of this analyst. Others argue these estimates are way too high. You will have to do your own investigation in order to decide whom to believe. As a quick 'n dirty tip, if they cannot show you their methodology, look elsewhere for information.

From my research it seems to be a safe bet that the number is in the billions of ounces when you include silverware, old silver coins, jewelry, bullion coins, small bars and ETFs. In other words, more than enough to overwhelm a corner if it flowed freely. However, most of the owners of the silver stock either hold it for its utility (use value) or they are “buy and hold” investors.

Will this silver stock flow? I hope we can agree that the answer is ‘No’ unless the price is high enough to overcome sentimental attachment or the individual owners of that silver experience a sharp decline in their income and/or standard of living. So for the purpose of this story we are assuming the bulk of the aboveground silver stock is not mobile at the present time. No immediate threat to a corner operator.

This wrap up of the World Silver Survey by Mineweb says: “Last year world silver fabrication demand grew 12.8% to 878.8 million ounces…”. According to Eric Sprott, in 2010 the total supply of mined and scrap silver amounted to 951 million ounces. We’ll take Sprott’s figure as the size of the flow that is central to this story of a market cornered.

In passing I would also like to point out that when analysts talk of “consumption” of silver they should mean “total industrial demand minus recycling”. This silver is consumed insofar as it is not financially viable to reclaim it (at present). Other holders of silver variously hoard, wear or utilize it in some way but it is not “consumed” and remains part of the aboveground stock. While the stock remains immobile, this non-consumption demand also competes for the flow with the consumers of silver – the industrial silver users.

Another issue I hope we can agree on is that silver, like a host of other commodities, has been and remains in a commodities bull market. The primary trend since 2002/2003 has been upward. Within that upward trend there has been lots of price volatility and potential profits for a savvy trader on both the up and down price movements. A corner operator could have dramatically increased their profits by accentuating the moves in both directions. The central theme of this narrative is market manipulation, not price suppression.

Silver Price Suppression

The belief in a scheme to suppress the price of silver is pervasive among silver bugs. If suppressing the price of silver was the sole objective of a silver market manipulator then my narrative collapses. (You will see why shortly.) So before we proceed further a few brief remarks to the “suppression” camp.

Analysts such as Ted Butler have been sounding the suppression klaxon since 1989 but I ask: Why look for a complicated explanation when supply and demand offers a simple, perfectly adequate explanation?

Throughout the period, such sell-offs that did occur, as well as announcements of planned sell-offs, caused immediate declines in the price of silver. Indeed, the Wall Street Journal reported in September 1976 that "[w]hen the US government makes noises about selling silver from the federal stockpile, futures traders start unloading futures contracts in speculation that such a sale would depress prices.”

Silver was a natural short play in the 70s, 80s and 90s. There were, collectively, huge amounts of silver overhanging the market in the form of old coins, national reserves, public and private stockpiles. That silver stock was mobile. The low price of silver over many decades had also made primary silver mines uneconomic. The silver that did come from the miners was mainly a by-product of their pursuit of other ores. Hence the silver was extracted and sold with little regard to the price of silver. All in all, a short seller’s dream come true.

I would argue that 2002 was the watershed year for silver, the year when the US Defense National Stockpile was nearing depletion as a result of the Silver Eagle coin program. That opened the way in 2003 for silver to join the long cycle commodity uptrend along with other industrial metals, agricultural commodities and so on. This in turn created the opportunity for a well-resourced trader to safely play either side (long/short) of the silver market without fear of a sudden influx of metal.

In this story, the end of the supply overhang also opened the way for an attempt to corner the flow of physical silver as the remaining stock was becoming increasingly immobile while demand from industrial users was growing strongly.

Ted Butler (and, to be fair, many others) allege massive naked shorting on the silver Comex. Ted lays out his case here. From what I have read it appears that in Ted’s narrative this massive naked short position is held, primarily, by JP Morgan and perhaps HSBC. This is how Ted’s tale ends—the Comex shorts will be chased over the “cliff” by the longs in a massive short covering squeeze - just like these bison:

“Head-Smashed-In Buffalo Jump bears witness to a custom practiced by native people of the North American plains for nearly 6000 years. Thanks to their excellent understanding of topography and of bison behavior, they killed bison by chasing them over a precipice and subsequently carving up the carcasses in the camp below.”

I want to be upfront with you. I think Ted and his cohort may prove to be dead wrong, finding themselves in a role reversal falling head-first with the bison and anyone else beguiled by their story. We will return to Ted’s story a little later when we consider the lack of transparency in the silver market and why the circumstantial evidence suggests that Ted and his cohort are dead wrong.

Let’s deal with another allegation which has been floating around, that JP Morgan inherited a huge naked short position in silver with their Bear Stearns acquisition. I’m not going to dwell on this for long. The fact that JPM was indemnified by the Fed on unknown terms for losses on this acquisition makes this a non-issue in my opinion. If there are losses I think we can safely assume that they will be picked up by Wall Street’s best little buddy, the American taxpayer.

The Central Characters and the “Supporting” Cast

The main characters in this story are the Bullion Banks, Miners, ETFs, Refiners, Mints, Retail Investors and the Industrial Silver Users. As this narrative unfolds it should be quite obvious that the only silver market operators with the capacity to make this story come to life are the international bullion banks. All that would be required of the other market participants is that they behave predictably. Their co-operation would not be needed by a manipulator. Let’s face it, the less people “in the know” the better.

(Incidentally if any reader needs an introduction to the precious metal fabrication and supply chain, Bron Suchecki of the Perth Mint has provided an excellent series of posts you can access here - top left of screen.)

The jewelry makers are peripheral to our story except insofar as the rising gold price has resulted in the increased substitution of silver for gold in the fashion jewelry business. So this segment of the market has added to the demand pressure on the flow of silver as well. In my opinion the gold jewelry market is much smaller than the official figures suggest. As Jim Sinclair has often pointed out gold jewelry in many Eastern countries is sold by weight and purity – it’s wearable ‘bullion’, not simply a fashion statement.

Miners have seen the price of silver rise to over US$40.00 per ounce while the Mineweb report (linked above) indicates that cash costs are currently $5.27 per ounce. Others estimate their average cost, by the time the silver is on its way to the refiner, at up to $15.00 per ounce. (The cost estimates put out by miners are notoriously unreliable. There are plenty of financial incentives for a mining company to understate their costs. Murray Pollitt discusses this issue here.)

The predictable behaviour a corner operator would expect from the miners is a desire to lock in some of their profits on silver through hedging. If a corner operator also advised the miners, provided finance and banking services to them and facilitated their hedging strategies it would give the operator a huge ‘edge’, a vastly superior information feed compared to other players in the silver market and more opportunity to influence the directional flow of silver.

A savvy corner operator might also see “the writing on the wall” in these high profit margins of the silver miners. A pointer to the “use by” date for their physical silver corner. Over the last few years silver ore bodies and old workings that were not economic for half a century have become financially viable.

Refiners produce a range of products in addition to the standard larger bar sizes. They produce flake, shot etc… to meet the specific needs of their fastest growing, and largest, customers - the industrial silver users. (Make no mistake, the industrial users are the most important customers in this market.) The challenge of matching their output to the demands of customers, with quite different needs, makes the refiners a potential choke point (a supply bottleneck) that a well-connected corner operator could exploit opportunistically.

The retail investor demand for silver has also been growing strongly. It has been reported that last year this segment accounted for around 10 per cent of total fabrication demand. Physical silver investors are price sensitive but many tend to just accumulate over time, dollar cost averaging their original stash. Many of these investors are “buy and hold” folks. From a corner operator’s perspective retail silver investors help to immobilize the stock, compete for the flow and they are somewhat predictable.

Institutional investment in silver generally flows into the ETFs, ETPs and mining shares for a simple reason. Many of these investors are prevented from holding physical metal by their investment mandates. Even if they wanted to they could not hold physical. I concede that mandates, and the laws that give rise to them, can be amended. (In order not to get bogged down in a “will too, will not” argument I hope others will concede that I have described the status quo.) Overwhelmingly pension funds and their ilk tend to the long side of markets they invest in. You know what I am about to say don’t you? They are predictable.

You are probably getting sick of the word ‘predictable’ by now but just try to imagine that you are a character in this story too. Imagine for a moment that it’s real. Behaving predictably might not be such a great idea if you are attempting to trade or do business in a cornered market.

Ed Harbuz CEO of the Perth Mint explains here why running a Mint is such a challenging, customer-driven business. Despite unsubstantiated allegations to the contrary the large Mints, by their actions, can be seen to be honest, conservative, generally prudent and not inclined to speculate.

The Mints' demand for silver is ultimately driven by retail and wholesale customers. Mints tend to have a “feast or famine” sales pattern that makes it difficult to forward plan capital expenditure programs. They certainly cannot expand their overall production capacity quickly. Hence they are also highly predictable and another potential choke point that could be exploited in a corner.

Industrial silver users are the single biggest market for silver, purchasing approximately half of the annual flow of silver. As mentioned earlier, this large market is growing strongly. A corner operator can rely on industrial users for profits when prices are rising. Here’s why:

“An important factor to understand in the case of silver is that demand from the industrial sector tends to be quite inelastic. This means that buyers have few options and have to pay at prevailing prices.”

In this story the industrial users would be the main target (victim?) of a corner operator.

When production bottlenecks occur at the Mints and/or the Refiners a corner operator could take advantage of the ignorance of most retail investors and play on the widespread belief that there is a shortage of silver. (I’ll return to this topic later.) The corner operator could also rely on many (all?) of the dealers to talk up any rumour or urban myth that sells silver. With premiums like these the dealers have every incentive to support the hype, hope and hysteria that often surrounds the retail silver investment market these days.

The Exchange Traded Funds (ETFs) are a segment of the market we should pay close attention to in our unfolding corner narrative. The ETFs that offer redemption in physical silver tend to have a minimum redemption quantity that is much higher than most small investors can easily afford. In most cases the shares trade freely but the metal in many of these ETFs sits still. Consequently these ETFs add to the stock while increasing its tendency toward immobility and they compete for the flow of silver. As Kitco reports here ETFs have become a huge part of the silver market (my emphasis).

The Web site for SLV shows that as of May 1, 2006, the amount of silver in the trust was a modest 653.17 metric tons. Flash forward to Thursday, and the Web site showed total holdings stood at 11,053.2 metric tons, or 355.4 million ounces, with total assets listed at $17.3 billion.

Through April 21, CPM Group put global silver holdings in 13 precious-metals ETFs around 605 million ounces…….For 2010, additions to global ETF holdings were 123 million ounces, Rannestad reported. In 2009, ETF holdings rose by 155 million ounces.

The ETF additions in 2010 represented 12.4% of total global supply of silver of 987 million ounce (including not only mine output but other sources such as recycling), Rannestad reported. Much silver is consumed by industrial uses. Excluding all fabrication demand, the amount of available silver was 142 million, meaning the ETF demand accounted for some six-sevenths of this.


SLV stands out from the other ETFs in three enormously important ways. Firstly, its structure and prospectus allow it to impact on both the physical and paper silver markets in ways that most other ETFs simply cannot. It’s also vastly larger than any other silver ETF or ETP. Lastly the SLV silver is literally both a stock and a flow at the will of the Authorized Participants. To illustrate, you may have heard Saudi Arabia referred to as the “swing producer” in the oil market. The Saudis are said to have the spare capacity to keep supply and demand in balance. SLV can fill that same role in the market for physical silver. In this story it does precisely that, with a slight twist. It is used pro-cyclically by a corner operator to amplify volatility in both directions, up and down.

Okay, I know that some observers confidently claim the SLV is just a paper façade with no actual physical silver. No amount of audits or bar lists will ever convince some of you otherwise. So be it. For those readers with an open mind, I invite you to consider the possibility that they have the physical silver they claim. For the purpose of this story it doesn’t matter if that physical silver is encumbered with multiple claims nor if SLV holds some paper silver for periods of time. In a corner the crucial issue would be who has the strongest claim to that SLV silver stock and the most influence and control over the flow of physical silver into and out of SLV. The industrial silver users obviously had some concerns about SLV’s potential clout. By the end of this narrative they might wish it had been drowned at birth.

Prior to its launch, the industrial silver consumers lobbied hard to try and convince the SEC to deny approval for this new physical-silver ETF. The Silver Users Association, whose members process 80% of all the silver used in the US, wrote a letter to the SEC in February 2006. It warned the SUA ‘opposes the creation of a silver ETF because of the concerns that doing so will require the holding of physical silver in allocated accounts, thus removing large amounts of silver from the market.’

And indeed the industrial silver consumers’ fears have come to pass. In mid-December 2010, SLV’s holdings hit an all-time high of 352.5m ounces of silver bullion! To put this into perspective, global silver production in 2009 ran about 700m ounces. American stock investors, by buying shares in SLV, have already absorbed the equivalent of half a year’s worth of all the silver mined in the world.
(My emphasis)

As I said earlier SLV is different to other ETFs. Below FOFOA replies to a question I posed in February when we were discussing the idea of a silver open forum.

”Very interesting. Considering that ‘demand’ exerts no pressure on an ETF to grow in size, one has to wonder. Physical contributions are the ‘will’ of an owner or purchaser of physical silver to encase it in SLV in exchange for easily tradable shares. The price-tracking function is simply a matter of market arbitrage. But of course this fact is not understood by the public. Very interesting.”

The custodians for SLV are HSBC and JP Morgan. Authorized Participants create and redeem baskets of SLV shares. You can find a list of them here (on page 27).

Before we end this examination of ETFs, and SLV in particular, I would like to leave you with a question to ponder. Has the price of silver become more volatile since SLV and the other ETFs started to gain traction in the silver market?

Martin Armstrong describes the typical behaviour of commodities as they move through an uptrend in the extract about wheat from this essay.

"In other words, we are about to make another thrust upward into a new trading band where the $6-7 level should become the floor. This is how commodities ratchet themselves higher that some call inflation. What is actually taking place, there is a very broad trading range that becomes the normal volatile swing between the peaks and the lows. The commodity will bounce off the floor and ceiling of this range until it starts to finally expand the trading ranges." (My emphasis)

Now let’s examine the Bullion Banks as we look into a would-be corner operator’s three most lethal weapons (aside from unlimited ‘free’ money) – opacity, reach and information.

Opacity, Reach and Market Intelligence

Since the repeal of the Glass Steagall Act some international banks have become monoliths in banking, broking, dealing, commodity trading, derivatives, research, private exchanges and OTC markets. Even a vigilant, well-resourced regulator would struggle to prevent “regulatory arbitrage” by banks, traders and speculators operating in multiple exchanges and markets in a number of legal jurisdictions. And vigilant, well-resourced regulators appear to be a little thin on the ground these days. The global activities of these banks are opaque to regulators.

The bullion banks have the very best ‘intel’ on the silver market. They have connections into every nook and cranny of this market from miners to Mints to margin traders. They also have the opportunity to make use of their own unallocated pooled silver accounts through fractional reserving. You can read about how the bullion banks are able to leverage these pools here.

As we mentioned earlier the Comex is basically a paper silver market. The leverage in this market has been widely discussed since the revelations early in 2010 by the team at GATA and CMP group’s Jeffrey Christian. (It is less widely known that ANOTHER revealed, thirteen years earlier, that the leverage in the LBMA was routinely 100:1.)

Let’s clear up another popular misconception. This one concerns the LBMA. As Bron Suchecki explains here, the LBMA is not an exchange. It is an association. Transactions among LBMA members and their clients are private. Bron also reminds everyone that the LME does not trade physical silver. For anyone interested here is a list of the Market Making members of the LBMA.

Some silver market analysts focus on Comex reports and the BIS bank participation report in order to draw conclusions about the positions of the bullion banks, and others, in the silver market. Ed Steer of Casey Research writes:

"The third graph is the number of US and non-US banks...and you can see the point that the CFTC began to withhold the number of banks so that they could protect JPMorgan. They started withholding this data when Ted Butler discovered the Bank Participation Report back in 2008...and within months, the CFTC pulled the data………… and the last graph is just the two US banks on their own....and their respective long positions [non-existent] and their monstrous short positions. It's easy to see that JPM runs the silver price show." (My emphasis)

Let’s assume that the information Ted Butler pounced on was as valuable as Ed Steer and Ted Butler seem to think. That line in Ed’s report I highlighted in bold prompts me to ask: What does it tell you about the rest of the public data feed if useful data you unearth is “pulled”?

The allegation that JP Morgan, HSBC etc have massive naked short positions in the silver market rests on a range of published data from regulators and bankers but primarily on the Comex reports. As mentioned earlier the silver Comex is a market that accounts for only around 5 per cent of the physical silver traded annually.

One of the tactics recommended by some analysts to break the Comex shorts is for all of the longs to stand for delivery. So readers may be interested in this explanation of trading between longs and shorts on the Comex from Metal Augmentors’ ‘silverax’. Here are a couple of snippets:

“…. the longs cannot force delivery on the shorts, but the shorts can force delivery on the longs. Yes, most everybody has it bass ackwards!”

“…..the delivery timing is almost entirely dependent on the short. It is the short that announces an intention (notice) to deliver and it is the long that is obligated to accept delivery. Not the other way around.”


If any reader, with an intimate understanding of the Comex, has the time to read the ‘silverax’ essay and post a comment here I’m sure we would all appreciate an explanation of how longs standing for delivery could force the shorts to deliver. Assuming, of course, if anyone did try to force the shorts into a physical default that the Comex would not intervene on behalf of their most powerful members - like they did with the Hunts.

The volume of physical silver, and other commodities, traded on the public exchanges is dwarfed by the trade conducted in wholesale transactions, private deals with banks (eg. members of the LBMA), through OTC markets and other parts of the shadow banking system. These alternative markets are both huge and totally opaque to outsiders. As this analyst notes:

"....the big players in banking and finance are using the OTC system and have a turnover 12 times that of the “public” markets..." (My emphasis)

It appears that the volume in the OTC markets and shadow banking “dark pools” comes at the expense of both liquidity and stability in the public exchanges. As a result the price discovery function of the public exchanges may be seriously compromised. At the same time the off-exchange trading must reference, at least to some degree, the prices "discovered" on the public exchanges. What a fricken mess! But an ideal environment for market manipulation.

David Galland of Casey Research had an interesting discussion with Dr. Andrew Bogan (here) on the subject of short selling in ETFs. Apparently some of the stock ETFs have short selling levels up to 1,000% (compared to, say, IBM stock at around 1.4% short). In order to put their discussion in context, Andrew Bogan explains how ETF shares are created:

Shares can be created at the end of any day if someone delivers a basket of underlying stocks to the ETF through an authorized participant. And shares that are not wanted in the marketplace can be redeemed in kind for the underlying stocks – or in some cases cash. That's all been carefully structured and works smoothly. The issue is what happens when short-selling dominates the trading. (My emphasis)

This is the part of the interview I think we should pay close attention to, where they discuss GLD. Keep SLV in mind as you read this. Andrew Bogan again (my emphasis):

The tracking of an ETF's price with the fund's NAV, which historically has been extremely close, is totally dependent on an arbitrage mechanism. The arbitrager can make money by continuously pushing the price of the ETF toward its NAV.

The short position in GLD isn't nearly as large as it is for some equity funds – but we have looked at GLD, and it has the same structural issues, just to a lesser extent, at least for now. The short interest in GLD has fluctuated around 20 million shares. Now, GLD is a pretty big fund. With 20 million shares short, it is roughly 95% fractionally reserved…… But GLD does not have to stay at 95% fractionally reserved.

DG: Could they just say, "From here on, we're not issuing any more shares"? Would that stop the short-selling?

AB: Not necessarily, because, you know, the short-sellers are selling – in fact, it would probably exacerbate the short-selling. So as long as a fund is issuing shares, aggregate buying demand can be satisfied by expanding the fund. If they stop issuing shares, aggregate demand would get satisfied by short-sales of existing shares. So, if anything, closing the issue window should make the problem worse, not better.

…….. The bigger challenge might be if there were an actual redemption wave. If that happened when GLD was already substantially fractionally reserved, then you're back to an 1800s gold bank problem. Fractionally reserved banks can be hit with a run………You know, one of the big risks, by the way, that no one has really discussed much, is if an ETF were to have a big redemption run in panicky market conditions and halted redemptions……. it's quite possible that if redemptions were halted for any length of time, the arbitragers wouldn't be keeping the share price in line with NAV. We already know from the Flash Crash that significant price departures from NAV are quite possible for ETFs.


In his new book Matt Taibbi discusses the spectacular growth of commodity market speculation.

"We know the amount of speculative money in commodities exploded, that between 2003 and 2008 the amount of money in commodities (Ed: derivatives?) overall went from $13 billion to $317 billion, and that because virtually all investment in commodities is long investment, that nearly twenty-five-fold increase necessarily drove oil prices up around the world, putting great gobs of money into the coffers of the SWFs." (My emphasis)

In this recent post Adrian Ash quotes a figure from Barclay's Capital of $412 billion as the level of global investors' holdings of "raw materials" at the end of March this year.

Most of these predictably long funds are up against speculators and the prop trading desks of banks with near-zero cost money and virtually unlimited leverage. Opponents who will play both the long and the short side. To make matters worse, by being in these paper markets in the first place, these long side speculators expand the derivative markets to the point where they can dwarf the actual physical commodities traded. Hence the paper derivatives may be unduly influencing prices in the physical plane. ThyssenKrupp CEO Ekkehard Schulz appeared to think so in this interview with Der Spiegel (my emphasis):

Schulz: (Ed: talking about new entrants into the iron ore market) But we now know of a few major investment banks that are painstakingly preparing to enter the ore market. One of them is JP Morgan. They have been buying up big in this sector.

Later in the interview:

SPIEGEL: Who are they, and how are they preparing?

Schulz: I don't want to mention any names here, but they are banks that were also involved in other big speculative bubbles. They are currently active in our markets, hiring natural resource specialists, buying trading companies and leasing storage facilities at major ports, where they can temporarily warehouse ore for speculative purposes. They see an opportunity to make billions in profits.

SPIEGEL: By driving up prices on the ore market?

Schulz: By disconnecting prices from the real economy and the natural resources from real consumption. This has already happened with nickel. Speculators and banks are already turning over 30 times as much nickel in the markets than is actually consumed in steel processing and other areas. In the process, the price per ton fluctuates between €10,000 and €50,000. Imagine a situation like this in a large-scale natural resource market like that of iron ore. The consequences would be devastating.


Putting all of this together, the presumption that the positions of JP Morgan, HSBC etc can be known from publicly available data is beyond incredible. To suggest that you can know they have a massive naked short position without knowing what other positions they are holding outside of the Comex and how their overall books are structured, is, in a word, absurd.

Before we take a look at how some of the price action in the silver market over the past few years could have been very profitable if a corner was in place it would be remiss of me to sidestep Max Keiser’s “Crash JP Morgan” campaign. Here’s why:

1. From the Max Keiser website (here):

(Note: I changed some of the paragraph breaks to compact this but the words are unchanged. I suggest you read the comments on this post as well. My emphasis in bold.)

Dear Max and Stacy,

My local dealer,, has been running OUT of Silver,, over and over again. Gold is available,,but SILVER is in HOT demand. I cleaned him out this time.. had to go so far as buying up the sterling silver flatware,, but hey,,silver is silver. Had some Kruggerands and Eagles (Au),, sold them and bought Silver. I have NOT liked the way Gold is not climbing up as silver has been doing,, so I finally got OUT of gold.

I didn’t know that I had so much gold,, been sitting on it.. so for me,,it was like buying $9k of silver,, for only $5k out of pocket…and now,, my “metal” will be rising even faster. But I hope I never have to stoop to buying any silver ”tea sets”..as they are just TOO bulky to fit in the under-floor safe. Hahaha… I’d have to SLEDGE HAMMER them into a small ball of ugly junk…but I’m OK with that. Silver is silver. Millionaires already have all the ”tea sets” they want.

Craig.


2. This extract is from an e-mail issued by Bix Weir of The Road To Roota. Sent: 1/3/2011 (My emphasis)

Let me give all you "Newbies" a hint...by the time you finish researching and comparing silver to all the other investments out there you will go ALL IN!

When I say "All In" I mean swapping EVERY other investment alternative for PHYSICAL silver in your pocket. Stocks, bonds, pension plans...everything. This means gold too. This means other silver investments also...ETF's, silver mining stocks, silver certificates... everything.”


3. Museice is a frequent contributor to the comments here at FOFOA blogspot. This is an extract from a comment he posted recently after deciding to roll his physical silver for physical gold.

For any Silverbugs out there (I was one)….. My conclusion: What does the GSR have to do with Freegold? Absolutely nothing! If you understand anything FOFOA has been writing you will bail on silver. Not because it has hit its peak. I don't care how high it goes. You will switch because you are holding the wrong metal. End of story.
(February 18, 2011 8:19 PM)


4. In the video below Michael Maloney of GoldSilver.com responds to that old chestnut “There isn’t enough gold” with “Baloney”. He then goes on to explain why. As I watched this for the first time the question on my mind was: “If gold can do the job on its own why do we need silver?” I had already started to have reservations about the silver we were holding. This video was one of the ‘nudges’ that prompted me to dig a little deeper (well, actually, a lot deeper). It should start playing at the 3:50 mark automatically:



Later I came across a few videos of presentations by Robert Kiyosaki. (I think he wrote a book called “Rich Dad, Thanks To Your Dad” or something like that.) The video quality on this clip is terrible so I am just going to provide you with a link . It is set to start at the 4:20 mark. Kiyosaki is asked if he is adding to his positions. He talks about silver among other things and then goes on to mention who will take his positions off his hands “just before it blows” – the “suckers”. Michael Maloney, one of Kiyosaki’s advisors, is in the background stage left. Who are the suckers? I’m going to suggest a candidate for that role at the end of this post.

And wow, that Bix Weir is certainly confident when he talks to newbies, isn’t he? Quite at odds in his thinking to many of the people who frequent this blog. Some of these folks have been delving into the matters we discuss here since 1997 when ANOTHER was posting his Thoughts. I don’t remember seeing anyone here give such bold advice as Bix about gold, especially not to inexperienced newcomers. So before we look at Max Keiser’s recent exploits, let’s revisit the issue of silver shortages in order to see if Bix Weir and some of the other silver experts may be a tad overconfident about the rarity of silver.

The Silver Shortage

First a few words to explain why I keep linking to Bron Suchecki’s posts and the Perth Mint in this story. Bron has made a huge effort to educate people about the precious metals and their markets over the past few years. The Perth Mint has recently launched its own blog and updated website. They have made a real effort to increase their transparency and to communicate with their customers and the general public. Some other Mints have a mixed record in this area. This report about a recent Congressional Panel makes for interesting reading if you follow the activities of the US Mint.

The Perth Mint is also a unique ‘animal’ in the gold and silver markets. Around 90% of their fabricated product is exported. Roughly half their pooled and allocated customers are outside Australia. They are also an integrated operation having their own refinery. Lastly they refine anywhere from 300 to 400 m/t of gold each year while Australia’s local production is around 250 m/t. They are a big player with excellent ‘intel’ on the silver market both locally and internationally. [Updated per footnote 7]

Back to the shortage issue. All through the recent huge increase in the price of silver the usual suspects were talking about shortages. Well, someone forgot to tell the folks at the Perth Mint. All through the “shortages” they frequently confirmed that there was “no shortage of metal”. You can read their updates on their blog. Production bottlenecks? Sure, but no shortage. In fact they are seeking to expand their market into China.

Who was talking about shortages and tight supplies of silver? Dealers and Bullion banks, apparently. The following quote was attributed to Dave Madge director of sales at the Royal Canadian Mint by Eric King over at the KWN blog:

"We are anticipating it to become even more difficult to secure supplies in the future. This is based on what we are seeing firsthand and what our suppliers are telling us. We work closely with these banks to secure silver and they tell us there is a lot of competition.” (My emphasis)

Alex Stanczyk of the Anglo Far-East Bullion Company mentions these reported comments by Dave Madge here. Here are a couple more links discussing the mythical metal shortages: link, link.

In response to this claimed shortage the Perth Mint is spending millions of dollars expanding its capacity to fabricate silver products. You can read about it here. Recently the Perth Mint did something that should help to convince you that there is no shortage of silver.

For many years the Perth Mint funded their gold and silver inventory through a certificate program backed by unallocated pools. The deal was simple, they got their inventory funded (less capital tied up) and the certificate holders got safe, free storage of their metal. The certificates could be exchanged for fabricated metal or cash. Recently the Perth Mint announced a change to this program which you can read about here and here. If you want to be part of the pooled unallocated silver program in future you will have to pay them storage fees. Let me break this down for the stragglers, they have plenty of silver, perhaps much more than they need and they don’t foresee any shortages in the near future.

Not enough for you? Okay, let’s take a look at recycling. Another frequent claim from the shortage spruikers is that most of the silver which is consumed cannot be reclaimed. It is not economic to recycle most of the products sold that contain minute quantities of silver. This is absolutely true. But never, say never. The viability of recycling is a question of price, proximity and technology PP&T). Let’s take a look at just one product for now - the cell (mobile) phone.

According to this USGS fact sheet (2006) there is a mere 0.35 grams of silver in the cell phone they based their study on. But this cell phone also contains “copper, iron, nickel and zinc” with “even smaller amounts of aluminium, gold, lead, manganese, palladium, platinum and tin”. Cell phones also contain plastics that become increasingly expensive when the price of oil rises.

Lastly, most of the cell phones, and other electronic devices, which make their way into waste streams end up in landfills. In many countries landfill is becoming prohibitively expensive in both financial and environmental terms. These devices are a pollution issue. Schemes proposing to add a deposit or bond to the selling price of new electronic devices, in order to subsidize the cost of recycling them at the end of their life, have been fiercely resisted by industry groups. Thus far the industry groups have prevailed.

Is there likely to be a huge increase in the amount of recycled silver from electronic devices any time soon? I, for one, doubt it but it is an issue of PP&T for several metals and other recyclables in these products, not just silver. So never, say never.

Here’s another potential headwind for the “silver to the moon” guys - the industrial silver users themselves. The manufacturers of the devices which use much of the consumed silver are in cutthroat competitive markets. They have to work hard to remove costs from their products. That includes silver of course. Higher silver prices give them even more incentive to focus on cutting down the silver content or replacing it with a lesser alternative such as copper. FOFOA has an anecdote about one such manufacturer that has already eliminated silver from his process. That said, I will concede that the expanding industrial uses for silver and increasing global demand for products containing silver may fully offset any reductions that the industrial users can make.

Finally don’t forget about the potential for increased supply from the silver miners. As I mentioned earlier “over the last few years silver ore bodies and old workings that were not economic for half a century have become financially viable” at higher silver prices.

Now I know these arguments won't be enough for some of you. Read on, we will touch on this “shortage” issue one more time from an angle that might surprise you.

Max Keiser was one of the earliest, most outspoken critics of the appalling behaviour of the Wall Street banks. I believe Max coined the evocative phrase “financial terrorists” to describe them. He was also one of the first media figures to advocate owning gold bullion to protect your wealth. Kudos to Max for his bravery and willingness to speak out. This aired September 18th, 2008, and the video should automatically start at the 1:44 mark.



Since gold advocacy started to become increasingly fashionable it seems that Max decided he needed a little “brand differentiation” and followed the political dictum If you want to be a leader, find a parade and get in front of it. In an apparent attempt to capitalize on the growth in silver investment, last November Max launched the “Crash JP Morgan” silver campaign. He too argues that JPM has a massive naked short exposure in silver. He claims that they can be brought down through the purchase of physical silver by retail investors.

Nowadays Max is the self-styled leader of a movement calling itself the Silver Liberation Army (SLA). Apparently the expectation is that untold millions of people will each buy some silver and the ensuing supply squeeze will cause JP Morgan catastrophic losses on their supposedly naked short position as the price of silver goes to figures as high as US$500 per ounce. I hope earlier parts of my story have given you serious doubts as to whether anyone can be sure that JPM is even short at all (naked or otherwise).

Max and his SLA give us an ideal opportunity to conduct an extremely important thought experiment and to revisit the notion of a shortage of silver (one last time). This experiment is extremely important if you are holding silver because the outcome may force you to conclude, like Museice, that you are holding “the wrong metal”.

Now, for reasons best known to themselves, the “pin-up girl” of ‘Colonel’ Keiser’s SLA happens to be Blythe Masters of JP Morgan. As I said from the outset this is a story of manipulation, not suppression. But to please the SLA we’ll make ‘Blythe’ the main character in A Scenario: Profiting From A Silver Market Corner which we will come to shortly.

Position Vacant: Corner Operator – Silver Market

I realize that we have covered a lot of ground already so before we proceed any further I’m going to summarize the key attributes, resources and capabilities that I think we could expect to see in a successful silver corner operator. As a major international bullion bank JP Morgan would certainly tick all the boxes below in terms of their capacity to breathe life into this narrative (or some version of it). But then so would HSBC, I imagine, and some of the other bullion banks, or a combination thereof.

• An information advantage over other silver market participants.

• Control/influence over a vehicle like SLV that can be used to hoard a large quantity of physical silver which can then be used to affect the flow of silver.

• Intimate connections with the silver miners and insights into their finances and hedge books.

• The ability to trade against clients, produce research that encourages investors to take the opposite side of your trades and access to media outlets that are receptive to your “press releases”, research bulletins and expert commentary.

• Sufficient capital to finance the corner.

• Captured regulators.

• The ability to keep other market participants in the dark about your activities, the structure of your book, where and how you are taking profits.

• Intimate knowledge of the choke points (Mints and refiners).

A Scenario: Profiting From A Silver Market Corner

As I promised the SLA, I’m going to make Blythe Masters of JPM the central character in this scenario. (For other readers, where I have used the word ‘Blythe’ please read Blythe Danner or BB trading desk, favoured clients and likeminded BBs.)


After the GFC hit in 2008 the industrial silver users pulled their bids for silver and ran down their inventories. The price of silver collapsed to around $9.00 from its previous high over the $20.00 mark. During this period ‘Blythe’ took profits by shorting the paper silver market into the ground knowing there was no solid floor under silver until the industrial users came back in. ‘Blythe’ began to build a long (that’s l.o.n.g) position in silver as the price bottomed and began to recover.

Some of the savvy traders and speculators came in at the lows because the GSR was way above the median of the last 10 years and they saw a panicky market that they were happy to take a contrarian position in.

Once it became clear that demand from the industrial silver users was reviving, ‘Blythe’ made the final preparations for her next play, a short squeeze in physical silver with the industrial silver users as the target. As we noted above these natural longs had run down their inventories. As sales of their products picked up they had to buy, regardless of price, or their production lines would have ground to a halt.

‘Blythe’ added to the pressure on the flow, and the price, by using SLV [1] and the other levers at her disposal outside the public exchanges to drain physical silver from the market. She sold down her long silver position into the rising demand from the industrial users at increasingly higher prices.

‘Blythe’ knows the refiners are a choke point. When they shifted their production focus to their industrial clients, they cut back on their bar production for the Mints and the wholesale market. This eventually started to cause some delivery delays in London on LBMA good delivery bars. [2]

‘Blythe’ knows that when there’s a surge in demand at the retail level, at some point, the Mints aren’t able to keep up. As silver approached its previous high the retail investors started coming in. Speculators moved in too, cautiously at first, pushing up the paper silver price.

The coin dealers and the silver perma-bulls started beating the drum about impending shortages. Eventually the Mints were struggling to keep up with the surge in demand due to the limitations in their fabrication capacity. As rumours of shortages and delivery delays made the rounds, the demand from the retail silver buyers went into overdrive. [3]

‘Blythe’ squared her books after the long physical play ran its course and she was neutral (neither short nor long). The speculators had started to pile into paper silver. So ‘Blythe’ got ready for her next play – a pump and dump in paper silver.

By this time the refiners had shifted their focus to bars as demand from the industrial users slowed. Wherever possible, the Mints had ramped up production and increased their output. Both of these choke points had begun to open up again.

‘Blythe’ had another ace up her sleeve. She knew the silver miners’ dormant hedging programs were about to come back to life long before the market knew. The miners were making noises to other parts of the JPM empire about hedging at these high prices. [5] Perfect set-up for ‘Blythe’. She piled on the shorts into the run-up to the blow off top in silver while she took the other side of the hedges put on by the miners. (That’s a future long physical position if she decides to hold onto it. It doesn’t bother her either way. She can always offload/offset it with SLV.)

The industrial silver users had begun to pull their bids as well. The traders and speculators, who took advantage of the high GSR, took advantage of the multi-year record lows and rolled some silver for gold. (Not all of it, no way. This game wasn’t over.) The coin dealers started to get nervous as their silver inventories began to build. The small fry were getting nervous about buying at record prices. The Mints ceased to be a choke point. Almost time for the dump.

‘Blythe’ painted the tape at the Comex with ever higher prices on thin volume [5] while she piled on shorts. All ‘Blythe’ needed now was a catalyst to turn the nervousness among the leveraged speculators into fear. ‘Blythe’ didn’t know or care what the catalyst was. Margin hikes, whatever [6]. As soon as sentiment shifts Blythe runs every stop she can. She tries to accentuate every dip until something puts a floor under the price. What, for example? “Who cares,” ‘Blythe’ replies, “I’m a trader."

After the dump ‘Blythe’ is neutral (neither short nor long). She’s just cruising, scalping small profits on the normal trading activity of clients while she looks for her next big opportunity. With this in mind she is watching gold very, very closely right now because she knows something most of us don't ......

What’s next? As a blogger known as London Banker used to say: “Wash, Rinse, Repeat.”

Trading

Some of you have made a lot of money trading gold and silver over the past few years. There are some enormously savvy traders out there. Newcomers who might be tempted by the profits in trading these metals should take a look at the charts and commentary that Nigam Arora provides here. That’s some volatility in those ETFs isn’t it?

So newcomers, for a moment, please pay attention to an old fool who has made every costly mistake you can think of (and some you probably haven’t). Please, do your homework. If you go stumbling around in these markets with your head full of nonsense and misinformation, margined to the eyeballs ‘Blythe’ will, sooner or later, take your head off at the shoulders. These are zero sum games that are being played. In order for ‘Blythe’ to win others must lose. This isn’t just my opinion. It’s a fact, Jack!

As I said earlier there are some savvy traders out there. I’m not one of them. I don’t have the skills or the temperament for it. Yet, I was able to predict the paper silver market’s behaviour and to get the timing just about right by drawing on this insight into rigged markets – “those who can be screwed, will be screwed” (it is a zero sum game after all).

Even if you are not a trader it also helps to read the writing of savvy traders and analysts like (in no particular order) Ben Davies, Tom Szabo, Adam Hamilton, Gene Arensberg, Trader Dan Norcini, Jim Sinclair, Alf Fields, Martin Armstrong and Stewart Thomson. There are others. Some of these fellas have subscription services. If you want to trade or invest under their guidance you can read their archives before you dive in and see the calls they have made. In some cases, over years. (If you want to put forward your own recommendations. the ‘comments’ are wide open.)

Many visitors to this blog have said that at some GSR level they are going to roll their silver into gold. Some of these high ‘rollers’ will be thrilled at the returns they make compared to plodders like me. However, I would like to point out a potential pitfall in attempting to play the GSR that I recently shared with one of my best buddies at the FOFOA blog.

There are serious risk assessment issues that need to be addressed if you are holding physical or paper silver with a view to rolling into physical gold at some desired GSR; in other words, if your aim is to obtain (via a GSR arbitrage) physical gold as your ultimate destination.

Let's walk through the risk assessment together. These days the GSR is generally calculated based on the Comex spot price of paper silver and paper gold.

To the unthinking, the GSR seems to imply some kind of direct exchange. As in 34 ounces of silver for 1 ounce of gold. Obviously this can happen by way of direct barter. But in most cases it is an indirect exchange. You have to transition through currency, selling one metal for an amount of currency and exchanging that currency for the other metal. The fact that you have been able to do this simultaneously and reliably in the past does not guarantee that you will be able to do so in the future.

Many here anticipate the eventual failure of the paper gold market. The paper GSR could be 1:1 if there is a systemic failure in the paper gold markets but that would be a currency ratio not a metal exchange ratio.

In a recent essay Eric Sprott made many interesting observations including this one:

"Now, it’s true that another potential source of supply is the very silver that investors already own......."

I agree, Eric, some of that stock could mobilize. In fact I know that some of it has already joined the flow and more of that stock intends to flow at some point. As Robert Kiyosaki told us in that video I linked earlier, that is his plan.

For those who have physical gold as our ultimate destination, the key risks are obvious. You have to weigh the risk that no dealer will want our physical silver because many other silver holders are trying to exit at the same time. Secondly, you have to weigh the risk that when you want to exchange silver for physical gold there are no sellers of gold at the paper GSR price, or even worse, no sellers at all.

I realize I may have tested your patience and forbearance with this very long post. If you aren’t yet convinced that silver is merely a ‘trade’, or an item for barter in a world gone completely mad, please take a little more time to share a thought experiment with me. You can let me know in the comments if you still feel the same way at the end of it.

A Thought Experiment

As I said earlier Max and his SLA give us an ideal opportunity to conduct a thought experiment. This experiment might lead you to conclude that in holding silver you are holding “the wrong metal” to carry you through a transition into a new monetary and financial system. If anyone wants to argue that the current system isn’t ‘terminal’ please jump right in with your comments and links. There are many ruinists* here of the hyper-inflation school (*h/t Rick Ackerman for that word). As promised we will also revisit, obliquely, the claim that there is a shortage of silver.

I’ve read a lot of the comments by Max Keiser and his SLA supporters about their campaign. Obviously I don’t believe for a moment that they can ‘crash’ JP Morgan by buying silver coins, teapots and small bars (or large bars for that matter). However, I don’t think that invalidates a thought experiment which treats the SLA as a proxy for the silver advocates and JPM as a proxy for the current system.

Many of team SLA, and other vocal advocates for silver, seem to be convinced that it will return to prominence in a new international monetary system. Others simply see it as “real money” returning to its rightful place in the world economy. Some, like Bix Weir, seem to see that rightful place as the pre-eminent “money”, the “people’s money” that will lift the yoke of a corrupt monetary regime from the necks of the citizens. I can see how firmly held beliefs such as theirs lead them to such passionate advocacy for silver.

What I can’t seem to find anywhere is a roadmap, a ‘battle’ plan from any of these silver advocates showing how they get to their ultimate goal. Will silver achieve their aims spontaneously? Is it likely to be unopposed by our proxy for the status quo, JPM? As the saying goes “if you don’t have a plan, plan to lose”. So as a thought experiment I would like to sketch out such a plan in order to test the achievability of the aims of the silver advocates.

Let’s recall that definition of a corner.
To “corner the market” is to control enough of a particular commodity to allow the price to be manipulated…..The corner operator hopes to gain control of enough of the flow of the commodity to be able to set the price for it.

The ‘military’ objective of the SLA is to corner physical silver. They want to control enough silver to set the price a lot higher and break JPM in the process. How are they going to do that if they don’t get a corner? Likewise if silver isn’t monetized how can it be part of any new monetary system they are advocating? They’re not going to get any support from the establishment. This will have to be done solely through people power.

The SLA’s war will have to be fought on three fronts. They will obviously have to corner the flow, but what if the stock begins to flow as well? Obviously I think it will flow. And more on this ‘third’ front at the end of our thought experiment.

Is there any precedent for this type of military adventure? As luck would have it, yes there is - gold. A similar war has already been fought in gold. So we can examine the recent history of gold and glean some lessons for the SLA plan and the topography of the battlefields they will be fighting on. Along the way we’ll identify some similarities and some differences in the circumstances of the two metals.

After WWII gold was effectively cornered by the US government. Over the next several decades that gold became more evenly distributed into the asset reserves of other central banks, governments and private hands. The stock of gold flowed freely during this post-war period despite the general public, in most countries, being prevented or discouraged from owning gold.

Fast forward to the present. Somewhere around 30,000-33,000 m/t of gold is in CB and government coffers while the balance, over 130,000 m/t is ‘out there’ in private hands - right now. (Whose hands? That’s one of the issues we discuss at this blog.) In this thought experiment it doesn’t matter whose ‘private hands’. Only two things matter. Firstly, this stock has not flowed despite a fivefold increase in the price of gold since the first Washington Agreement signaled the end of central bank leasing of gold to the bullion banks. This gold stock is not giving any indication that it will join the flow, quite the reverse in fact. The gold stock has become highly immobile. It is in the strongest of strong hands.

The investment demand for gold has had to compete solely for the flow of gold in recent years. This flow has been supplemented by a huge increase in the supply of scrap gold which was readily absorbed by investors. (Gold scrap topped out about a year ago.) The gold fashion jewelry market is a shadow of what it was. The demand for gold displaced in this market, by silver and other materials, had to be absorbed by gold investors as well. They did, comfortably.

According to some estimates there was a single digit increase in mine supply last year. The only countries with substantial increases in their (already large) mine production (mainly China and Russia) have also been adding to their own reserves. Gold investors have demonstrated their ability and willingness to fully absorb all of this flow by continuing to bid the price of gold up.

The gold investors also now have some extremely powerful de facto “allies” that the SLA does not. The Central Banks and Treasuries are net gold buyers again. These are fantastic allies to have. They issue their own fiat currencies so there is no objective limit to how high they can bid the price of gold. They can never “run out” of that currency either. They just need sound reasons for bidding for gold and those reasons are the raison d’etre of this blog. Now why would gold investors want this competition for the flow? For the stragglers, “over 130,000 m/t is ‘out there’ in private hands - right now.” This de facto alliance is between the private and public owners of the stock, not with those investors who are now competing for the flow.

Now let’s try to apply some of the lessons from gold’s experience to the silver advocates game plan. The SLA has a de facto ally (but a very unwilling one) in the industrial silver users. Because their demand is inelastic they have to pay the going price. They will, whether they like it or not, help the SLA with one of their key objectives—to increase the price of silver—by competing for the flow.

The SLA will need to expand its share of the annual flow of silver into the market to a level where they can take control of the price of silver. The existing SLA silver holders must hold and continue to buy in ever increasing amounts or the SLA will need a constant stream of new recruits. Rising silver prices and altruism (or anger and resentment toward JPM) are the only recruitment strategies they have, as far as I can see.

Based on gold’s ‘battlefield’ experience, in order to achieve their ultimate goals the SLA (and retail silver buyers in general) will have to continue buying as each of the following events unfolds (but not necessarily in this order).

At some price level, some of the stock of silverware and all the old coins will begin to flow into bullion. The SLA will have to absorb this flow and bid the price up. At some price the silver fashion jewelry market will collapse. There are other white metals and alloys and there is no silver bullion jewelry market to speak of. The SLA will have to absorb this flow and continue to bid the price up. At some price the scrap silver market will turn into a flood (just like it did for gold). The SLA will have to absorb this flow and continue to bid the price up. Then the going will start to get a little rough for them.

If I am right about SLV being used as the “swing producer” in the physical silver market it is already part of both the stock and flow. At some point the silver in the other physical silver ETFs will also start to flow. The sponsors of these ETFs cannot prevent this. If enough shares are presented they must tender the physical silver. If the SLA absorbs all of the flow described above, while bidding the price up consistently, they will demonstrate to speculators that there is a rock solid arbitrage opportunity. Speculators will pull this silver out of the ETFs and coin it to sell to the SLA. The silver ETFs are not ‘strong hands’. They are the weakest hands of all.

Then another problem will emerge. There are silver “traitors” outside the SLA and troops in the SLA ranks planning to “desert” at the first whiff of grapeshot. People who have no intention of holding silver indefinitely. Some, like Robert Kiyosaki, are waiting for the right time to offload to the “suckers” as he calls them. Others have a target for the GSR. When reached they intend to roll their silver for gold. Perhaps the SLA can keep up the pace of recruitment so that it adds new recruits to replace the deserters and continue expanding its forces. Another problem may emerge (later rather than sooner) for the SLA: increased mine supply.

The silver advocates take comfort in the fact that silver is used in such small quantities in each product that the industrial silver users sell, that high prices, even incredibly high prices, will not deter them from buying. That is most probably true. Score that one for the SLA. However, the SLA may have completely misunderstood the threat. The price may be irrelevant. Earlier in this thought experiment they cornered the flow and the stock. The political heat from the industrial users, including the military-industrial complex, will be ferocious if the SLA threaten the supply lines of these users. (Recall the recent controversy over China’s corner in rare earth metals.) Perhaps the politicians will stay firm. Perhaps they will only sequester the silver mine supply on national security grounds. If so, the SLA is still in the game.

If the SLA can overcome all of the challenges that have been listed so far and “bullionize” all of this silver into retail product, it will then be confronted with the most terrifying enemy it has faced in this war. Their third front – 160,000 m/t of gold. Michael Maloney explained why (indirectly) gold and silver are enemies. There is enough silver too. If necessary it could be the sole monetary metal, even if that meant dividing it into atoms. Do you understand the implications?

You see this phrasing all the time “gold and silver”. There is no “and silver”. In this thought experiment the correct perspective is “gold or silver”. If the SLA and the other silver advocates are successful in making silver the premier monetary metal then gold won't just be less valuable, it will be worthless to everyone, everywhere. Superfluous. Redundant. Just like silver is now in the monetary system. Gold now has no other purpose than being the crème de la crème of monies. If silver wins this contest gold will have no value at all except for a small range of industrial applications and as cheap jewelry. Hooray for the SLA.

Hold it right there SLA. This thought experiment isn't over yet.

The SLA needs to ask itself a few questions as we conclude this thought experiment: Who is holding this gold? Why are they holding this gold? How much power and influence do they have? What are their options and capacity to respond to the threat you pose?

If the SLA gets carried away with delusions of grandeur and the silver advocates start to achieve their aims, then the governments and Giants who hold this gold will respond. You can understand that, can’t you? The moment that silver presents a ‘clear and present danger’ to their interests, they will understand this threat. The threat that their gold is soon to become worthless. They will squash the silver bugs – like a bug. Silver would then be a losing bet for political reasons. If the SLA is clearly going to fail then the silver holders will be perfectly safe. The gold holders will simply ignore them. Silver will be a safe losing bet until game theory kicks in.

Let’s wrap this up with a final question: Are you holding the right metal?

…………………………………………………………………

PS. This is a short note about donations to the host of this blog (if Max, Ted and Bix have made it this far, they can probably skip the next few lines). Our host relies solely on donations to continue the work here. He accepts no advertising or commissions. If you have profited from the realization that silver is a trade rather than an investment you might care to share some of your profits with FOFOA by clicking on the Donate button on the right of your screen. Rest assured none of your ‘hard-earned’ will be coming my way. I’m a donor and I hope you will become one too.

Footnotes:
[1] January 14, 2011 (Link) “Provocatively about 1/6th of SLV’s total silver hoard was acquired in less than 5 months between late-July and mid-December 2010. SLV’s holdings shot up 18.9% during silver’s massive 76.0% autumn rally we saw last year. This is no mean feat! The 55.8m ounces of silver this ETF had to buy over this short span is staggering.”

[2] Delivery delays (Link) “The industrials, when they see that there is tightness or delays in shipping, will then go out and stockpile silver so their assembly lines are not shut down. We would then be talking about potentially tens of millions of ounces required for delivery to these industrial users in a short period of time. The banks have told these industrial users for years that there is no problem with silver supplies. When these industrial users lose faith in the banks, they will move right away to secure stockpiles.”

[3] Record sales of silver eagles (Link) “The US Mint sold 6,422,000 Silver Eagles in January 2011 – half as many (again) as were sold in the previous record-setting month of November 2010.”

[4] Miners hedging again (Link) ”Raymond Key, head of metals trading at Deutsche Bank, estimates that about 100m ounces of silver has been hedged in the past two months. That compares with total outstanding hedges, called the global "hedgebook", of 20m ounces in late 2010 and annual mine production of about 700m ounces, says precious metals consultancy GFMS.

Michael Jansen, metals strategist at JPMorgan, said 2011 was "probably the year of the producer hedge". He added: "This bull market in commodities is maturing to a point where, as much as supply is under pressure, you can say with a bit more certainty that in two to three years it's going to be different."


[5] Paper silver graph (Link) h/t Market Ticker

[6] Margin hikes (Link) “The maintenance margin to trade silver with leverage is now $15,000. If you bought at $4 an ounce, the cost to buy 5000 ounces, fully paid for, would have been $20,000. The value of 5000 fully paid ounces of silver is now almost $250,000.

I believe leveraged trading of silver will end before the silver bull market ends. Silver fell $7 an ounce on Sunday night. That’s a $35,000 move per contract, and more than double the margin put up by the average leveraged player.”


[7] Updated with a correction from Bron Suchecki of the Perth Mint that pointed out a factual error in the post. Refining statistics provided by Bron Suchecki in the comments on page 2.

695 comments:

«Oldest   ‹Older   601 – 695 of 695
Art said...

THIS IS WHAT DP SAID TO ME (it was deleted for some reason, possibly by FOFOA himself):


@Art.

It would be useful I believe if you could clarify a few points about your new global monetary system, that I will today christen for the time being (until you've had a vote and come up with your preferred name we should use for it?) "Art, you're simply the best!".

1) OK, first I am interested to hear how exactly in your new global monetary system you propose to fix the prices of goods in the shops? Does every shop have a telescreen with the constantly-updated "prices"* of every good for sale, in both "oz Ag" and also "oz Au", of course in the base numeraire currency* as well? Or perhaps the goods are all labelled with their fixed currency price, as they are today, and there is just a telescreen in every shop with the Au and Ag exchange rate to the currency? Or do they call the bank along the street for a quote? If the produce is labelled with a static currency price, because the currency is basically unstable in terms of silver/gold (otherwise it wouldn't be floating), does this mean that there is no parity between silver/gold and other real goods? I'm just trying to get an idea of whether your silver/gold are to match any inflation, and if so whether the inflation rate for all other goods is different? Basically: what will shopkeepers use to determine what price they will charge? Maybe you just armwrestle for it at the checkout because it'll be quicker than trying to work it out?

2) What is this currency?* Is a modified Dollar? Or something new? If the latter, perhaps we will call them "Art, you're simply the bests" for the time being, until you've had a meeting and voted on a less catchy, but more practical name?

3) Gold-backed currency? OK, so it's 100% reserved physical gold, represented by circulating paper gold receipts. Yes? I guess the ole Dollar is indeed toast then. Bit of a pisser for all those people who had saved them up all this time, but c'est la vie. It'll be worth it for them in the end I assume, once we've all understood it in better detail. We have at this blog actually in the fairly recent past had a run through of how a 100% reserved currency but with continued lending of the store of value, is problematic. Somebody might be able to supply a reference(?), because my memory isn't so good for these things.

4) "Issue loans" in what? What will they loan? Gold and/or silver? The "Art you're simply the bests"? Also, please would you clarify "FRACTIONAL banking permitted" is what you intended to say, yes? Perhaps you can also clarify for us what happens when some borrower inevitably defaults on their loan? Especially in light of the matter of there being no "FDIC-like" entity to ensure the naive depositors of this world (which will be most, as it is now and it always is) don't end up losing their life savings in the process and coming to the steps of the CB with pitchforks and scythes in hand (again).

Thank you,

DP


* What is your system's base numeraire that everything is based on? You are saying silver and gold both "float" in some way, not in a fixed ratio, right? And the evil paper Dollar, clearly, is toast long ago by then, right? So do the metal prices both "float" in a sea of "Art, you're simply the bests"? Or do Arts (this is a pretty catchy name already actually, I think maybe I can see who is printed on the reverse too?) and gold float on a tether to the fixed platform of silver? Or, or, or... I dunno?

Art said...

DP,

1) Is there a currency quote screen at Walmart now? We use the mediums of communication in place now to inform ourselves of what precious metals and currencies are doing EXCEPT that the system's control and monitoring is relinquished to honest and patriotic public servants who have OUR best interest in mind, NOT the bankers' or Freegolders'.

Currencies are unstable TODAY but people don't "armwrestle at the checkout" to determine prices. YOU decide whether you want to pay WHATEVER price the SELLER decided to sell his wares at. You check out the store ONCE and if you don't like the way the merchandise is priced, you don't patronize the place again.

2) What difference does it make what call it? Let's call it the dollar if you ask me. Gold dollars for the gold backed one and silver dollars for the silver backed one. Why invent a new name? However it'd be best to refer to specie, I mean the precious metal coins themselves, in terms of units of weight this time; 1/10 toz piece, 1 toz piece, etc.

3)No, there is no legislatively-mandated 100% backing. There is only 100% requirement of TRANSPARENCY on the part of the issuing institution, the nonprofit National Bank. The National Bank is free to INFLATE the money supply BUT must constantly inform the public what its gold reserves are. Any three-year-old with a pocket calculator can divide total gold reserves by the total quantity of currency in existence (An exact and continuous reporting of this number is required by law) and determine what the present gold- or silver-backing rate is. At any time, you can go to the National bank and redeem your dollars in gold or silver based on the current quote.

4)Private banks can issue gold loans OR loans the proceeds of which are credited to the borrower's account in SCRIP - which is not legal tender currency and only a form of private credit, and which no one is obligated to accept as a legitimate form of payment. However the loan itself must be repaid in gold-backed legal tender currency. Since the bank and debtor are implicitly claiming that the creation of credit will result in the creation of tangible goods and services, then they must literally put their money where their mouth is.

PERSONALLY, I am not for borrowing nor lending, period. I abhor debt and support INVESTMENT of capital instead. If you believe in a project then put your money where your mouth is and INVEST in it with your capital OR your labor.

"Fractional banking permitted" means just that, with the caveat that the private scrip proceeds are accounted for in terms of gold-backed currency. Private bank reserve amounts are not set by government regulators but must be made transparent continuously. The banks must say every day how much they loaned out and what their own currency and gold reserves are.

In case of DEFAULT, the bank loses. Losses are not socialized. If the bank goes bankrupt, your deposits are paid in terms of whatever assets the bank has left. That could be as low as ZERO. However legal versions of "pitchforks and scythes" are encouraged and enabled. On the steps of the PRIVATE bank though.

*The base numeraires are gold and silver.

*Gold and silver don't float. Currencies' backing floats. One ounce of gold remains one ounce of gold.

Desperado said...

@Blondie,

I suspect that one reason you have more faith in the giants is that you live in New Zealand. I know very little about NZ, but it would not be hard for your politicians to be much less corrupt than those in the US.

Check out these bunkers for the for the TSA and the US government.

We know that the giants (ultra-rich) can hop into their private jets and fly to some ranch they own somewhere in the world when the HI starts. The problem is that these giants need someone to stay behind and watch over their "investments". These investment security guards for the giants are the TSA and homeland security. The giants have to convince these guys that they will be taken care of.

This is why they are building these giant bunkers.

Listen here Blondie: The giants have helicopters to use to fly off of the titanic to their tropical islands. Now we see that the crew members are preparing their own lifeboats, and yet you insist that if you manage to swim to shore after the titanic goes down that these guys are not going to make you their servant????

http://www.youtube.com/watch?v=DqgXzPfAxjo

She came from Greece she had a thirst for knowledge,
she studied sculpture at Saint Martin's College,
that's where I,
caught her eye.
She told me that her Dad was loaded,
I said "In that case I'll have a rum and coca-cola."
She said "Fine."
and in thirty seconds time she said,

"I want to live like common people,
I want to do whatever common people do,
I want to sleep with common people,
I want to sleep with common people,
like you."

Well what else could I do -
I said "I'll see what I can do."
I took her to a supermarket,
I don't know why but I had to start it somewhere,
so it started there.
I said pretend you've got no money,
she just laughed and said,
"Oh you're so funny."
I said "yeah?
Well I can't see anyone else smiling in here.
Are you sure you want to live like common people,
you want to see whatever common people see,
you want to sleep with common people,
you want to sleep with common people,
like me."
But she didn't understand,
she just smiled and held my hand.
Rent a flat above a shop,
cut your hair and get a job.
Smoke some fags and play some pool,
pretend you never went to school.
But still you'll never get it right,
cos when you're laid in bed at night,
watching roaches climb the wall,
if you call your Dad he could stop it all.

You'll never live like common people,
you'll never do what common people do,
you'll never fail like common people,
you'll never watch your life slide out of view,
and dance and drink and screw,
because there's nothing else to do.

Sing along with the common people,
sing along and it might just get you through,
laugh along with the common people,
laugh along even though they're laughing at you,
and the stupid things that you do.
Because you think that poor is cool.

Art said...

PAUL SAID: "freegold can't be bothered by morality. It is moral[ity] by itself."

No Sir, the medium is not the message no matter how many times you say it. This Nietzschean attitude of there is no right and wrong, only my will, and whatever I say is right, will not stand the light of truth.

Art said...

DP,

1) Is there a currency quote screen at Walmart now? We use the mediums of communication in place now to inform ourselves of what precious metals and currencies are doing EXCEPT that that the system's control and monitoring is relinquished to honest and patriotic public servants who have OUR best interest in mind, NOT the bankers' or Freegolders'.

Currencies are unstable TODAY but people don't "armwrestle at the checkout" to determine prices. YOU decide whether you want to pay WHATEVER price the SELLER decided to sell his wares at. You check out the store ONCE and if you don't like the way the merchandise is priced, you don't patronize the place again.

2) What difference does it make what call it? Let's call it the dollar if you ask me. Gold dollars for the gold backed one and silver dollars for the silver backed one. Why invent a new name? However it'd be best to refer to specie, I mean the precious metal coins themselves, in terms of units of weight this time; 1/10 toz piece, 1 toz piece, etc.

3)No, there is no legislatively-mandated 100% backing. There is only 100% requirement of TRANSPARENCY on the part of the issuing institution, the nonprofit National Bank. The National Bank is free to INFLATE the money supply BUT must constantly inform the public what its gold reserves are. Any three-year-old with a pocket calculator can divide total gold reserves by the total quantity of currency in existence (An exact and continuous reporting of this number is required by law) and determine what the present gold- or silver-backing rate is. At any time, you can go to the National bank and redeem your dollars in gold or silver based on the current quote.

4)Private banks can issue gold loans OR loans the proceeds of which are credited to the borrower's account in SCRIP - which is not legal tender currency and only a form of private credit, and which no one is obligated to accept as a legitimate form of payment. However the loan itself must be repaid in gold-backed legal tender currency. Since the bank and debtor are implicitly claiming that the creation of credit will result in the creation of tangible goods and services, then they must literally put their money where their mouth is.

PERSONALLY, I am not for borrowing nor lending, period. I abhor debt and support INVESTMENT of capital instead. If you believe in a project then put your money where your mouth is and INVEST in it with your capital OR your labor.

"Fractional banking permitted" means just that, with the caveat that the private scrip proceeds are accounted for in terms of gold-backed currency. Private bank reserve amounts are not set by government regulators but must be made transparent continuously. The banks must say every day how much they loaned out and what their own currency and gold reserves are.

In case of DEFAULT, the bank loses. Losses are not socialized. If the bank goes bankrupt, your deposits are paid in terms of whatever assets the bank has left. That could be as low as ZERO. However legal versions of "pitchforks and scythes" are encouraged and enabled. On the steps of the PRIVATE bank though.

*The base numeraires are gold and silver.

*Gold and silver don't float. Currencies' backing floats. One ounce of gold remains one ounce of gold.

Art said...

DP,

1) Is there a currency quote screen at Walmart now? We use the mediums of communication in place now to inform ourselves of what precious metals and currencies are doing EXCEPT that that the system's control and monitoring is relinquished to honest and patriotic public servants who have OUR best interest in mind, NOT the bankers' or Freegolders'.

Currencies are unstable TODAY but people don't "armwrestle at the checkout" to determine prices. YOU decide whether you want to pay WHATEVER price the SELLER decided to sell his wares at. You check out the store ONCE and if you don't like the way the merchandise is priced, you don't patronize the place again.

2) What difference does it make what call it? Let's call it the dollar if you ask me. Gold dollars for the gold backed one and silver dollars for the silver backed one. Why invent a new name? However it'd be best to refer to specie, I mean the precious metal coins themselves, in terms of units of weight this time; 1/10 toz piece, 1 toz piece, etc.

3)No, there is no legislatively-mandated 100% backing. There is only 100% requirement of TRANSPARENCY on the part of the issuing institution, the nonprofit National Bank. The National Bank is free to INFLATE the money supply BUT must constantly inform the public what its gold reserves are. Any three-year-old with a pocket calculator can divide total gold reserves by the total quantity of currency in existence (An exact and continuous reporting of this number is required by law) and determine what the present gold- or silver-backing rate is. At any time, you can go to the National bank and redeem your dollars in gold or silver based on the current quote.

4)Private banks can issue gold loans OR loans the proceeds of which are credited to the borrower's account in SCRIP - which is not legal tender currency and only a form of private credit, and which no one is obligated to accept as a legitimate form of payment. However the loan itself must be repaid in gold-backed legal tender currency. Since the bank and debtor are implicitly claiming that the creation of credit will result in the creation of tangible goods and services, then they must literally put their money where their mouth is.

PERSONALLY, I am not for borrowing nor lending, period. I abhor debt and support INVESTMENT of capital instead. If you believe in a project then put your money where your mouth is and INVEST in it with your capital OR your labor.

"Fractional banking permitted" means just that, with the caveat that the private scrip proceeds are accounted for in terms of gold-backed currency. Private bank reserve amounts are not set by government regulators but must be made transparent continuously. The banks must say every day how much they loaned out and what their own currency and gold reserves are.

In case of DEFAULT, the bank loses. Losses are not socialized. If the bank goes bankrupt, your deposits are paid in terms of whatever assets the bank has left. That could be as low as ZERO. However legal versions of "pitchforks and scythes" are encouraged and enabled. On the steps of the PRIVATE bank though.

*The base numeraires are gold and silver.

*Gold and silver don't float. Currencies' backing floats. One ounce of gold remains one ounce of gold.

Art said...

DP,

1) Is there a currency quote screen at Walmart now? We use the mediums of communication in place now to inform ourselves of what precious metals and currencies are doing EXCEPT that that the system's control and monitoring is relinquished to honest and patriotic public servants who have OUR best interest in mind, NOT the bankers' or Freegolders'.

Currencies are unstable TODAY but people don't "armwrestle at the checkout" to determine prices. YOU decide whether you want to pay WHATEVER price the SELLER decided to sell his wares at. You check out the store ONCE and if you don't like the way the merchandise is priced, you don't patronize the place again.

2) What difference does it make what call it? Let's call it the dollar if you ask me. Gold dollars for the gold backed one and silver dollars for the silver backed one. Why invent a new name? However it'd be best to refer to specie, I mean the precious metal coins themselves, in terms of units of weight this time; 1/10 toz piece, 1 toz piece, etc.

3)No, there is no legislatively-mandated 100% backing. There is only 100% requirement of TRANSPARENCY on the part of the issuing institution, the nonprofit National Bank. The National Bank is free to INFLATE the money supply BUT must constantly inform the public what its gold reserves are. Any three-year-old with a pocket calculator can divide total gold reserves by the total quantity of currency in existence (An exact and continuous reporting of this number is required by law) and determine what the present gold- or silver-backing rate is. At any time, you can go to the National bank and redeem your dollars in gold or silver based on the current quote.

Art said...
This comment has been removed by the author.
Paul said...

art

when equitable, yes it will

Art said...

DP,

1) Is there a currency quote screen at Walmart now? We use the mediums of communication in place now to inform ourselves of what precious metals and currencies are doing EXCEPT that that the system's control and monitoring is relinquished to honest and patriotic public servants who have OUR best interest in mind, NOT the bankers' or Freegolders'.


Currencies are unstable TODAY but people don't "armwrestle at the checkout" to determine prices. YOU decide whether you want to pay WHATEVER price the SELLER decided to sell his wares at. You check out the store ONCE and if you don't like the way the merchandise is priced, you don't patronize the place again.

2) What difference does it make what call it? Let's call it the dollar if you ask me. Gold dollars for the gold backed one and silver dollars for the silver backed one. Why invent a new name? However it'd be best to refer to specie, I mean the precious metal coins themselves, in terms of units of weight this time; 1/10 toz piece, 1 toz piece, etc.

3)No, there is no legislatively-mandated 100% backing. There is only 100% requirement of TRANSPARENCY on the part of the issuing institution, the nonprofit National Bank. The National Bank is free to INFLATE the money supply BUT must constantly inform the public what its gold reserves are. Any three-year-old with a pocket calculator can divide total gold reserves by the total quantity of currency in existence (An exact and continuous reporting of this number is required by law) and determine what the present gold- or silver-backing rate is. At any time, you can go to the National bank and redeem your dollars in gold or silver based on the current quote.

4)Private banks can issue gold loans OR loans the proceeds of which are credited to the borrower's account in SCRIP - which is not legal tender currency and only a form of private credit, and which no one is obligated to accept as a legitimate form of payment. However the loan itself must be repaid in gold-backed legal tender currency. Since the bank and debtor are implicitly claiming that the creation of credit will result in the creation of tangible goods and services, then they must literally put their money where their mouth is.

PERSONALLY, I am not for borrowing nor lending, period. I abhor debt and support INVESTMENT of capital instead. If you believe in a project then put your money where your mouth is and INVEST in it with your capital OR your labor.

"Fractional banking permitted" means just that, with the caveat that the private scrip proceeds are accounted for in terms of gold-backed currency. Private bank reserve amounts are not set by government regulators but must be made transparent continuously. The banks must say every day how much they loaned out and what their own currency and gold reserves are.

In case of DEFAULT, the bank loses. Losses are not socialized. If the bank goes bankrupt, your deposits are paid in terms of whatever assets the bank has left. That could be as low as ZERO. However legal versions of "pitchforks and scythes" are encouraged and enabled. On the steps of the PRIVATE bank though.

*The base numeraires are gold and silver.

*Gold and silver don't float. Currencies' backing floats. One ounce of gold remains one ounce of gold.

Art said...

Hi JC,

YOU SAID, " I enjoy receiving promises to pay from decent people and then seeing them later come through to their word."

I agree with you. The system I described will enable us to do exactly that. It is the best monetary compromise between Faith in one's fellow men and Trust but VERIFY.

Anonymous said...

A brilliant piece, Costata, thank you!
I've 'felt' a growig kinship with Freegold over the last couple years, yet hadn't been able to put my finger on it or understand it until I happened upon FOFOA and Another's (Thoughts) relatively recently. It truly was like discovering a long lost brother, separated at birth. :)

In the early 2000's I accumulated an enormous inventory of Sterling jewelry in Bangkok for my online business which flourished until the recession/depression deepened. I had been thinking of shutting down the business and 'sitting' on all that silver for future prosperity. Until, I read FOFOA's RPG article supplemented with very insightful comments by the veterans here. This moved me to act in exchanging almost all of my 'quiet' inventory - literally several hundreds of ounces, including a significant number of bars and coins, when silver approached $40 and into the mid-$40's - for gold.

Though your article comes after my actions, it adds to and solidifies my confidence that I did the right thing - I'm not one for a game of hot potato, if you know what I mean...
Thank you, and thank you host(FOFOA), again.
-David

Rui said...

@Paul

If you meant to say that FreeGold is just an immoral encore of bankers' perennial "print to loot" scam then you were simply proving Art's exact point.

All the talking points about FG such as "harmony", "meritocracy" and what not are sale pitch at best if not hollow promises.

Robert LeRoy Parker said...

I think James Turk has been reading Fofoa. From king world news, he says

“What actually happens and what is quite clear is that there is usually some kind of event, it’s a tipping point.  And the event causes people’s confidence in the currency pretty much to evaporate, and once that event occurs you’ve basically got six months before the currency is history.” 

Art said...

DESPERADO,

Nice video.

Here's a video DEDICATED to FREEGOLDERS:


http://www.youtube.com/watch?v=oK6drtuGric


ENJOY and be yourselves again!

Finn said...

It sounds like you drew your conclusion and then built all the facts around it.

A lengthy treatise does not make for an "elegant" piece. The assumptions throughout are generous.

Looking back through some of the comments I find myself agreeing with Stefan. You sound like the antithesis of the $1,000 silver bulls (i believe it will get there someday).

Your conclusion regarding silver and the SLA (basically silver), with all due respect is simply baseless. You state "If the SLA gets carried away with delusions of grandeur and the silver advocates start to achieve their aims, then the governments and Giants who hold this gold will respond. You can understand that, can’t you?"

How in the world can you know that? Why would they see silver as a danger. How in the world could silver make gold worthless? They both have inherit value? Seriously?

And you speak of delusions of grandeur....the grandeur is your writing of this piece. Might I remind you sir that until gold is $50,000 you are wrong and sound like a zealot. Silver (pre margin hike, and by the way, why was that necessary?) had been SMASHING gold.

I don't doubt the validity of the FOFOA theory and I consider it carefully. Upon reading much of the info I immediately converted some silver into gold as I believed it prudent. The theory is sound but it has not become practice and there are NO guarantees of anything at this point.

All the assumptions about what people would or would not do and the crystal ball attitude about the future of gold can harm one's integrity. Tread carefully my friend.

Gary the Good said...

@Finn
You state the opinion that I most agree with at this point.
I see a complete movement from currency could take decades to take solid foothold with the masses. I just can't envision it happening overnight. We would have plenty of time to discuss it further as ut transpires (yes, it is transpiring - albeit slowly).
I am henging with both Gold and Silver and don't see one eclisping the other. I wish I had bought more Silver than Gold in the past couple of years though.
Best,
Gary

mortymer said...
This comment has been removed by the author.
Art said...
This comment has been removed by the author.
moneymaverick said...

Another: let's see where we are going (follower)
Art: let's work to make where we are going just (leader)

Art said...

I understand that sums equal to more than half an entire year's silver production are traded on paper EVERY DAY! We're also aware of the almost daily bombings of margin hikes delivered by the bankers' commodities exchanges like the Comex - NEVER raised when the shorts are underwater; only when the longs have the upper hand. Plus, the concentrated short positions held by a couple of American banks which I believe equal about a quarter of yearly silver production if not more (Read Ted Butler). Gold is only about ten times scarcer than silver as found in the earth's crust BUT actual available above ground supplies of silver are a fraction of the silver sold on paper or through Futures contracts. I haven't checked lately but from memory, there is perhaps 100 million ounces available for delivery against a DAILY trade of around 500 or more million ounces per day.

What's the Freegolder's argument against silver being a good investment, a better one than gold perhaps?

mortymer said...

RLP: KWN knows about Fofoa. Had some email exchange. J. Sinclair knows about Another, certainly knows as well about this place, just listen to his last audio about 4min before the end. I played it few times.
There are just few leaders in this business and a lot of copy-paste/recyclers. I just hope those have enough integrity to support at least anonymously if not straight enough to admit openly. :o)
I would highlight the last article from Mr. A.Fekete. Really a must read.
http://www.goldstandardinstitute.net/2011/05/sources-and-remedies-of-financial-instability-gold-bond-life-saver-for-the-u-s-and-world-economy/
This is also a reason why I check rather "official" sources like bis, imf, ecb, archives, research. You get the real stuff with no goulash around.

Unknown said...

@Finn,

Thank you for saving me the typing. I also agree with your analysis. The Author presents his arguement like an attorney with a subjective predetermined agenda, not a scientist/philosopher seeking objective truth. This is a troubling method and at least to a few of us, not very convincing.

Paul said...

despereado

not what I am sayinmg at all, for more homeschooling in morals I suggest you read Pirsig.

"Cultures are not the source of all morals, only a limited set of morals. Cultures can be graded and judged morally according to their contribution to the evolution of life.

A culture that supports the dominance of social values over biological values is an absolutely superior culture to one that does not, and a culture that supports the dominance of intellectual values over social values is absolutely superior to one that does not."
Pirsig, Robert M., Lila. An inquiry into morals. New York (Bantam Books) 1991

or

"It's not the "nice" guy who brings about real social change. "Nice" guys look nice because they're conforming. It's the "bad" guys, who only look nice a hundred years later, that are the real Dynamic force in social evolution."

and

"Morality is not a simple set of rules. It's a very complex struggle of conflicting patterns of values. This conflict is the residue of evolution. As new patters evolve they come into conflict with old ones. Each stage of evolution creates in its wake a wash of problems."

lots more, good book. might change some perspective for you.

CandyMonkey said...

@Art:

You said: How can you save if you CAN'T save? Tell me that. As I explained above, going back and forth between saving and spending mode will make you lose money. And if you want to keep your wealth in fiat in order to avoid transactional costs, then you'll lose out to inflation.

CandyMonkey says: Go to the bank today with four quarters and ask for a dollar bill. What are your transactional costs? Let me guess: zero. Welcome to freegold. You exchange an ounce, or half an ounce, or however many grams, and you get fiat to buy goods and services. There are no transactional costs to eat your savings just like there are not transactional costs when you go to the bank today with four quarters. You assume there will be. I say no there will not be. Big difference is assumptions. You can agree to disagree about that assumption, but I just explained the solution to your problem of transactional costs.


Someone? SAID: "The other simple thing is that Freegold separates means of exchange from store of value."

MY REPLY: No, it doesn't do that. Freegold doesn't just separate what cannot be separated to begin with, but it also DESTROYS your savings. Under Freegold your savings are depleted - and your wages diminished over time due to inflation - just like they do NOW. Freegolders are therefore LYING when they claim that the Freegold system will protect your savings better, that you savings in gold will be safer and more valuable. WHY? I explained it before and I'll do it one more time since you're pretending not to have read my previous posts:

REMEMBER: If you "save" in gold and have to sell your gold every time you want to buy something, you will pay the bankers and the coin dealers fees and commissions each time PLUS they will buy your gold back for LESS and sell it to you for MORE when you want to convert your currency back into gold in order to "save" it. How stupid and self-defeating. This is pure economic suicide! In the process, you will basically LOSE everything you have if you thus "save" your wealth in gold.


CandyMonkey says: Here is how Freegold is different than what we have now and why Freegold separates means of exchange for store of value.

Under freegold, gold is repriced at a nominal value that allows all the fiat to be backed with whatever gold reserves the US Treasury/US Govt. holds. If one day the government doubles the supply of fiat, the nominal price of gold would double so you would not lose purchasing power to inflation. Fiat would lose purchasing power in that situation, but not gold. It rises and falls in nominal price as the supply of fiat rises and falls or the amount of gold in the coffers rises and falls. So, if you hold gold when fiat is increased, your store of value stays steady while fiat's value declines. That is a separation between means of exchange and store of value. Now you can argue that the government will lie about how much fiat is being printed etc... but that does not negate the fundamental argument that there is a separation between means of exchange and store of value. Only the execution could be flawed, not the underlying philosophy.

As it stands now, all the gold held by the Treasury/US Govt. priced at $1500 cannot back all the outstanding fiat. That is the big difference between what we have now and Freegold.

The CandyMonkey is out!

Paul said...

not despereado but rui
sorry

mortymer said...

CandyMonkey:
USA has low savings (in sum), dollar is not a good medium to have savings in anyway, all know this.
Since 2000 a lot of value went into RealEstate which is inflatable. If it went into gold it would be different story today.
Sooner or later the excess value will find its destination.
We create too much credit instead of saving value properly to be reinvested somewhere else.

tEON said...

CandyMonkey says: Go to the bank today with four quarters and ask for a dollar bill. What are your transactional costs? Let me guess: zero

Depends what year(s) the quarters were minted.

DP said...

@gary: I wouldn't want to mess with a monkey's candy. God only knows what kind of friends he keeps in his animal kingdom

J said...

I agree that to make a new post would be the best way to be rid of the barrage of shouting, non-listening comments. A new post, please, FOFOA!

Even though I promised myself I wouldn't, I can't resist one more tilt at the windmill.

ART, please take a breath and spend just ONE HOUR trying, with an OPEN mind, to understand just what it is that is being said by those who think that Freegold will occur at some point. (One BIG hint - they're describing what they think will unfold, not what they necessarily think is ideal or most desirable or most equitable or preferable. Is that clear? What they think will happen.) If you do so, you just might derive something of benefit from the dozens of posts here, and at the very least you might be able to construct an argument that is based on an accurate understanding of their position. (Another hint - they have very similar views to you.)

As it is (I really hope you will listen to this and consider that I might be right) you're arguing against your inaccurate understanding of the Freegold thesis, and so you're wasting your time.

Here's an example.

You responded at Blondie like this:

BLONDIE SAYS: "Freegold gives an objective valuation to paper currency, as discovered by the market."

LOGIC SAYS: An objective valuation CANNOT be given without objective numbers and/or quantities being ascribed to the RELATIONSHIP of gold to paper currencies. This relationship can CHANGE and the valuation may fluctuate; but things can only change in relation to an objective reference point that is fixed in time and space.


You've completely missed the point that Blondie believes there needs to be, and (more importantly, in a way) believes there *will* be, an objective reference point called GOLD. That way you, and I, and everyone else, will have something (GOLD) against which we can measure the paper currencies and therefore we can AVOID being screwed over in the way we are right now. You and Blondie, here, are saying basically exactly the same thing!

Here's another of your responses that has misunderstood the original commenter:

MICHAEL H SAYS: "Who sets the value of a currency? It is the reciever [sic] of the currency, not the issuer."

COMMENT: OK, I'll tell the grocery store clerk that the one dollar bill I just handed her is really worth $100 in my opinion and that's how much groceries I'm going to buy now since that's what I value it at.


ART, who is the receiver of the currency in your example? That's right, it's the clerk, who would politely tell you that you are crazy and that it's really only worth a dollar. Which it is, incidentally.

Here's a much better example that illustrates that Michael H is right, and that I think you'd agree with him:
Post-Freegold, Mr Scumbag McFiat comes to me and says he wants to buy my car for a fistful of dollars - $1,000,000. Although I'm impressed by the number and denominations of the pieces of paper, and the pretty colors, I am no longer a sucker to the same extent I was, and I've heard that GOLD is the reference point against which currencies should be measured. So I check how many dollars are required to buy an ounce of gold, and I see that it's $1,000,000,000,000 (because the nasty people you and I both dislike have printed lots and lots of dollars and are trying to foist them onto people like me). Fortunately, because of the Reference Point Gold, I'm able to see that the offer Mr Scumbag McFiat is making me SUCKS, and so I tell him to take his one millionth of an ounce of gold and take a long hike.

No need for your 'perfect bank', just gold sitting around, no longered obscured and encumbered by paper gold and by generations of Western ignorance of its role.

Does that make ANY sense to you???
J The Newer

Unknown said...

Someone over at Automatic Earth thinks your concept of Freegold is in error. See today's article there. Care to respond FOFOA?

DP said...

Art,

1) So the vendor will choose to markup the prices on all their goods in whichever they prefer of either Silver Dollars or Gold Dollars. They will have to choose one or the other for the base numeraire in their store, since the two metals are not locked into a fixed ratio — they couldn't print up stickers on every can for both the Silver Dollar and Gold Dollar prices, if those prices are constantly fluctuating. Every vendor will have a telescreen available so that both they and their customers know what the current metal exchange rates are at checkout time. The two parties can from this information come to a mutally acceptable agreement over which metal the buyer will settle in on that occasion for the goods in their basket. Or, to be more accurate, whether they will pay with paper Silver Dollars or paper Gold Dollars. If I have misunderstood, please correct. If I am right, you can perhaps see as I do that most people don't want this complexity. They want to know what the "money" (whatever it might be) in their wallet is worth, and they want to look at the price on a product and know instantly, intuitively, how that relates to what they have in their wallet. This is what they are used to and expect from a monetary system. A single common numeraire within their economic zone.

On your point about currencies being unstable today, I would say that I know what you mean by this. But I would say that 99.7%* of both vendors and buyers, don't think their currencies are unstable — they believe that everything else is unstable. Because what they are accustomed to using as a unit of account and a medium of exchange, and even for most of them store of value too, is the local currency. The single common numeraire within their economic zone. These 99.7% of people don't buy either gold or silver, because they don't think it is money. They think it is a pointless and risky speculation, of no value to them. Now you and I can talk about how they're naively getting raped and they don't even know it, but it would be a waste of time because we would only agree. But the fact remains you and I are distinctly in the minority.

Almost everybody would never click the "YES" button if asked to vote for a planned migration to an entirely new metallic monetary system, rebuilt from the ground up and with a chaotic window of downtime between what we have right now, and what you are proposing to implement. Frankly, nobody is interested in silver or gold except us fringe wierdos meeting up in darkened corners of the Internet like this. And they certainly aren't interested in making their own lives more difficult.

"Most people would would rather die, than think." — Bertrand Russell


2) Agreed, it doesn't really matter, in a technical sense, what any new currency might be called. In the US, calling any new currency "Dollar" would likely make the medicine go down easier. But, again, introducing a choice between "Silver" and "Gold" Dollars... well, I have a strong suspicion that 99.7 will say "WTF?" "You want me to think about choosing my money?" And if they were told that they are to give up their nice and simple decimal system of Dollars and cents, in favour of old-school ounces? Hmmmmm, well call me a sceptic about that flying for most people. So, while none of these architectural design considerations really matters in a technical sense... getting people to eat it is a different story.

...cont'd...

DP said...

...cont'd (2)...

3) OK, I am clear that your currency is not 100% backed. At least, not by the Central Bank reserves themselves anyway.

Now I'm going to tell you something that I daresay you must already know now, but what you have described is what actually already happens, today and for the last decade+, in the Eurozone. This is why it is called the Euro-Freegold architecture. Or, just Freegold for short. Now I don't say this as an invitation for you to swing the conversation back to responding to your criticisms of Freegold, but I would prefer us at least for the time being to continue to analyse your system. If it is superior, let's establish that and perhaps agree. If it is not, maybe we can eventually come to agree on that. You have come to the spiritual home of Freegold, so the onus is on you to show a better system while you are here. Or at least to demonstrate a proper understanding of Freegold if you are to continue to criticise it. Until you have done one or the other, or perhaps both, of these things, you are flogging a dead horse doing what you have been doing.

Now, there is a small but significant difference between what you have advocated and how it works for the ECB, and that is that silver doesn't enter the picture. It would make the system confusing and unworkable to include silver (or anything else) in addition to gold (which has already been chosen and The One). There needs to be only one base numeraire that the currency is measured in, or it ceases to have clarity and objectivity. You can infer by triangulation what the objective price of any good or service is, including silver, in either euros or gold or any other currency that is also measured in gold in the same manner (which evidence suggests will be a growing list, because there is a lot of interest in this idea). So, while it is true that you cannot objectively measure the real price of goods and services in Dollars today, you can in euros. And this is exactly because the ECB do pretty much exactly what you advocate, except with a bit of a refinement in using a single base numeraire.


...cont'd...

DP said...

...cont'd (3)...

4) So people can borrow credit notes issued by a private bank (either denominated in Gold Dollar/Silver Dollar for repayment)? This is truly money from thin air, and with no FDIC-like backstop too. And what is more, it's not even "money that you can spend anywhere". It's not legal tender. Private bank owners might enjoy this, except... who would choose to take this in payment for their goods and services? I suspect I probably wouldn't, unless I was pretty desperate to sell and felt I could get it exchanged for something better pretty quickly. I don't think I'd put it in the safe and let it lie still for a few decades to pass on to my kids! :-) I suspect I'd be worried about keeping it until the end of the month. It just doesn't feel like it would be worth the risk to me.

TBH I'm with you again when you say you're personally not in favour of lending or borrowing, but would prefer an equity investment. But again, you and I are in that minority 0.7%* — just about everyone else wants it all and they want it now, and they don't understand or care about how that is bad for them and everyone else. They're again not very likely, IMO, to click that "YES" vote button in favour of this systemic revolution in the monetary system, not if it means (a) having to change something, which just about everyone resists, (b) it's going to make their life more complicated because they're going to have to start thinking in two numeraires all the time, and perhaps find that when they wish to buy something the seller wants something else for payment, (c) they're not going to be able get that SUV, big-screen LED TV, and those granite worktops they've had their eye on.

Now, I probably don't need to remind you that Freegold is an evolution (that BTW is already in progress for a decade+ and that is gathering momentum all the time). Nobody needs to "vote YES" for this change before it could happen. There is no downtime between the end of one system and the start of another -- the new version of the system overlaps with the old already today, as one is heading towards a mid-air explosion at the end of its timeline as the other is ramping up towards takeoff speed.

...cont'd...

DP said...

...cont'd (4)...

Finally, I would like to address your concerns regarding the unrestricted issuance of currency in a Freegold paradigm. I hope that you will take the time to visit the ECB's statements, where you will see the amount of gold held in reserve and alongside it the number of euro liabilities that have been issued against the collateral of those reserves. Now, when Blondie says to you that Adam Smith's guiding hand of self interest is at work in a Freegold paradigm, I hope you can appreciate how he can think that when you think back to that ECB balance sheet. To try to sum it up, if they over-issue their euro liabilities into the system, it will be right there on the balance sheet shortly after and people can choose to vote with their feet into gold or some other currency they feel is being better managed. They would have to be pretty stupid to go against this guiding hand of self-interest, no?

The fight is not between the Dollar and precious metals, or gold and silver. But between the old Dollar-based global monetary system and the new Euro-Freegold-based global monetary system (aka "Reference Point Gold"). There is also by the way a "non-fight" between silver and gold, as I am sure will be clear to you. The new monetary system only uses gold as the base numeraire, the monetary reserve. So, while gold isn't about to become monetised into legal tender currency (medium of exchange and/or unit of account), it is going to be monetised as the go-to store of value. Whatever is monetised is levitated in value far beyond its intrinsic use-value. This is how there is a marked divergence of fortune between "precious metals" under the emergent system.

I hope that you can see by now that Freegold is only really about 6 inches from where you think it might be best to go. In the scale of this planet, 6 inches isn't much of a stretch to have to make to finish your journey. You're already a VERY long way from the paper Dollar. I hope you can make it to the finish, after coming so far along the road.

Sincerely,

DP :-)


PS: At the end of your comment you said: One ounce of gold remains one ounce of gold. I was just wondering to myself... One ounce of gold remains, how many ounces of silver? I still don't quite "get" how you propose a double base numeraire can work. Please show me how there can be more than one base in a system, if you don't by now accept that there can only really be one.


* A tip of the hat to my favourite statistical source, once again. ;-)

julian said...

Hello All,

Seems as though something occured to blogger system?

Ate many comments, yes?



@ Art,

In one of those supposed eaten comments, sometime between the 11th and the 13th on the dates, you had answered those wondering about your proposed monetary theory that bests freegolderism.

Regarding all those amazing things you wanted, like health care, etc and etc (I can't recall the other two at the moment), you went on to say, and I paraphrase: All of this would be funded through taxation.

Taxation is coercion, it is violence and theft, purely. Meaning it is not voluntary. And it is what we already have now. All these evils you concern about, they are all made possible through monopoly on force (regulation etc). These arguments (Free Market vs. Coerced Market) are better made over at freedomainradio .com, so go there if you feel like disputing their validity. Or visit stefbot on youtube.

Here you came, Art, not even wanting to read what's already been answered many times over, even in recent posts too, and you demand of people to answer your already answered questions:

What's the Freegolder's argument against silver being a good investment, a better one than gold perhaps?


You speak ill of Freegold as evil, yet you turn around and advocate more of the same, something which Freegold is not. You also propose a lot of what has already been tried, and failed understandably. You want to fund things based on violence! Let's try something new. Now we're talking :)

It's May 13 and you still assert that Freegold is what we have now. If blogger really was down, you still could have read the archives. Surely one of those pieces would have held to reason that Freegold is not what we have now.

Instead of asking why not silver, read the answers already written, and deconstruct them (don't say that you already have, all you have done is been speaking to a mirror) or provide reasons why silver, ones that actually dispute the relevant arguments. Unless you ask because you don't know why not silver. Yet you defame anyone who posts previous writings, even though they are relevant, and you ask for things to be virtually proven in a mere few sentences.

Your high horsery annoys me. At least if you deserved it. But you do not merit that horse, sir!

I wish for you to stick around, open your mind, and read some past writings. That's all. You have a lot of room to grow.


@ moneymaverick,

you shill on your spare time?!



Kindly,


Julian

FOFOA said...

Hello Art,

One thing that was clear from your many comments yesterday (that were somehow fortuitously cleaned up by Blogger itself) was that you are utterly incapable of understanding even the simplest concepts utilized here at FOFOA. You do have your own deeply ingrained principles and backward understanding of concepts, but you cannot think in principles. And you cannot understand counterintuitive concepts, even when someone spells them out for you. It is no wonder that you don't get Freegold.

I'll give you two quick examples of what I'm talking about. Michael H tried to help you out with the concept that, when comparing two monies, circulation velocity correlates to and is a measurement of their store of value properties. In other words, the currency that circulates with greater velocity is the "bad money" with a short store of value timeframe, while the slower currency is the "good money" with a greater ability to store value at that time.

Note that this is a clear example of how the transactional and reserve functions of money are able to separate into two different media. Think about Zimbabweans quickly spending Z$s while hoarding US$s. Mises called it a "secondary media of exchange." This simple concept went right over your head as was evident in your reply:

"I also take note of your claim that if money circulates and people like it so much that they use it more and more, it must be because it' BAD money."

He also tried to help you with the concept that I call "The Judgment of Value" which shows that value is determined by the receiver, not the giver of a currency. This also cleared your cabeza with ease as you quickly came back with this:

"OK, I'll tell the grocery store clerk that the one dollar bill I just handed her is really worth $100 in my opinion and that's how much groceries I'm going to buy now since that's what I value it at."

Art, these are two very simple concepts that have been discussed often and at length here. It is now completely clear to me that you will never get any of the larger concepts. You will never get why hard money always fails. Why it sucks for the debtors that make up at least half of the people, including those in power right now, and why it always ends in tears for the savers, just like easy money does. You will never get the genius of the grand induction performed by the architects, nor the sweetness of its anonymous revelation through the Internet's only gold discussion forum at that time.

You will not get any of it until you actually see it in front of your face. Because in order to get it before you can see it, you must be able to think in principles. I'm going to share with you (and everyone) an email from one of my brilliant supporters. This was from a while ago, so it was not about you, Art, although it does apply to you.

Cont…

FOFOA said...

p.2

Dear FOFOA,

I judge you to be more of an Objectivist than the majority of those who claim themselves to be, but who have done so on the same whimsical grounds by which they might have chosen their favorite NFL team.

The defining attribute of an objective manner of thinking is the ability to—more deeply, the recognition of the necessity to—think in principles. To see reality as it is, then to grasp reality in non-contradictory conceptual form.

But thinking in principles will not succeed unless its elements—the conceptual terms in which the principles are expressed—are solidly grounded in reality. This is where the term "objectivity" arises. You best reveal your own appreciation for this fact by the manner in which you validate your unwinding of the concept "money."

This is not the way most people think, and this is why your blog is so striking to so many people. But it is only your fellow thinkers-in-principles who possess the capacity to respond in this way. Those who don't get it, including those commentators to which you refer, lack that capacity. Ayn Rand called these the "anti-conceptual mentalities." The anti-conceptual mentality has been fostered and nourished by Pragmatism, the philosophy which dominated U.S. academia the first half of the 20th century, and dominates our educational and political systems still today. We swim in a sea of Pragmatism.

…[G]iven a certain context of knowledge, and given a certain observation (and there need only be one observation, no enumeration necessary), the induced proposition will be seen as necessary. That is, to deny the proposition will be to deny the validity of the observation, or to contradict the entire context of your knowledge.

Because the mind is finite, the immediate context supporting your induced conclusion will be limited. The role of deduction at this point will be to explore the applicability of your result to a broader context. Think of Newton, having just induced the inverse square law in the context of local and orbital mechanics, now asking himself, "How might my equation apply to the shape of the earth?" and then deducing the equatorial bulge and the tides.

…[F]rom what prior principle did Newton deduce universal gravitation? Newton's theory is the product of a grand induction, an integration of prior inductions made by Kepler and Galileo, based on observations of planetary orbits, and of the behavior of physical bodies on earth.

Freegold, too, is a grand induction. Your method of approaching the issue from a variety of perspectives, all leading to the same necessary conclusion, after precisely defining your concepts, is essential to a proper inductive process.

Regards,
XXXX


Cont…

FOFOA said...

p.3

The email above was from an intelligent and successful man, a highly-skilled professional of the utmost respectability. Art, I imagine this email probably exploded your head. I can guess what you're thinking right now. Something like "you evil FREEGOLD CROOKS are trying to use LOGIC to trick us REGULAR folks." (Paraphrased from one of your comments yesterday.) It reminds me of a comment on Rick Ackerman's site under one of his concession posts, perhaps this was even you:

"We are dealing with insane, malevolent psychopaths here… [they are] very dangerous using logic in predicting what they’ll do next."

Ha! The world is indeed a dangerous place when the 'Masters of the Universe' have co-opted things like nature, gravity and LOGIC as their tools of oppression. Perhaps they have also co-opted sanity? If you really want to be free, Art, it seems that you might want to become insane and illogical to avoid their traps. Oh wait! Snap! Seems you already are free!

And now, Art, you can be free from this Freegold HELL-TRAIN we call FOFOA.blogspot. You see, with you it's not that I'm threatened by your superior intellect or the righteousness of your ideals, but it's more like I get the feeling someone crazy has walked into my home and is now pooping in his own hands and flinging it on my guests and smearing it all over the walls during MY party. So I am kindly asking you to leave.

You can continue to smear your poo on this thread. But any comments that show up on any other threads, including new posts, will be deleted on sight, regardless of content. I won't even read them. I'll just delete them. That's right, you are now banned just like Shelby and Huy's Finance. I also reserve the right to delete your future comments from this thread.

So all you Art fans, like Desperado and Rui, you might want to sign up for email notifications from this thread. That way you won't miss out on any of Art's future poo.

I will also repost this announcement in short form for those that skim past the longer comments.

Sincerely,
FOFOA

FOFOA said...

Cliff's Notes from the above:

Art is banned from commenting on all future and past posts. If he posts a comment, I will delete it on sight. I won't even read it. But because he's not quite as bad as the other two I banned, and because a few of the other "anti-conceptual mentalities" here are fans of Art's form of logic, he can continue to post comments on this thread, within a reasonable tolerance.

I warned Art, and he continued onward. He has used very offensive language aimed at me and my guests. And he has professed that his mission is "to prove that Freegold is FRAUD and to save people from buying your lies." Fine. But he can do that elsewhere. He is no longer going to interrupt, pollute and derail the conversation in which most people come here to engage. This blog, fortunately, is not a tribute to Art.

Sincerely,
FOFOA

Art said...

DP,

1) You can sticker prices in gold or silver dollars or both, and sticker them also for gold and silver specie as well (you may demand payment in precious metal coins only if you like. It's you store). You may price your wares substantially differently in terms of market purchasing power, if one means of payment is more desirable than the others for you. If people are so mentally-challenged then they'll patronize only stores that offer all forms of pricing or only the one they prefer. OK? And if they'd rather die than think, well then that'll make more room for the rest of who'd rather stick around.

After a short period of adjustment, there is no reason to expect that prices under a metallic standard would fluctuate anymore than they do today, so telescreens are not needed. You make your basic choice as to which metal or currency (incidentally, four choices and not just two) you will use to buy and which you will save in, and you take it from there in a less hectic pace than today's. It is logical to assume a that a finite commodity money will have less volatility than a fiat one issued by a gang of international criminals (The IMF forbids the use of gold as money. IMF = Freegold).

2)I suspect that people can think when money is the subject, don't worry.

3)No, the currency IS backed by the National Bank but at a floating rate. It's the private scrip that is not backed NOR legal tender.

No, this is not what is happening in the Euro zone. So you're dead wrong when you claim that you can objectively measure prices in Euros. The Euro is NOT gold backed. They just mark to market what they claim as their gold reserves, which are not verified by someone outside the banking system. And the Euro is issued by a central bank which is not subject to the political will of the people of Europe. Therefore, for all practical purposes, the ECB is just as "private", and not public nor really part of the (national or European) government, just like our own Fed.

4)Your observation about this are correct. I personally wouldn't deal with such a bank either unless it's set up by Jesus Christ or Gandhi or some such great man himself. The main purpose here is to not preclude freedom of choice and to allow for the flourishing of great enterprises by great men and women.

As for the rest,

If the goal is to have your cake and eat it too, then it is clear that you will not achieve your goal by listening to me.

However one bird in the hand is better than two in the bushes.

Up to you.

DP said...

Yay! Looking forward to being back in my happy place soon! :-)

Art said...

No Julian,

You're not being honest about what I said regarding taxation. I copied and pasted the exchange you're referring to below so all can judge for themselves:
===================================
[AQUILUS is asking how the National Bank that I referred to could add to its gold reserves]

""3.3 What is the technique - how does the government acquire this new gold [for the National Bank]? It cannot pay for it with new currency (since it cannot issue any without more gold) so then does it mandate that mines deliver it at a discount or does it nationalize mines."

MY ANSWER: ...the government may attempt to issue currency to buy gold with whatever success the market place will mete out to such a dubious enterprise. It can also attempt to take over mines and attack the sanctity of private property with calamitous results.

Or it can reduce its size and basically only finance national defense (NOT imperialism fostering) expenditures; an efficient and JUST court system (CLEANSED of crony corrupt judges); and a real national health care service (CHEAPER and accessible to ALL as proven in Europe); ALL of which are to be funded by an equitable taxing apparatus.

ALL of the above are to be determined by open national debate and REFERENDUM. (If we can't as a people do this, it's the end of our republic anyway so take your gold and silver and run for the hills.)

Thus having reduced the need to acquire enormous additional amounts of gold to fill the reserves, the government can obtain extra gold through 1)collecting tariffs; 2)[benefiting from the proceeds of foreign gold payments] for trade surpluses; 3)payments in gold from patriotic citizens for government services; and, why not 4)even from the gold miners themselves who prefer to have some gold-backed paper cash handy for its convenience.
===================================
NO, as you can see, I am against taxation without representation nor CONSENT. Look up the meaning of REFERENDUM in the dictionary please.

Art said...

ON SILVER,

DP SAID, regarding bimetallism: " I was just wondering to myself... One ounce of gold remains, how many ounces of silver? I still don't quite "get" how you propose a double base numeraire can work. Please show me how there can be more than one base in a system, if you don't by now accept that there can only really be one."

REPLY: Is not foreign exchange de facto part of the monetary base? Do we have only ONE currency in the world now? In many countries of the world, the average citizen is proficient in trading in several currencies every day. Even in Europe only about a decade ago, this was still the case.

I spent quite a bit of time in Europe in my younger days. I vividly recall a distant family member who had a souvenir shop close to the Louvre museum, constantly selling his knick knack and assorted 'Paris' t-shirts against half a dozen currencies every day. He either kept them or exchanged them for French francs at the end of the day, depending on how he felt about the value of the foreign exchange he had received. (He was very fond of the US dollar as I recall and stuffed it under his mattress.)

This still goes on in other parts of the world. For example, peasants from Anatolia who can't quite read nor write, trade in, and buy and sell, various foreign currencies in the bazaars of Istanbul as though it were the most natural thing in the world.

So there you have your answer. It was done. It is done today. It can be done. We had a bimetallic system in the US not long ago. The main problem was that the ratio of gold to silver was FIXED. Remove that and you have two forms of honest money competing against each other.

How sexy is that?

Art said...
This comment has been removed by the author.
Art said...

FOFOA SAYS: "... when comparing two monies, circulation velocity correlates to and is a measurement of their store of value properties. In other words, the currency that circulates with greater velocity is the "bad money" with a short store of value timeframe, while the slower currency is the "good money" with a greater ability to store value at that time."

MY REPLY: The "circulation velocity" of worthless tokens that people STOP accepting in payment would quickly attain that of molasses in January. Conversely, the "circulation velocity" of honest money that people start turning to would ACCELERATE. There you have the logical proof that 'slow' does not equal 'good' money.

FOFOA SAYS: "Note that this is a clear example of how the transactional and reserve functions of money are able to separate into two different media. Think about Zimbabweans quickly spending Z$s while hoarding US$s. Mises called it a "secondary media of exchange." This simple concept went right over your head as was evident in your reply...".

MY REPLY: Here FOFOA is committing the fallacy of equivocation: Getting rid of hot potatoes as fast as you can is not the same as "using" them voluntarily in the course of normal business - just as dumping garbage as fast as you can because it stinks, is not "using" garbage. How disingenuous you are, Sir.

FOFOA SAYS: "... It is now completely clear to me that you will never get any of the larger concepts."

MY REPLY: This one is called the fallacy of mere assertion.

FOFOA SAYS: "... You will never get the genius of the grand induction performed by the architects, nor the sweetness of its anonymous revelation through the Internet's only gold discussion forum at that time."

MY REPLY: I didn't know the Bernank was a poet.

dojufitz said...

Costata's Silver article is looked at by BrotherJohnF on youtube.

http://www.youtube.com/watch?v=QTAO_M9mexw

he has 2 parts but it looks like it might end up being 5 - 10 parts....as there is alot to cover.....

I was going to send him Costata's article but apparently many other youtubers did so before me.....this is the most comments i've seen on FOFOA....500 plus?

Indenture said...

Art: In the system you describe are their personal credit cards that can be used for daily transactions?

julian said...

Art said:

ALL of which are to be funded by an equitable taxing apparatus.

taxation cannot be voluntary...instead that would be called free trade/free market interaction

either it is voluntary, with consent, as in free market (and is no longer taxation)

or it is to some degree or another forced, coerced upon people, perhaps through majority rule, but all the while requiring the use of monopoly on force in order to enforce it

otherwise it's completely voluntary, in which case there need be no institutional monopoly on force and money collecting

private institutions and voluntary interaction can do everything the monopolistic organization (government) purports to do


anyhow, we might leave this point of debate for now, since it isn't directly on topic for these comments


Kindly,


Julian

Indenture said...
This comment has been removed by the author.
Indenture said...

The Future of Physical Gold, Part I - Dialectic Foundations

Aquilus said...

Well after reading this latest post by Art, I lost the appetite to continue the conversation started in the lost posts.

The "reply" on circulation velocity is a shining beacon of the most utmost lack of comprehension of the most basic of concepts.

I would say that Art has the fire of Jean-Paul Marat but not his intellect.

I look forward to a new Art-less "cleanup" post.

Art said...

FOFOA SAYS: "Art, I imagine this email probably exploded your head."

MY REPLY: (...i thought they'd killed bin laden?)

FOFOA QUOTES: "We are dealing with insane, malevolent psychopaths here… [they are] very dangerous using logic in predicting what they’ll do next."

MY COMMENT: Yep, Freegolders and logic is an EXPLOSIVE combination.

FOFOA SAYS: "You see, with you it's not that I'm threatened by your superior intellect or the righteousness of your ideals, but it's more like I get the feeling someone crazy has walked into my home and is now pooping in his own hands and flinging it on my guests and smearing it all over the walls during MY party. So I am kindly asking you to leave."

MY REPLY: I was under the impression that this was a debate and not a pissing contest involving egos.

P.S. Please tell your mentor who says that "The defining attribute of an objective manner of thinking is the ability to—more deeply, the recognition of the necessity to—think in principles..." that one principle the refutation of which could have cost you your life not that long ago was the principle that the earth is flat. Pass along my greetings to Another please.

Sincerely,

Art

Art said...

JULIAN says: "taxation cannot be voluntary...either it [taxation] is voluntary, with consent, as in free market (and is no longer taxation)...]

I suggest you take some logic lessons from FOFOA, Julian. (I can't wait.)

Indenture said...

from link above: "If the Freegold system were to take root in certain parts of the world soon, then it would most likely consume itself rather quickly, since none of the underlying structural instabilities of the system would be absolved by its presence. These instabilities stem from the mechanisms of value creation, realization (profit taking) and speculation in the financial capitalist system.

Such instabilities escape the imagination of Freegold advocates because, along with the flawed dialectic foundation, they base its prospect on a fundamental misunderstanding of economic value in a capitalist system. The broader inevitability of financial capitalism is ignored to make room for the perceived inevitability of a global and gold-based monetary paradigm."

This is how you politely refute Freegold.

Art said...

INDENTURE,

You are wrong. Freegolders are not advocating a "gold-based monetary paradigm." They are advocating a FIAT-based monetary paradigm. According to Freegolders, gold is NOT money. Money is only a medium of exchange according to the Freegold myth.

Rui said...

@ FOFOA

"It is now completely clear to me that you will never get any of the larger concepts. You will never get why hard money always fails. Why it sucks for the debtors that make up at least half of the people, including those in power right now, and why it always ends in tears for the savers, just like easy money does."

If it sucks to be a debtor then DON'T BE ONE. No one forces you to take on that debt for God's sake. What is it that while 1.3 billion Chinese on the same planet are able to collectively live debt free & have a sustainable economy and yet you cannot?

Bankers (under political pressure or not) first encourage people to borrow (in FOA's exact quote - "we all must borrow in this modern world") to get everyone in debt troubles and then turn around to blame it on hard money for not being able to dilute the debt bankers create in the first place.

Truth is we all must live within our means and produce, rather than borrow, in the old world, this modern world, the future world and any world. Principles like above do not take genius but common sense to figure out.

A monetary system therefore has to have tough love, period. Running it on some spoiled kid borrowing "we all must borrow / there's a desire there's a loan" mentality is an express lane to fiscal ruin, and that is where the world is at now.

Bankers like to think themselves as genius while in fact their very loose lending practice is the source of the problem. Nice try, FOFOA, but you still have not grasped it.

Aquilus said...

Indenture,

Polite indeed, but what in God's name is the author trying to say?

Short of re-instating fractional reserve gold I don't see what he could be talking about. Clues?

Aaron said...

@RUI

"Truth is we all must live within our means and produce, rather than borrow, in the old world, this modern world, the future world and any world."

You are arguing in favor of your ideals against the reality that surrounds you.

While you are trying to convince 6 billion people not to borrow, tell them your great ideas about how we should no longer engage in war and abandon xenophobia. Let me know how that goes.

julian said...

I enjoy catching wind of things from a freegold perspective. Usually it is only a snippet, not even a minute long. But it confirms much.

Perhaps there is confirmation bias, but that is omnipresent, as an act of one's desire for confirmation. Sometimes the bias is accurately aligned. The correct trail walked.

Just observations making connections, and attention to language/concepts.

Chris Whalen, in this interview link below, says some interesting things about people preferring currency for usage, even with suffering some inflation rates. People would have savings in physical assets.

He doesn't address an important point: assets like housing being valued using the currency, rather than the store of value / savings reference. The question of the numeraire?

We'd need a good numeraire, wouldn't we?

To me, his words imply that people are operational, practical. Very much so. Economic. Efficiency 'n Effectiveness, this is what people seek to achieve, on a fundamental level.

He speaks explicitly of the separation of currency and of store of value. For my this was already validated. ;)

Here is the link, the pertinent clip begins around 8:50, and goes to 9:40. I don't know how to link that, how FOFOA does.

http://www.youtube.com/watch?v=gTIt3x747Ak

He mentions "goldbugs." This is perhaps in reference to strict gold only, or general hard goldmoney advocates? I don't know.

He also mentions capital flight, from emerging markets. Hiding money from your domestic government so they can't tax it. Even another government's hidden tax of inflation can be high and still be attractive place to settle down some personal capital.

I wonder how that plays into the idea of unencumbered gold in private hands held within a "domestic" region. (Like Vietnamese owning Gold allocated at Perth Mint?)

julian said...

Art said:

JULIAN says: "taxation cannot be voluntary...either it [taxation] is voluntary, with consent, as in free market (and is no longer taxation)...]

I suggest you take some logic lessons from FOFOA, Julian. (I can't wait.)


No, Art, let me correct you:

...either it [the act of payment] is voluntary, with concent, as in free market (and is no longer taxation)...

Sorry for being unclear in my writing.


And, I've already taken and continue to take some logic lessons from FOFOA. Logic of Human Action and Economics. So far it has been an abundant provider to Reason.

Art said...

JULIAN,

How do you pay for something that no longer exists?

julian said...

*consent


P.S. Art, that was a weak jab at FOFOA. Are you getting tired in the latter rounds? You might catch another wind. Keep your guard up though. You're in the evil freegolder lair with all kinds of manic followers of the vampiric FOFOA surrounding you from above, hanging upside down. Inversion. It's good for the spine?

julian said...

Art said:

How do you pay for something that no longer exists?

With an acceptable medium of exchange?

I don't quite understand your question.

Indenture said...

Aquilus: I just said it was polite. It felt like I was walking up an Escher Stair and then I realized I was just meandering in circles. The piece was big word fluff.

Robert LeRoy Parker said...

@mortymer

Thanks for the Fekete article. Very interesting. He also hinted at Fofoa which I found interesting as well. It feels like Fofoa blogspot is on the precipice of exploding, but perhaps it has felt that way to the long time readers for some time now.

Wendy said...

Art,

Perhaps you should just take the Mogambo Guru's advice and just buy some gold and silver, then chill. Because we're all freaking doomed (FD) anyways according to him.

Anonymous said...

Good stuff, everyone. I enjoy all of the comments... except CAPTAIN CAPS LOCK.

Art, I'm not gonna miss you. You'll probably leave here thinking you've "won" and spout off on other blogs, forums, to your wife and girlfriends about how you destroyed evil Freegold and changed the world, but... well, you failed miserably in all respects.

Take note, in the future, of how Victor, Desperado and Rui present their opinions without shitting all over the place, if you'd like to gain the respect of your peers.

ART, this one's for you!


HEY YOU GUYS!


..Back to my wine now:)

Rui said...

@Aaron

"You are arguing in favor of your ideals against the reality that surrounds you.

While you are trying to convince 6 billion people not to borrow, tell them your great ideas about how we should no longer engage in war and abandon xenophobia."


Not exactly ideals, Aaron.

Productive people in the world have no interest in lending their money to unproductive borrowers, and who can blame them? It's when their money stays in the production loop that keeps propelling the economy forward to benefit everyone.

Heck, we even teach our own kids to be self-reliant and independent. Why should the whole society behave differently?

It's always those who produce and make ends meet that make it through, and those who live by borrowing that fail at the end. Survival of the fiscally fittest, and demise of the fiscally unfittest. Darwinism at work.

Trying to hack it with a FIAT tweak to enable everyone to borrow is like picking up a fight with Darwinism,

Could you name me one thing ever standing in the way of Darwinism that did not get crushed?

It's not ideals but the ultimate reality. Deep down there you know I'm right, Aaron, do you not?

Wendy said...

Rui: "Productive people in the world have no interest in lending their money to unproductive borrowers"

I agree with you in theory Rui, but in practice that's exactly what they are doing by depositing their excess production in the system as digital dollars.

And honest to god Rui, Darwin (natural selection) has been replaced by modern medicine and modern hedge funds, unless you are a fruit fly.

There is nothing naturally selected anymore, welcome to the casino!!

Pete said...
This comment has been removed by the author.
Pete said...

Before blogger deleted a bunch of posts, someone made a comment about why gold is preferred vs other commodities such as diamonds.

I'm not advocated hard currency, but thought I'd respond with something I read a few years ago.

Also, FOFOA might have this posted somewhere but I couldn't find it.

From Properties of good money:

----------
"...what makes a commodity ideal to function as money? They are:

Portability
Ideal money must be portable. That is, it has to be convenient for you to bring it along to wherever you want. Obviously, cattle fail the portability test and was not the favoured form of money.

Divisibility
Ideally, money should be easily divisible to cater for all types and sizes of transactions. Again, cattle obviously fail the divisibility test.

Durability
Physical money should be durable. If not (i.e. can decay), it cannot be a reliable store of value. Tea fails the durability test.

Sufficiently rare
Obviously, money has to be sufficiently rare. If not, you will have to haul a massive quantity of it for transactions. Seashells fail this test. On the other hand, it cannot be too rare. Otherwise, it will be impossible to sub-divide it further for tiny transactions.

Fungible
Any commodity that functions as money ought to be fungible. That is, you can trade or substitute it for equal amounts of like commodity. Someone asked whether diamonds is a suitable commodity for money. The answer is no because diamonds are not fungible. Since each diamond is unique, they cannot be substituted or traded easily. Therefore, it cannot be conveniently used for transactions.

Un-consumable
Oil cannot function as money because because it is a consumable commodity. Obviously, it is not a good idea to consume your money! It’s pragmatic value is far too great to function as money.
----------

Gold and silver both qualify for all of these qualities, although you will notice that silver fails the last one.

mortymer said...

Why the West Is Attacking Gaddafi
by Michael S. Rozeff

http://www.24hgold.com/english/news-gold-silver-why-the-west-is-attacking-gaddafi.aspx?article=3481351794G10020&redirect=false&contributor=Michael+S.+Rozeff

+
Complete Transcript
[Historic Speech of Gaddafi to UN General Assembly, 2009]

http://metaexistence.org/gaddafispeech.htm

+
Gaddafi gold-for-oil, dollar-doom plans behind Libya 'mission'?

http://www.youtube.com/watch?v=GuqZfaj34nc

mortymer said...

M. A. Armstrong

"...We are facing the greatest threat to the preservation of wealth for the Sovereign Debt Crisis is truly a Bonfire of Real Wealth...."

http://www.martinarmstrong.org/files/So%20You%20Thought%20the%20Sovereign%20Debt%20Crisis%20was%20Over%2005-10-2011.pdf

FOFOA said...

I will be reposting all of my comments that were deleted by Blogger yesterday. If anyone wants to host it on their Scribid account, I also have a pdf of all the comments that were lost.

FOFOA said...

p.1 of 5

Hello Victor,

I didn't really want to jump into the fray here, but I am compelled to correct a couple of your errors.

Here's the part of your comment I'm focusing on:

2) I know that FOA once wrote that silver will go to zero. I think if he was still reading here, he would wish to have that statement back. I think about it this way. Another said "something similar might work with silver, but I am not an expert on silver" (from memory). Another is the master. FOA said "gold will go to $30000/ounce and silver will go to zero". He is the disciple. This is one (out of a few) things he was too enthusiastic about to get them right.

First of all, he wrote that silver would go to 50 cents, not zero, and he also qualified that as in 2001 purchasing power. Here are the exact words:

"This not only has "everything to do with a gold bull market", it has everything to do with a changing world financial architecture. And I have to admit: if you hated our last one, you will no doubt hate this new one, too. However, everyone that is positioned in physical gold will carry this storm in fantastic shape. This is because the ECB has no intentions of backing their currency with gold and every intention of using gold as a "free trading" financial reserve. None of the other metals will play a part in this.

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

For the first time,,,,,,,, our industrial production, along with the demand for industrial metals like silver, will fall away even as hyper inflation in prices takes hold.

For the first time,,,,,,,, demonstrating that no other asset is equal to gold, even though promoted to be!

When the coming paper illusion price of gold is destroyed, sending its trading price way up and way down, several times, before shutdown,,,,,, the thinner paper markets of lesser metals will be absolutely devastated. Yes we will see $50.00 silver in our time,,,,,, $50.00 for a hundred ounce bar,,,,, that is! No less a relative price decline for the other metals is in store. Even if these actual dollar numbers prove incorrect,,,,,, relative inflation adjusted prices will show the exact same ratios to gold. The gain will truly be in gold!"


And this, some time later:

"Silver may hit my .50 before taking off and so will many other real assets. My point is that we are on an "end time run" in fiat dollar production that will soon produce a spike in real price inflation that crushes hedge vehicles. One item alone, physical gold, because it is the main wealth asset behind the next currency system, will outrun everything by a wide margin."

Cont...

FOFOA said...

p.2

As far as FOA's credibility versus ANOTHER's credibility goes, FOA addressed this:

"Of Credibility
A long time ago a gentleman told me; "go ahead, use your mind, speak for me as I give to you. Tell them our thoughts, it be good for all to know these things". With that comment, it all started. Even further back, long before we had these internet forums the logic and efforts behind this push was flowing..

Presently, I write almost entirely for myself. Another shares with me when and if as he sees fit. Often, to my consternation, and some embarrassment, his Thoughts do not arrive for copy when I say they will. Truly, this is as it should be.

I (we) expect none of you to consider anything said here as credible. Everything is given as I understand it. If you came with a notion that I am someone who sees the future; grab the children and run far away. For these Thoughts, and my ongoing commentary, are meant to impact exactly as the "gentleman" said they would. People hear them, and whether believed or not, the words leave a mark. A mental mark on the trail, if you will. And later, after the world turns, our little "stacks of rocks" will be easier to understand next time you are passing this way. In fact, your ability to find your own way will forever be enhanced for having seen this path in a different light."


Victor, I find your arguments in favor of silver being a "monetary metal of great value" in our future interesting. But I, for one, do not find them the least bit convincing. My view of your arguments is that they are coming from someone who does not really understand why FOA wrote the above. And so he clings to a couple statements made by ANOTHER as his justification for FOA being wrong in this particular aspect of "the A/FOA paradigm."

I wholly disagree. I view ANOTHER's "concessions" to the silver bugs of the time as just that, conciliatory statements meant to calm them down. Silver bugs can be feisty! But here is the key to the whole A/FOA paradigmatic view, quoting ANOTHER:

"You have heard the phrase, "money is moving into real estate, land, oil, stocks or bonds". It is a bad meaning, as it does not what it says. All modern digital currencies do not go into an investment, they move THRU it. The US unit is only an exchange medium to acquire assets valued in dollars…

There is an alternative. Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies". Gold can be used to revalue any asset, and not be destroyed in the process!"


Victor, do you find it funny that ANOTHER used the word "only" there? Do you think he was conveniently using "gold" as the abbreviation for "gold and silver," that he really meant this?... "There are two alternatives. Gold and Silver! They are the only media that currencies do not "move thru". They are the only Monies that cannot be valued by currencies. It is gold and silver that denominates currency. It is to say "gold and silver move thru paper currencies". (LOL)

Here's how I put it in my backwardation post. A.E. Fekete found this part particularly interesting:

"This is the key to EVERYTHING!!! It is not "gold liquidity" that the bullion banks create... it is DOLLAR LIQUIDITY. Dollars bidding on MSFT stock set the value of that stock. If dollars are frantically bidding on MSFT (high velocity), the stock skyrockets. If dollars stop bidding for MSFT all at once (low velocity), the price falls to zero. This is true for everything in the world except gold...

Cont...

FOFOA said...

p.3

"Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero. This is backwardation!"

Again, Fekete found this interesting and rephrased it thusly:

"Fofoa says that the dollar needs voluntary bids from private physical gold holders to survive. But the pool of real bids is bone dry and cracking. Dollar liquidity is just a cheap facade. As the gold price rises slowly, nervous Nellys, suckers, and other weak hands will relinquish bits and pieces of the yellow precious which will keep the merry-go-round in motion."

Here's a question for all the Fekete fans, because I honestly don't know the answer. Is he still writing about silver backwardation being the system-killer, dollar-buster or hyperinflation instigator that he was back in 2006? It seemed to me that he had changed his "bimetallic focus" to a "monometallic" one by 2008 when he revisited that 2006 piece with a gold-only focus this time. The only mention of silver in the whole 2008 article being this:

"But Comex will eventually have to declare “liquidation only” policy, effectively closing its gold window. The phrase means revoking the right of holders of contracts to demand delivery on their expiring gold futures under certain circumstances. Clients have to accept settlement on their contracts in cash. This has happened in the past, e.g., in silver and palladium, although it has never happened in gold. It is not widely known that Comex would not go bankrupt de jure if it declared “liquidation only”. Small print in the contract makes allowance for this option in case of force majeure. Nevertheless, Comex would be considered bankrupt de facto in the eyes of the public if it declared “liquidation only” on its gold futures contracts. Comex is the residual source of the world’s only currency that is not the liability of some government, gold. Moreover, by implication, it would also be the end of the irredeemable dollar as we know it."

Personally, I never imagined silver backwardation being the system-killer that Fekete wrote about in 2006, mainly because of what ANOTHER wrote above:

"Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies".

And now I am able to add some sustained silver backwardation to my list of confirmations. Perhaps, or I should really say apparently, ANOTHER knew what the heck he was talking about. Gold really does stand alone in this monetary role, that from which transactional currency needs a bid.

You see, today's gold is what Mises called a "secondary media of exchange" which is kind of like a focal point monetary store of value in this context:

"…secondary media of exchange must first be exchanged against money or money-substitutes if one wants to use them—in a roundabout way—for paying or for increasing cash holdings…

He can expect that when one day it is necessary for him to increase his cash holding he will be in a position to sell these goods of a high degree of secondary marketability without delay at the highest price attainable at the market."


Cont...

FOFOA said...

p.4

That was from "Human Action". And "secondary media of exchange" in this case is AE-speak for monetary wealth reserve, or monetary store of value. Here's an interesting quote from Menger's "Principles of Economics":

"But it appears to me to be just as certain that the functions of being a “measure of value” and a “store of value” must not be attributed to money as such, since these functions are of a merely accidental nature and are not an essential part of the concept of money...."

Hmm… Here's some more from Mises' "Human Action". Notice he's writing about gold, not mentioning silver. Do you think he was just abbreviating "gold and silver" as "gold" to save on the cost of ink?

"Gold is the money of international trade and of the supernational economic community of mankind. It cannot be affected by measures of governments whose sovereignty is limited to definite countries. As long as a country is not economically self-sufficient in the strict sense of the term, as long as there are still some loopholes left in the walls by which national governments try to isolate their countries from the rest of the world, gold is still used as money. It does not matter that governments confiscate the gold coins and bullion they can seize and punish those holding gold as felons. The language of bilateral clearing agreements by means of which governments are intent upon eliminating gold from international trade, avoids any reference to gold. But the turnovers performed on the ground of those agreements are calculated on gold prices. He who buys or sells on a foreign market calculates the advantages and disadvantages of such transactions in gold. In spite of the fact that a country has severed its local currency from any link with gold, its domestic structure of prices remains closely connected with gold and the gold prices of the world market."

The point is, Victor, that Freegold, gold's emergent role today is different, on a deep conceptual level that is perfectly consistent with the thoughts of "past masters". You can "want" silver to do the things you say until the cows come home. But the evidence says otherwise, to me at least, and to a few others who can see beyond their own hopes and desires.

Here is one way in which I think gold and silver are very different. If the paper markets of both metals were to collapse simultaneously in a big financial collapse, I think silver would crash as gold skyrockets. I cannot prove this, but it is what the evidence tells me. It is my analysis. I think that in a physical-only market the purchasing power of gold would be much higher than today and the purchasing power of silver would be much lower.

I think the paper markets are actually levitating silver right now. They are bringing in investment demand, speculation (through ease) and leverage that simply wouldn't be in silver in a physical-only market. FOA wrote about this as well. And it must be viewed within the dynamic context of these markets failing. Much of the "big money" that is in silver, thanks to the ease of the paper markets, would not be interested in taking delivery of "the heavy metal". And in the dynamic of a market crash, it would rush from silver into gold for multiple reasons, which FOA outlined in the Gold Trail.

This is not totally unlike the effect the "paper market" (meaning the paper US dollar) had on "monetized" gold and silver in the early years of the gold standard. Silver, being a stamped coin, was overvalued ("levitated") in that monetary form. Meanwhile gold, being the monetary base, was forcefully undervalued. I have written about this before, and its effect was briefly visible in 1933 when FDR was forced to raise the price of gold but conversely had to buy silver to levitate its price.

Cont...

FOFOA said...

p.5

Here's another way I see them as different. I look at GLD and SLV as "CB-sized stockpiles" of physical metal that, while "owned" by the public, are under the control of the banks. In other words, by their very pricing structure, the banks can take out or put in metal at any time with very little cost and almost no effect on the price of the underlying. And they have no carrying cost because that is picked up by the shareholders. It's a win-win for the banks; their own private "CB" that they control. But there is a key difference between the two ETFs, that being the difference between silver and gold.

I see that the banks have control of their own "CB" for physical silver and gold. And in the case of gold they are likely using it, as slowly as possible, to satisfy the demand of small Giants that show up at the "gold window" à la Who is Draining GLD?. Yet, in the case of SLV, I see a means to corner the flow and churn the profits banks are famous for churning à la Has the silver market been cornered.... AGAIN?

Desperado has written in the past, "silver represents freedom and liberty far more than gold." But the way I see it, with gold you join in the freedom and liberty enjoyed by the Giants. In silver, the value of your wealth is under their control, like the voodoo doll in this Capital One commercial.

I can absolutely see silver circulating as a currency during a hyperinflation event, just like you and Desperado. Absolutely! But even so, that does not mean a higher purchasing power for silver than it has today. In my analysis it means a much lower purchasing power than silver has today. Yet still I keep some pre-65 halves just like I keep some physical cash at home. I don't expect to get more for it than I paid, in real terms, but it's good insurance to keep around. How could the PP of silver be lower if it is used as a currency? Circulation velocity! All those poor silver bugs (poor man's gold) dishoarding in favor of scarce food while the gold lies still.

I see no contradiction between FOA's words at the top of this comment and what I still expect to unfold. I think we are just hitting the beginning of what he was describing. And I, for one, do not think FOA would take those statements back. I also don't think he was being overly enthusiastic when he wrote them. Perhaps he was being a little more candid with the silver bugs than ANOTHER was willing to be, but that's something I can relate to.

You can discount this whole paradigm if it doesn't agree with your desires and/or pre-conceptions. I don't care. I am only here, like FOA, to be sure it is presented as accurately as possible, to leave a "stack of rocks" that can be revisited later, and to offer a "different light" that might "enhance" the view of this trail for some, as it did for me. All I'm doing here is sharing the view that has brought me the most peace of mind. The little angst I still have is in deciding what I'm going to do with my remaining silver. By the way, for the record, and for the umpteenth time, I haven't bought a single ounce of silver since I discovered the writings of A/FOA. But that's just me and my understanding. You need to find your own understanding and peace of mind, and that's why I write. Now, back to my cave.

Sincerely,
FOFOA

FOFOA said...

One more and then back to my cave. ;)

I wanted to thank Art for calling me Evil. Quote:

"Another/FOA/FOFOA are EVIL."

Art, you are on thin "Shelby-like" ice here now. Watch yourself.

Oh, and he also suggested that I might work for the evil CIA:

"It was suggested at the time by some that the USAGold forum was a mindf-ck operation sponsored by the CIA, among others. In any case, all these blogs and forums are either monitored or instigated by governments and the bankers who use the internet as a way to put their feelers out there."

…and perhaps that I'm also an evil banker:

"So it's not mere speculation on my part that they are affiliated with bankers."

…and that I hate gold:

"In other words, FOFOA is fighting for his job. He HATES gold."

All posted on the last Open Forum. Art likes to post on any thread that feeds him.

Art, do you even realize that you come across as someone who is slightly unhinged (detached from reality)? Truly, you do. But, you are probably the worst possible PR agent your kind could ask for, so carry on.

And to thank you, Art, I wanted to bring forward two HYSTERICAL videos that DP used in a comment to Art that, unfortunately, spent too many hours in the spam cell. So most of you probably didn't see them.

In this first one I'm assuming that Art is the cat, and the tennis ball is Freegold, or something like that:

Click --> Art the Cat

:)

And in this next one it looks like Art got on a train full of 'Freegolders'. It seems that being surrounded by 'Freegolders' caused Art to undress himself. Perhaps he also realized that this Freegold train was the only train going anywhere, so he decided to get off and run around naked? Oh, those 'Freegolders' are EVERYWHERE! EVERYWHERE I tell you! Run for your lives!!

Click --> Art rides the Freegold Train!

I guess it should be no surprise that Desperado and Rui kinda like the reality-challenged Art.

Sincerely,
FOFOA

Robert LeRoy Parker said...

Haha, good to be a night owl tonight. Moving from Aristotle back over to Fofoa.

Indenture said...

Wendy: "There is nothing naturally selected anymore." I can chew on that idea all day.

Indenture said...

Greece had entered into not one, not two, but a total of 13 different currency swap contracts with Goldman Sachs
Sell The Parthenon

Ashvin said...

The Future of Physical Gold (Part I - Dialectic Foundations)

Part I in a series about the likely role of gold in the monetary/financial systems of our future (this one is focused on abstract theoretical foundations of the dynamics in an industrial-financial capitalist economy)

Art said...

I recommend that you back up the truck and buy silver next week. Selling some gold and converting the proceeds into silver would also be a good speculative move.

As evinced by the Freegolders' fear of silver and their anti-silver propaganda (Freegolders are saying that silver will go down to 50 cents a troy ounce), the bankers and their governments are even more scared of silver than they are of gold.

Don't be afraid. Think. At this point, the Western financial powers that be do not have the upper hand. They simply CANNOT sustain enough selling on the paper markets to keep the prices of gold and silver down for more than three weeks. This is now about the time frame that they can afford to keep up the manipulation before PHYSICAL BUYING in gold and silver by the BRIC countries forces them to give it up.

Next week is their last week.

I recommend that you use this window of opportunity to buy silver. There is less above-ground silver available for delivery than gold. Think.

Have a fun weekend.

Wendy said...

mortymer,

Thanks for those links, I had seen the video, and I think it was you that linked it in the previous post.

The only way this constant warring is going to end is for the US gov to become completely, and visably broke/bankrupt.

In the meantime their efforts to retain their imperialistic power will become increasingly desperate IMO.

Wendy said...

Art,

Why now?

Why do you think the paper markets are going to crack open after next week?

I use the term crack open for lack of a better one.

I'm always interested in the "why" of predictions on timing, and would appreciate if you would expand on your comment.

Art said...

JEFF,

aka Mr. Genius,

WHY will the price of gold adjust any differently than it is doing now?

WHAT will change under Freegold?

Freegolders are not offering any reason why the same bankers will start acting differently after Freegold is declared by Freegolders.

WHAT RATIONAL AND EMPIRICAL NEW FACT WILL CAUSE THE FIAT ISSUING AUTHORITIES TO ACT DIFFERENTLY UNDER FREEGOLD?

Freegolders CAN'T and DON'T answer this simple question = Freegolders are LYING when they say that they KNOW that bankers will be unable to print money under Freegold like they do now.

Art said...

WENDY,

I didn't say the paper markets will disintegrate next week. They've got about eighteen months to go for that to happen.

I said Western financial powers no longer have the ability to sit on gold's and silver's price for more than three weeks now. This OPINION of mine is based on what my sources indicate regarding the degree of selling in the Futures markets in comparison to the amount of physical takeoff in non-Western markets. Even though there is not that much delivery of physical metal at the COMEX for example, the bullion banks are no longer able to supply the amount of precious metals that BRIC buyers now stand delivery for at these artificially-lowered prices.

Most of this information is publicly available though much of it is made willfully opaque and misleading. But the signs are there for those who are attuned to the pulse of the market.

It's not the end of the game next week. It's the final week of the suppression for this cycle because they don't have enough metal to deliver after next week at THESE low prices. They have to let silver rise to just below $50 before the pressure for greater amounts of silver abates.

Now you know their weakness. The sharper the selloffs they induce, the less TIME they have. Presently, this is about three weeks; that's how much playing time their infinite paper backed by little physical affords them now.

They'll have no choice but to reduce their time in the sandbox to about a week before next Fall.

This summer is going to be fun!

Wendy said...

Thanks Art,
I have a better understanding of your comment now. It will be interesting to note if we see Armstrong's cyclic bottom going into the first week of June.

I agree that this summer will be fun for the observer.

Art said...

Sorry, I meant to say 'physical offtake', not takeoff (freudian slip).

Wendy said...

freudian slip indeed ;)

I'm off to Vancouver for our Victoria day long weekend next week and plan to buy a gold maple and a few silvers. Looks like my timing is ok.

ultarnerd said...

To take the chance that this post wont disappear too.One of the main reasons I do not like the idea of only gold reverting to money is this.
The Rothschilds controls the gold market http://www.youtube.com/watch?v=oWFhfoAvkmc&feature=related
I do plan to check this out more but I do believe it probably was true.Remember it says 400 trillion dollars both in cash and in gold.
I do not like the idea that any other group would end up with much of the worlds wealth especially not one where the wealth was made in banker scams and a ruthless history.I could go on about the insanity of any country giving its money printing press to a Foreign family but I wont.However I do suspect they might have far less gold now if they have sold much of it earlier on to protect the value of the dollar.Remember this very rich family all but literally owns the FED and with that the very printing press of the US dollar.And as I often hypothesis if you owned the golden goose that laid the rolls of paper dollar bills, would you not want to protect that goose.I expect their attitude must be changing now if they realize that paper is going to crash no mater what as is becoming the case now and I will expect they will then try to discredit silver as they do not have so much of it as I do not think they have much silver.

I do not have time to print all I have on this but there is some good circumstantial evidence that the US does not like competing currencies dealing with both e-gold and another I can not remember where it looked like if they were not so US centric they would not have been so bothered.
See gold money and etc for ones still around and note where they kept their gold.

Art said...

Freegolders HATE silver.

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