Wednesday, October 5, 2011

RPG Update #4


On New Year's Eve I dubbed 2011 "Year of the RPG" in deference to Robert Zoellick's recent editorial in which he described gold as "a key reference point to allow people to assess the relations between different currencies." This description was so close to Freegold that Zoellick's FT editorial led us to an additional name, "Reference Point Gold" or Freegold-RPG.

Throughout the year I posted "RPG Updates" every time the ECB published its quarterly Consolidated Financial Statement for the Eurosystem in which it revalues the system's reserves to market value denominated in its own currency, the euro. Such "marked to market" (MTM) revaluation is an important first step in allowing gold to be "a key reference point to allow people to assess the relations between different currencies." Here are the links to my first three updates:

Update #1
Update #2
Update #3

There has been some confusion about the details and the relevance of this quarterly, system-wide or consolidated revaluation of reserves and the ECB's role as the system's aggregator. In the beginning, each participating country had to "buy in" to the system with a specified, euro-denominated value of foreign currency/gold reserves.

On April 18, 1998, eight months before the launch of the euro, ANOTHER explained that the idea of any gold being part of the initial buy-in had been a recent development. He wrote that it was initially discussed that gold would be only 5% of the buy-in, but that the BIS had decided that making gold 15% to 30% would render a euro that was stronger in oil. Less than three months later, on July 8, 1998 at a press conference, Willem Duisenberg, President of the ECB, announced the final decision:

Ladies and gentlemen, the Vice-President and I are here today to report on the outcome of the second meeting of the Governing Council of the European Central Bank held yesterday.

…The Governing Council decided on the size and form of the initial transfer of foreign reserve assets to the European Central Bank from the national central banks participating in the euro area. This transfer is to take place on the first day of 1999. It has been decided that the initial transfer will be to the maximum allowed amount of EUR 50 billion, adjusted downwards by deducting the shares in the ECB's capital subscription key of the EU central banks which will not participate in the euro area at the outset. The transfer will thus be equal to 78.9153% of EUR 50 billion, i.e. approximately EUR 39.46 billion.

The Governing Council furthermore agreed that this initial transfer should be in gold in an amount equivalent to 15% of the sum I have just mentioned, with the remaining 85% being transferred in foreign currency assets. I should stress that the decision on the percentage of gold to be transferred to the ECB will have no implications for the consolidated gold holdings of the ESCB.

The precise modalities of the initial transfer will be finalised before the end of the year.

Before the end of the current year the Governing Council will also have to adopt an ECB Guideline pursuant to Article 31.3 of the Statute of the ESCB, which will subject all operations in foreign reserve assets remaining with the national central banks -including gold - to approval by the ECB.

In connection with the setting-up of common market standards, the Governing Council also reached agreement on a number of issues related to the quotation and publication of reference exchange rates for the euro. Specifically, it was agreed to recommend to market participants the "certain" method for quoting the exchange rates for the euro (i.e. 1 euro = X foreign currency units) and to have daily reference exchange rates for the euro computed and published by the ECB.


It should be noted that this initial transfer was not a surrender of assets to a third party central bank, but instead it was a buy-in, a purchase of equity in the system itself. So while a country might have contributed 8% of the ECB's gold, that country now owned 8% of the interest in the system. And being part of a system, that country also agreed to all operations in foreign reserve assets, not just those transferred to the ECB, being centrally coordinated by the system aggregator, the ECB.

So all this early talk about "gold backing" and various percentages—5% or 15% or 30%—turned out to be quite confusing in the beginning. Soon after the very first quarterly revaluation one astute reader asked FOA about it:

Goldfly (5/8/99; 22:04:55MDT - Msg ID:5787)
FOA - 15% backing?
http://www.ecb.int/press/pdf/wfs/1999/fs990430en.pdf

Actually, it looks like they're at 30%

From the Eurosystem Weekly Financial........

Asset 1 Gold: 105,323

Liability 1
Banknotes in Circulation: 332,280

Asset 1/Liability 1 = 31.69

$1000 gold would equal 100% backing(!?!?!)

GF


FOA (5/8/99; 22:24:54MDT - Msg ID:5790)
Reply
Goldfly (5/8/99; 22:04:55MDT - Msg ID:5787)
FOA - 15% backing?

Goldfly,
Hello again. Truly the ECB percentage as a number does not mean much at this time. It's the concept that is 180 degrees against the IMF / dollar system. For anyone to measure the value of Euro backing at present, is like looking at gold at today's price. It's out of context.

The beauty of the ECB ploy, is that it doesn't lock them into a rigid gold exchange standard. With gold trading in the open, all currencies are free to be exchanged for gold at any given point in time. The old IMF / dollar manipulation of gold, used from the early 70s gained nothing and cost the world dearly for the benefit of the fictional US living standard it created. Had they just allowed gold to rise from the beginning, commerce would have been much more balanced, nation to nation.

Prior to the Euro, Europe had to play the IMF game. The same game that has now backfired on the US today. They truly don't need the IMF and may pull out later. FOA


Now there is an interesting note in this exchange to which I would like to draw your attention. Goldfly was erroneously looking at the consolidated value of Eurosystem Central Bank gold versus the total number of euro bank notes. This is not what we look at, and it is not even particularly relevant since they aren't running a "rigid" (as FOA called it) Bretton Woods-style gold standard, but what Goldfly observed at 31% in 1999, has today grown to 50%.

We don’t look at the gold on the asset side of the balance sheet versus the euros on the liability side. And we also don't look at the present value of only the subscription fee to the system, the reserves held by the ECB itself. We look at the aggregate reserves for the Eurosystem as a whole (lines 1 and 2 on the asset side only) and how the proportion of gold in those reserves has evolved over time.

On a CB balance sheet there is a distinction we can make between assets in general and those assets that qualify as reserve assets. At the central banking level such as the ECB, its institutional liabilities largely take the form of issuance of currency banknotes and deposits held on behalf of commercial banking institutions (such as those being held to meet a commercial bank's reserve requirements, and to facilitate check-clearing between institutions) which are denominated in its own domestic monetary unit (i.e., the euro.)

The requisite assets to balance against these liabilities are largely in form of euro-denominated claims on commercial credit/banking institutions. As these claims are often collateralized by government bonds, at the very end of the rope it is fair to say a large portion of assets held by the central bank take the form of government bonds even though they were (largely) acquired indirectly through typical financing operations to extend credit to the commercial institutions.

These euro-denominated claims (assets) are suitable for offsetting euro-denominated liabilities, but they do nothing in regard to your rare "rainy day" when it is found necessary to defend the euro's stature against its foreign peers. For that purpose a central bank needs to have either gold (which is a universal asset) and/or a position in foreign currency claims against non-resident (foreign) institutions. It is this combination of gold assets and foreign currency assets that constitute the official "reserves" of a central bank.

The proportion of RESERVE assets among the central bank's TOTAL assets is normally a judgment call. Generally, the more unstable or insecure a central bank deems its national government and economy to be on the world stage, the larger the proportion of assets it will hold in the form of reserves. (Recall the expansion of reserves among Asian countries following the 1997 Asian Contagion crisis.)

And regarding the make-up of the reserve assets specifically, it is ultimately a central bank's own internal management decision that determines what proportion of reserves are in the form of gold versus foreign currency. At launch, January 1, 1999, the make-up of the Eurosystem's reserves was 30% gold and 70% foreign currency claims on non-euro area residents (mostly dollars, in fact, probably mostly US Treasuries left over from supporting the US trade deficit for 20 years to buy the time necessary to launch the euro).

In addition to the distinction I just explained, another key definitional aspect of CB reserves is that they are "readily available to and controlled by monetary authorities for direct financing of payments imbalances, for indirectly regulating the magnitude of such imbalances through intervention in exchange markets to affect the currency exchange rate, and/or for other purposes… the concept of reserve assets should encompass those assets over which authorities exercise direct and effective control." (my emphasis, quote from the IMF BOP Manual)

So aside from being either gold or foreign currency-denominated claims on non-residents, the two main criteria for assets to qualify as reserve assets for central banks are availability and control. This official definition ought to translate loud and clear into an institutional preference for in-house physical gold holdings over the alternatives. (After all, try to truly consider and assess the concept of "control" insofar as it applies to an asset defined as a mere "claim" on a foreign entity denominated in a foreign monetary unit! Does anyone remember Nixon?) That we have not yet fully attained this operational reality despite the logical preference for it is what our long-winded discussions regarding the slow evolution from dollar-centric toward Freegold tries to explain in a rational political context.

There is one other nuance in CB reserve reporting standards that I should mention. The reason the ECB makes its "net position in foreign currency" (claims minus liabilities regardless of residence) so prominent in the commentary portion of its ConFinStats is explained in Chapter III of the ECB's Statistical Treatment (Oct. 2000):

"Since the monetary crises which took place in most of the Asian countries in the late 1990s, international organisations have gradually become more concerned with the availability of reliable information on the capacity of a country to contend with potential financial crises. Consequently, the IMF ... requires additional details on international reserves and other foreign currency claims and drains from those presented so far in international standards, addressing, for the first time, the compilation of figures on reserve-related liabilities."

In other words, taking the liability side into account for the "net position in foreign currency" came into vogue thanks especially to the experiences of the Asian contagion crisis wherein it was shown how quickly and easily a nation could be stressed by its liabilities denominated in foreign currency. So the net position in foreign currency is now a fundamental part of any CB's overall Health-O-Meter. And so with this view in mind, it is clear that a value shift away from foreign currency reserves toward gold, the universal reserve asset, is also a shift in the overall quality of a portfolio.

But the strict definition of reserve assets within the Eurosystem is simply the GROSS total of the qualifying asset items and foreign-denominated claims on non-residents of the euro area as summed from the asset side of the balance sheet, without any further adjustment for items on the liabilities side. In other words, the official reserves are calculated through the simple addition of asset items #1 plus #2, which is what I use in these updates.

The De Facto Ascent of Gold

It is a common misconception that any retreat from dollar-denominated CB reserve assets would, in itself, destroy the value of the CB's portfolio of reserves. This canard is often used by the anti-gold financial media to explain the dollar's apparent strength, claiming that the world is trapped in perpetual dollar use by the existence of its humongous dollar reserves. Here is Randy Strauss from my post Gold: The Ultimate Hedge Fund:

[article] ...Even in light of all of this shifting by central banks into other currencies, the dollar still comprises 2/3 of global reserves and attempts to shift away from the dollar would destroy the value of central banks’ portfolios.

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

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

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

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

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

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

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

When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold.


R.


From my post Your Own, Personal, Freegold, here's how the leverage in gold as a reserve asset behaves. This is what the Eurosystem's quarterly MTM parties reveal, and it can work on an individual level the same as it does for central banks, thus the title of my post. BTW, the pivot point in these illustrations is the physical plane of real goods, real services and real world capital:



Whoop There It Is

And now let's have a quick look at the results of the latest MTM party:

In the week ending 30 September 2011 the increase of EUR 56.8 billion in gold and gold receivables (asset item 1) reflected quarterly revaluation adjustments.

The net position of the Eurosystem in foreign currency (asset items 2 and 3 minus liability items 7, 8 and 9) increased by EUR 13.2 billion to EUR 191.1 billion. This change was due to the effects of the quarterly revaluation of assets and liabilities, the customer and portfolio transactions carried out by Eurosystem central banks during the period under review and US dollar liquidity-providing operations.

Quarter-end revaluation of the Eurosystem’s assets and liabilities

In line with the Eurosystem’s harmonised accounting rules, gold, foreign exchange, securities holdings and financial instruments of the Eurosystem are revalued at market rates and prices as at the end of each quarter. The net impact of the revaluation on each balance sheet item as at 30 September 2011 is shown in the additional column “Difference compared with last week due to quarter-end adjustments”. The gold price and the principal exchange rates used for the revaluation of balances were as follows:

Gold: EUR 1,206.399 per fine oz.

USD: 1.3503 per EUR

JPY: 103.79 per EUR

Special drawing rights: EUR 1.1564 per SDR



In other words, the decade-long trend continues, even in the face of all that "dollar strength." Last quarter gold made up 62.7% of the Eurosystem's reserves. This quarter it rose to 65% of the reserves. This is especially remarkable given not only the dollar's recent "strength" which accounted for most of the rise in currency reserves, but also the dramatic price plunge in gold just a week before the party.

You'll find much more on the Euro-MTM/Freegold-RPG model in the earlier "Updates" listed at the top as well as the other posts I linked including this one: Gold: The Ultimate Wealth Consolidator.

Conclusion

Don't make the mistake of assuming central bankers are stupid, or anti-gold, or that they are not fully aware of the concepts and principles I am writing about. When I write about the "logical preference" for gold, or the "de facto ascent of gold" to global IMFS reserve asset par excellence status, or gold as "the de facto solution to the international reserve question," these are logical, de facto realities of which central bankers are acutely aware. So when you hear them talking about complex solutions requiring massive[ly unlikely] global cooperation, new international treaties and enabling legislation, realize that they are talking about ditching the dollar in the most diplomatic terms they can, and then recall Randy's words:

When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold.


And after you think about it for a while, maybe you'll start to understand why gold was the asset chosen to occupy the #1 spot on the Consolidated Financial Statement of the Eurosystem, and why this is a key driving force (along with impartiality and systemic stability) behind the evolution to a 90+% gold proportion of reserves in the new international "Freegold-RPG" monetary system. And then, as Randy suggested above, you might want to front-run the CBs with your own flight out of dollars and into gold. Randy ended with this, and so will I:

"Again, on average the central banks have 10% gold. The ones who have less are scrambling. How about you? Do you have enough gold to put a suitable *BANG!* in your portfolio?"

Sincerely,
FOFOA

455 comments:

«Oldest   ‹Older   401 – 455 of 455
Motley Fool said...

Pamplona trader

Wow. I'm not even sure how to start.

How about... do you have a porche?

Would you consider selling it to me for $100.

Your son does owe me $10, after all.

TF

costata said...

You Don't Have To Outrun The Bear

Extract from Axel Merk's analysis here:

http://www.merkfunds.com/merk-perspective/insights/2011-10-19.html

(My emphasis)

"With all the market concerns surrounding Europe, we would be remiss not to mention why we hold a contrarian, optimistic view on the currency over the medium and long term, relative to the U.S. dollar.

Europe certainly has problems, but in an odd way, it is the inflexibility of its political make-up that may lead to a stronger euro over the foreseeable future.

With no central Treasury to decide on fiscal policy for the Eurozone as a whole, the political process to agree upon almost anything is convoluted and time consuming. We have seen it time and again, and it has caused no end of consternation regarding sovereign bailouts and the European Financial Stability Facility (EFSF) in particular.

Many individual countries find themselves with very weak political leadership, but interestingly, have instigated, in many cases, very strict austerity measures with opposition support.

The issues facing the Eurozone are significant, and there is no simple, easy solution; it’s likely to be a drawn out process rectifying years of malinvestment brought about by unconscionably low funding rates for periphery nations (Greece could borrow at rates similar to Germany for years leading up to the crisis).

In turn, economic growth may be restrained over the foreseeable future. Note, however, that economic growth is not necessarily a precondition for a strong currency; it is not incompatible to have poor economic growth on the back of a strong currency – just look at Japan.

We believe two key reasons have contributed to Japanese yen strength – weak leadership and a current account surplus. Weak leadership meant that Japanese politicians had little influence on the Bank of Japan, thus monetary expansion was constrained and the supply of Japanese yen remained relatively stable.

In fact, the Japanese were one of the only central banks not to drastically increase the size or composition of its balance sheet in reaction to the financial crisis in 2008. On the other hand, a country with a current account surplus does not require investment from abroad to underpin strength in its currency; it essentially needs investors to sell its currency to stop it from appreciating.

The opposite is true for the U.S. – the present current account deficit requires purchases in U.S. dollar denominated assets every single business day just to keep the dollar from declining."

Cheers

JoyOfLearning said...

@Costata:
wow! fascinating article! Thank you! Also possibly the first one I read which says so very out loud what I've been thinking: a weak government can actually be very good for a currency/it's people.

Crack said...

DP,

I think we at #32,771? Ima keep this on pause ready for The Big Day

DP said...

OH Fµ©K YESSSSSS, CRACK!

Now I need to buy a pair of 17,000W subs, place them 2" either side of my head and wait... I'll need one of those volume controls that go to 11 too.

@mortymer001 said...

Global currencies for tomorrow: A European perspective

A report on options for, and implications of, reforms of the international monetary system prepared for the European Commission in the context of Contract No. ECFIN/220/2010/573686 by a Bruegel and CEPII team composed of:

Ignazio Angeloni, Agnès Bénassy-Quéré, Benjamin Carton,
Zsolt Darvas, Christophe Destais, Jean Pisani-Ferry, André Sapir, and Shahin Vallée

http://ec.europa.eu/economy_finance/publications/economic_paper/2011/pdf/ecp444_en.pdf

@mortymer001 said...

"...Starting from this hybrid system, we review three scenarios for the IMS and assess their implications from various perspectives, including for the EU economy. The three scenarios are the following:

• A repair-and-improve scenario whereby changes to current arrangements are introduced through incremental reforms. These are inter alia enhanced surveillance, a voluntary reform of exchange-rate arrangements, especially in Asia; improved international liquidity facilities; accompanying domestic reforms such as the development of home-currency financial markets; and regional initiatives to complement current IMF facilities. Under this scenario, the international role of key currencies remains broadly constant and the US dollar retains its dominant role, the euro’s role remains broadly unchanged, and the one of the Chinese renminbi increases, but remains marginal in comparison to the dollar and the euro.

• A multipolar scenario in which a system structured around two or three international currencies - presumably the dollar, the euro and the renminbi – emerges over a 10-15 year horizon. Although a move to a multipolar system is generally viewed as a remote prospect, especially in the case of the renminbi, it corresponds to the long-run evolution of the world economy. The Chinese authorities have taken significant steps in this direction through various schemes and their currency has a strong potential for internationalisation. As for the euro, it has already developed as a diversification currency and in this scenario the euro area overcomes its current difficulties and the euro graduates from a mainly regional to a truly global currency. Yet we also examine an alternative bipolar scenario with the dollar and the renminbi which may occur if the euro remains handicapped.

• A multilateral scenario in which participants agree to take steps towards a strengthened international monetary order. In contrast with the multipolar scenario, which will largely rely on market forces and national policies, renewed multilateralism would require a fairly intense degree of international coordination and the development of new instruments to help escape the pitfalls of regimes based on the dominant role of one or a few national currencies, foster macroeconomic discipline and provide for international liquidity management. A system of this sort could build on the existing SDR or rely on other, new vehicles.

While recognising the potential merits of a truly multilateral monetary order, we doubt it could materialise in the foreseeable future and therefore conclude that, at the 10-15 year horizon, the probability of the multipolar scenario is relatively high and that this scenario could contribute to mitigating some (albeit not all) flaws of the present IMS. The transition to a multipolar system however entails some specific risks, such as of an abrupt reserve diversification, that would require tighter coordination during the transition..."


Note the report from 2011 summer.
Note2: A very good report IMHO.

DP said...

Mrt,

While recognising the potential merits of a truly multilateral monetary order, we doubt it could materialise in the foreseeable future and therefore conclude that, at the 10-15 year horizon, the probability of the multipolar scenario is relatively high and that this scenario could contribute to mitigating some (albeit not all) flaws of the present IMS. The transition to a multipolar system however entails some specific risks, such as of an abrupt reserve diversification, that would require tighter coordination during the transition..."

Sure sounds like options 1 and 3 are being taken off the table by those plucky Europeans, doesn't it?

Clyde Frog said...

Why are you guys so cool? I don't really understand what you are saying most of the time, but I can't stop myself coming back and reading all the time! Thank you FOFOA. I hope one day I will finally come to understand all of this stuff. For now I think I am just going to have to buy a little bit of gold just in case you are right!

I couldn't help thinking Crack and DP could give their speakers a workout with this while they are waiting for "the big day" (when will this be by the way?? and what is going to happen??? guess I need to read some more posts)

http://www.youtube.com/watch?v=0RBWQEBffvY&feature=player_detailpage

Clyde Frog said...

Oops. Sorry I thought that would make a link.

@mortymer001 said...

"3.2 Is the current regime unipolar or multipolar?
The current regime has alternatively been characterised as a multipolar regime (in which several currencies play international roles) or as a unipolar one (in which there is a dominant international currency). Some authors (for example Rose, 2007) claim that what has emerged from the ashes of the Bretton Woods order is a system in which there is ‘no role for a centre country, the IMF, or gold’, but in which a growing number of advanced and emerging countries have adopted some form of inflation-targeting and float independently. Others (for example Padoa Schioppa, 2010, or, implicitly, Zhou Xiaochuan, 2009) see the current international monetary regime as one where the US retains the privileges (as well as duties) accruing to the issuer of the international currency. Others again (for example Dooley, Folkerts Landau and Garber, 2004) claim that part of the world has moved to a floating regime of the sort described by Rose while another part lives under a revived Bretton Woods regime centred on the US dollar, which leads Aglietta (2010) to call it a semi-dollar standard."

[Ps: the option 3 is about SDR but there could be another anchors as well, markets direct.]

J said...

(Reuters) - China plans to sign an agreement with the 10-member Association of South East Asian Nations (ASEAN) to settle trade in yuan, said two independent sources, another step in China's long campaign to make its currency one widely used beyond its borders.

The framework agreement with ASEAN -- which as a block is China's third-biggest trading partner -- will pave the way for banks in China and the ASEAN countries to start exchanging yuan for ASEAN currencies, said the sources, both of whom have direct knowledge of the planned agreement.

"This will lay the foundation for the yuan to become a regional currency," the first source told Reuters, requesting anonymity because he was not authorized to speak to reporters.

China to step up ASEAN yuan trade settlement

Motley Fool said...

Clyde

You should buy as much gold as you understand, which from that comment seems perilously close to nothing.

Don't buy more than you understand, it will weigh on your conscience.

TF

Clyde Frog said...

Thanks (I think) for replying Motley Fool.

The thing is that I don't think I really know how much I understand. Or more to the point how much I don't understand. How much is there?

Should I buy nothing?

Motley Fool said...

Who am I to guess your thoughts or judge what you understand?

If you do not feel comfortable buying any gold, then don't.

I consider my own minor gold holdings as money thrown in the water, but I do sleep like a baby.

Clyde Frog said...

Thing is, since I have read a couple of articles and their comments here I am now feeling slightly uncomfortable with not owning any gold at the moment. But maybe you are right and I'd feel even more uncomfortable if I did!
Seems like maybe I should only buy a few shares of GLD for now, while I read some more.

THANKS!

Motley Fool said...

Pamplona trader

Since you have not replied yet, I'd like to modify my statement.

.....

How about... do you have a porche?

Would you consider selling it to me for $100.

Your son does owe me $10, after all.

Forget the $10 I owe him.

I'll be willing to sell it back to you for a couple of hundred thousand as soon as my finances are in order of course.

.....

What's wrong with the above? Once you have decided on (all) the faults, you will have a reply; since mine is a simple analogy of your suggestion.


TF

Motley Fool said...

Clyde

If you are buying gold to ease discomfort, then physical is better than mythical.

TF

JR said...

Hi Pamplona,

Following up on MF's point, which is that you need not just a willing buyer, but a willing seller, why would the Euro or the PIIGS sell its gold now?

Lets talk this through a little bit

The debt that engulfs the world (not just the PIIGS, this debt is truly a product of the $IMFs, which is everywhere as the reserve currency) cannot be paid back in real terms - if we can see this, do we not also think others see this too?

Why would these others give up real wealth, real treasure in payment of paper promises that were never intended to be honored at face value? Here's Another about the South Korean crisis, noting that in the current $IMFs system, gold is in the background:

"Date: Fri Dec 12 1997 21:33
ANOTHER (THOUGHTS!) ID#60253:

Even Korea will find out that oil is all that counts. Their paper will die! Gold would have helped them in a different world, but for now gold is in the background as the IMF tries to add more paper to this inferno. If one owns real gold, it will be with ease to view the world currency developments. They will be truly of biblical proportions!"


==================================

Is it possible the current pricing system does not properly value gold, and CBs indeed value it more preciously than the COMEX price?

"Date: Sat Apr 18 1998 19:18
ANOTHER (THOUGHTS!) ID#60253:

But, how can this be, you ask? It is done, "right before your eyes" and we see it not! I ask you, if you have one ounce of gold, and sell it on the market for $300, it is worth $300, yes Now, what if CB hold one ounce of gold, and sell it twenty times, that one ounce is now worth $6,000, no? The difference between you and CB? The persons that hold "interbank" IOU for gold, value it at the multiple of leases/sales made against reserves. This leverage, it is held for performance on bank part. The BIS, it force performance, on any economy! You ask Korea about gold, yes?"


===============================

Might it be the Euro has a another plan for their gold instead of selling it now to fund its current $IMFs debt issues?

Greece is the Word

"It usually only takes one little shock to bring down a house of cards. And this is why I say you cannot be prepared too early. There is no such thing when the stakes are so high. Preparation must happen early and completely. Because once this thing starts to unravel it will be too late to prepare and to even prosper from the foresight of an inevitable event. Once it all starts unraveling you will be completely preoccupied just trying to limit your losses.

Gold

This is where physical gold comes in. I have shown you what is wrong with the system when viewed from outer space. And I have shown you what is missing, and what will be found. And I have shown you how the really big money with really big foresight has prepared.

Notice that Greece and the ECB do not have palladium in their reserves. Just sayin'."


cont.

JR said...

cont.

AS FOFOA discussed above in RPG Update #4, on a CB balance sheet one can distinguish between assets and reserve assets. It is *reserve assets* that are for a "rainy day" to defend the currency.

On a CB balance sheet there is a distinction we can make between assets in general and those assets that qualify as reserve assets. At the central banking level such as the ECB, its institutional liabilities largely take the form of issuance of currency banknotes and deposits held on behalf of commercial banking institutions (such as those being held to meet a commercial bank's reserve requirements, and to facilitate check-clearing between institutions) which are denominated in its own domestic monetary unit (i.e., the euro.)

The requisite assets to balance against these liabilities are largely in form of euro-denominated claims on commercial credit/banking institutions...

These euro-denominated claims (assets) are suitable for offsetting euro-denominated liabilities, but they do nothing in regard to your rare "rainy day" when it is found necessary to defend the euro's stature against its foreign peers. For that purpose a central bank needs to have either gold (which is a universal asset) and/or a position in foreign currency claims against non-resident (foreign) institutions...


==================================

Another

"I think, the currency of a country does no longer hold "backing". This term, it is used often, but is not correct. Today, all modern money does have "reserves", and such is used only for "the dirty float" in currency warfare. As in war, the larger and better equipped army in "reserve" does rule over the lesser force. Perhaps we should think in this way: in a "cold war" of modern exchange rates, "digital currencies from reserves are used", however, when a "hot war" of major default does begin, "nuclear weapons of GOLD" are deployed!

As in real war defense, of today, some countries hold a much lesser army, and depend on "the alliance" with other stronger nations to defend them. Such it is with the currencies! Many states hold but a few "digital currencies" as reserves for currency wars and see no need for "gold nuclear weapons". They sell off these weapons and do join "the currency alliance" of stronger nations. We see this in Europe, yes? "


Do you see this view Pamplona?

Cheers, J.R.

JR said...

Hi Clyde,

"The thing is that I don't think I really know how much I understand. Or more to the point how much I don't understand."

Me neither. Maybe that's why I keep coming back too?

=========================

PS - I almost went to Sultan & Ned Shepard at Beta last Feb. Beta can still be fun, but the old days were ... the good times seem to just roll on :) Morgan's coming next month.

Clyde Frog said...

Thank you again Motley Fool for your additional help. I really appreciate it.

Unfortunately I am not sure I understand what you mean though. Are you saying GLD do not have physical gold? I have a friend who is always talking about gold and he seems to keep telling me I should buy shares of GLD. He also says shares in SLV, but one of the posts here I was reading a lot of commenters don't like silver. I'll have to look for more posts about why. It seems I have a lot of reading before me don't I! I'm sure it will be worth it.

Clyde Frog said...

Sounds awesome JR - I bet you wish you'd just done it. From what I've seen of your comments, you seem to know your way around. Are you going next month?

Michael H said...

Clyde,

I do suggest you keep reading -- it is definitely worth it! The sidebar on the right of FOFOA's blog has the links of where to start, starting with the ANOTHER archives,

http://www.usagold.com/goldtrail/archives/another1.html

And continuing through FOA, Gold Trail Auxilliary, and USAGold HoF.

The end of this FOFOA post has a good list of 'must-reads':

http://fofoa.blogspot.com/2010/12/freegold-in-proper-perspective.html

Michael H said...

Plus there's been some 'must-reads' published since then:

http://fofoa.blogspot.com/2011/01/freegold-foundations.html

http://fofoa.blogspot.com/2011/02/how-is-that-different-from-freegold.html

http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html

http://fofoa.blogspot.com/2011/05/costatas-silver-open-forum.html

http://fofoa.blogspot.com/2011/05/return-to-honest-money.html

Apologies for the non-clickable links.

zabba said...

Clyde, dude!?! GLD, really? What have you read here? If you're serious, please take pause and reconsider.

The only true requirement to experience "Freegold" is to own physical gold now.

Run! Go get yourself some piece of mind and bring some of your wealth into the physical plane.

Clyde Frog said...

Thank you Michael H - it seems I really DO have a LOT of reading ahead of me!

I see on your list there is one like silver-open-forum. Maybe this is the best place for me to find out why people here don't like silver?

Michael H said...

Clyde,

Yes, costata's silver open forum is a good place to start. Be sure to read costata's comments in that post and in the subsequent 'part II' post.

The earlier post by FOFOA,

http://fofoa.blogspot.com/2010/12/kicking-hornets-nest.html

is also a good silver primer.

Clyde Frog said...

Thank you zabba. I still don't quite know whether or not you guys mean GLD don't have any physical gold, but it seems like you are saying that I should own some actual gold, not shares in GLD. I will have to think a bit more about this and maybe when I have done some more reading (thank you again Michael for your lists) it will make more sense. Thanks again!

Clyde Frog said...

Michael H thank you for the hornet next suggestion. I may have to read these silver posts first because my friend really does like to bang on about silver.

And don't worry about the "non-clickable links" because as we saw earlier it turns out I haven't got much of a clue about those myself either!

DP said...

Clyde Frog,

You might find this page useful.

Nice "on hold music" selection. Although I still personally prefer Run and Warning Call for the moment. :-)

CHEERS!

DP said...

Pamplona: Geithner seems adamant about assisting the EU.

Only in as much as he cannot stand idly by as they default, which will set off a chain reaction that will end with the dollar-system ("$IMFS") imploding.

DP said...

Message to Geithner: we'll get back to you.

Crack said...

DP,

Message to ECB: stick to your guns - enough is enough.

Aaron said...

Hi CF-

"Maybe this is the best place for me to find out why people here don't like silver?"

I don't think anyone here hates silver. I own some, Wendy owns some, even FOFOA has some silver. The difference is that none of us are using silver to shuttle our wealth across the time dimension. Silver is for spending and in my case specifically, silver is for defending my gold in the face of hyperinflation. If/when HI hits, you can bet I'm going to sell every last ounce of silver I have to Defend the Precious.

--Aaron

Clyde Frog said...

Aaron: I see. (no, I don't see - but maybe I will when I finally get around to reading the post you linked. THANKS!)

DP: Thanks for that! (hope I got this right...)

Clyde Frog said...

YES!!

Max De Niro said...

An interesting exposition of the problems caused by the current $IMFS and the need for Freegold (without actually mentioning Freegold).

On ‘Immaterial Value and Scarcity
in Digital Capitalism’

Jeff said...

http://www.zerohedge.com/news/fed-dollar-swap-lines-europe-soar-19-billion-most-june-2010

...the dollar shortage in Europe is now as bad as it was just after the first Greece insolvency, when nobody was prepared for the bank lockup that followed.

and a comment from Shameful:

We all know about the swap lines from the Fed to EU banks. This makes little sense, aside from system risk and really that could be the ECB handling it. However if looking at Freegold I there is a rational. The EU banking system could be holding the $IMFS hostage! "Give me dollars or we pull the plug now and kick on freegold". I could still see them putting a bid in for gold, but it would make sense why the Fed is basically handing them dollars.

and FOFOA:

Think about it this way. Think about Eurodollars. Think about European banks outside of the Federal Reserve System making dollar denominated loans or simply issuing dollar liabilities to FX traders. Sure they have a few physical dollars in reserve. But they don't have direct access to the Fed lending facilities. So if they find themselves short on reserves, they will have to go into the market to buy some dollars, just as you say. Which, in aggregate, could drive up the price of the dollar versus the euro. Which is why Ben arranged a $500B currency swap in 2009. To keep the dollar from spiking.

Remember back in 2009 the Fed swapped $500 billion with foreign CBs? That was for this same purpose. Those Eurodollars need to be serviced with Realdollars from time to time. But that $500 billion swap line has now been withdrawn...Without that access to Realdollars from the Fed, Eurodollar players must bid up Realdollars on the exchanges, which the Fed doesn't like.

Now, in my humble opinion, you need to look at these operations in the proper perspective. And in my view, they are not creating new money or new dollars. What they are doing is changing the very nature of our money...

Eurodollars are just like the "bank credit money" we use inside the US. It is nothing but bank credit, backed by an asset that is a claim on someone else to provide Realdollars to the bank. But slowly and surely, we are replacing that backing, those "claims on someone else" with actual Realdollars. This can be seen in the expanding Fed balance sheet…

The Fed has not created more money, it has simply changed the nature of existing money. Remember, FOA said that "...hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"

During hyperinflation the entire money supply becomes "Realdollars" rather than bank credit backed by debt assets. So that is how I view all these "excess reserves held at the Fed", QEx and Swap lines etc.., as a step toward dollar hyperinflation.

costata said...

JR et al,

I was going to head this as another "Woo hoo Debt Deflation" jab at Team Photocopier but it is too depressing to make a joke out of it. It appears that the Fed and the banksters are now “plumbing” the shadow banking system directly into the currency supply system.

From Chuck Butler's Daily Pfennig below (my emphasis):

http://www.kitco.com/ind/Butler/oct202011.html

Then there was this… This makes my blood boil, and it should yours too, folks… from Bloomberg… “Federal Reserve Now Backstopping $75 Trillion of Bank of America’s derivatives Trades” Bank of America shifted derivatives from its Merrill Investment banking unit to its depositary arm, which has access to the Fed discount window and is protected by the FDIC…

According to Bloomberg… “This means that the investment bank's European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn't get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to "give relief" to the bank holding company, which is under heavy pressure.

This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input. You will also read below that JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives guaranteed by the FDIC and Federal Reserve.”

Chuck again… So… remember when I told you that a large percentage of the Credit Default Swaps on Greece and other Eurozone peripheral countries where held by U.S. institutions? Well, folks… looks like that liability is now being switched to you and me… the taxpayers…

costata:

If this report is correct it looks like another step in the preparations for the "front lawn dump" IMO. A/FOA did not say that this would happen in an instant.

Consider the logistics of actually delivering all of this currency to the "front lawns" of stakeholders who are deemed important enough to save. If it helps you to better understand this process you could view it as a series of pipelines being filled in readiness for opening the valves.

costata said...

Balance Sheets Must Balance

In a comment above J posted a link to a very significant article from Reuters. Thank you very much J well spotted. This article is about China creating a regional trading bloc around the Yuan/Renminbi in SE Asia. This is an absolute must read IMVHO. Consider how rapidly this initiative is gaining traction.

http://www.reuters.com/article/2011/10/20/us-china-economy-yuan-idUSTRE79J2JR20111020

(Reuters) - China plans to sign an agreement with the 10-member Association of South East Asian Nations (ASEAN) to settle trade in yuan, said two independent sources, another step in China's long campaign to make its currency one widely used beyond its borders.

The framework agreement with ASEAN -- which as a block is China's third-biggest trading partner -- will pave the way for banks in China and the ASEAN countries to start exchanging yuan for ASEAN currencies, said the sources, both of whom have direct knowledge of the planned agreement.

‘This will lay the foundation for the yuan to become a regional currency,’ the first source told Reuters, requesting anonymity because he was not authorized to speak to reporters……..

In 2009, China launched a pilot program allowing companies in some provinces to settle imports and exports in yuan, meaning that Chinese companies can in principle use renminbi for their transactions with counterparties in any country.

The program, which was also trialed between ASEAN and Yunnan and Guangxi in south China in 2009, has since been expanded nationwide.

But the latest deal would formalize the arrangement and possibly offer more support to firms and banks in ASEAN countries to conduct commerce in renminbi. Renminbi, or people's currency, is another name for the yuan.

Since then, yuan-denominated trade has swelled -- it accounted for 8.9 percent, or 957.57 billion yuan, of China's total trade volume in the first half of 2011.

China is ASEAN's biggest trading partner. Bilaterial trade rose 26.4 percent in the first nine months of 2011 to $267 billion with an $18.9 billion surplus in favor of the bloc, Chinese customs data shows.

A China-ASEAN Free Trade Agreement came into effect in January 2010. Trade between China and ASEAN nations would grow by 20-30 percent over the next three years, said Wang Rujun, a Chinese economist.


We know the impact of trade surpluses and deficits on country balance sheets, do we not? Balance sheets must balance. A trade surplus must be offset by a capital account deficit – importing capital. There are many investment opportunities in SE Asia that would aid development rather than being simple malinvestment as we see in so many Western countries.

Recall also that China has stepped away from claims that it would backstop European debt. The EU sovereign debt is “too big to bail”. China’s reserves are big enough to help to stabilize, say, the rate of interest on EU sovereign debt by providing some of the demand. But that is only likely to be successful IMO as part of a broader effort that is already succeeding. China could not reverse the tide.

ASEAN is an entirely different proposition once this regional strategy is fully implemented. If, say, a raider attempted to attack one of the ASEAN member’s currency then China could do the same thing they did to speculators in Hong Kong a few years back. They could break the speculators like a twig.

Sometimes here we speculate on the use of the “nuclear option” and when it might be used. Clearly it would not be used when the people in control of the “weapon” are near ground zero. Therefore every action that distances the controllers from ground zero and insulates them from the effect of using the nuclear option makes it more likely to be used, does it not?

Wendy said...

DP,
I never did buy into that bullshit either ;)

Aaron said...

Ode to the US Dollar

Wendy said...

OMG Arron you are a true metal-head
=8o)

J said...

Costata,
I'm glad somebody noticed the article lol. I also feel it is huge.

China has been making a lot of moves lately. the Eurozone took their position and is trying to maintain until the inevitable. Asia is fighting for position and is making the $ less relevant by the day. Think of all the $'s they hold..will they be as vital to their survival now? The answer is no.

I wonder if the GCC will stay quiet or if they'll start to pick up the pace.

The Production Bloc and the Energy Bloc will surely see a lot of trade and a strong GCC would make this easy.

you said... "ASEAN is an entirely different proposition once this regional strategy is fully implemented. If, say, a raider attempted to attack one of the ASEAN member’s currency then China could do the same thing they did to speculators in Hong Kong a few years back. They could break the speculators like a twig."

Not part of ASEAN but SK is taking notes

(Reuters) - South Korea wants to expand its won-yuan swap with China from the equivalent of $26 billion at present to boost its defences in the event of a selloff in the won currency, a local newspaper reported on Friday.

S.Korea aims to expand currency swap with China

Productivity = China + ASEAN + SK
Energy = GCC
Quality? = Euro

Is our (U.S) military as important to Oil as it used to be? Will the GCC see the writing on the wall? Times are changing and king $ is losing it's position.

Turkey just invaded Iraq...

So many scrambled thoughts so little time. I need to get back to work and increase my stack.

costata said...

Cheers J,

Thanks for the additional snippet about South Korea.

I don't have an opinion on the GCC. It will be interesting to see how this unfolds.

@mortymer001 said...

Jean-Claude Trichet: Remarks at the farewell event
Speech by Mr Jean-Claude Trichet, President of the European Central Bank, at the farewell
event, European Central Bank, Frankfurt am Main, 19 October 2011.

http://www.bis.org/review/r111021a.pdf?ql=1

Ladies and gentlemen,
It is more than thirteen years since the European Central Bank was founded, and almost thirteen years since the Euro was launched. As my mandate as President of the ECB draws to a close – and throughout my eight years of office – I profoundly feel the high level of trust and confidence the European democracies have decided to bestow on the ECB. Our primary mandate of preserving price stability, as well as our independence in fulfilling this mandate, were given by the people of Europe on a multinational and multipartisan basis. In being fully faithful to our mandate, we are faithful to the democratic will of the Member States.
With my five colleagues of the Executive Board, my twenty-two colleagues of the Governing Council, as well as with the dedicated staff of the ECB, we have been called upon to realise a long-standing and ambitious idea of the people of Europe.
The single currency is an ancient idea, which has deep roots in history. Without going backto the Roman Empire or the Carolingian Empire, six centuries ago Georges Podiebrad, the king of Bohemia, was calling for a common European currency...

costata said...

Hi mortymer,

Thanks for the link to Trichet's farewell speech.

Cheers

Max De Niro said...

From the closing remarks of Trichet's speech:

"The future calls for a vision of where we are going, a
sense of direction."

Familiar phrase?

Trichet=Another?

That would be sublimely delicious.

DP said...

Jeff: Great comment - thanks for sharing that ZH link and your own (and Shameful/FOFOA's) observations. You always drop knowledge! ;-)

(Source of your FOFOA quote in here)

Cheers

DP said...

Can't help but feel the Reuters story that J supplied and Costata recommended as required reading, is highly germane to the quote Mortymer provided - where Europe essentially told the world that the IMS will be evolving towards a "multipolar" (I read: "tripolar" system), rather than the alternative options.

The way I see it the world will be carved up into currency zones like: North/South America; Europe; Asia. And trade imbalances will be settled by gold changing ownership.

I have questions for myself about where the remainder of the world (ME, Africa, Aus/NZ) will fit in. Perhaps GCC for the ME forms its own zone as J suggests - totally can see that happening. But what about Africa? Will it fall into the sphere of "Europe", perhaps pegging to the Euro like Switzerland officially are now (and TBH I secretly think the BoE are trying to do on the down-low, because it's remarkable how stable the £:€ rate has been IMO?).

And where do you guys think Aus/NZ would figure? Their own zone? Are they big and numerous enough for that together? (Maybe Tonga makes the difference...) Pegged to Asia as proximity might suggest? Pegged to the America's?

Really, I'm interested to know what you think of all this?

Cheers!

Crack said...

DP,

Global corps already carve the world up. Note EMEA. Relvant?

Crack said...

@Crack: Hmmm... interesting, but I dunno. Maybe ME and A countries could peg to euro I guess(?).

How about Aus/NZ though?

costata said...

DP,

The way I see it the world will be carved up into currency zones like: North/South America; Europe; Asia. And trade imbalances will be settled by gold changing ownership.

Quite likely.

I have questions for myself about where the remainder of the world (ME, Africa, Aus/NZ) will fit in.

"We" will fit in where we are told to fit in. It was ever thus.

DP said...

Monetary Neocolonialism: you're what's for dinner!

?

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