Wednesday, January 11, 2012

The Studebaker Effect

One of my resolutions for 2012 is to spend some time finding new ways to introduce gold-resistant paperbugs to the powerful arguments for buying and holding physical gold right now. But I never want anyone to invest in anything based merely on a recommendation. I want them to understand the reasons for the purchase themselves. Peace of mind can only come from within, and that's what understanding can provide.

This is tricky ground for me because I'm not a gold activist. The purpose of this blog is stated at the top. It is a tribute to Another and FOA. I'm not here to convert the unwilling. I'm not here to project my thoughts and draw in the masses. But at the same time, I do want to share what I've learned with loved ones. And from the email I receive, so do a lot of other people. That said, you can't just approach the unwilling with stories of decade-old anonymous internet personalities.

So this is my first foray into the frustrating world of the gold-resistant paperbug. With your help, I hope to build a primer on the gold thesis explaining "why gold, and why now," to those who know nothing about The Gold Trail that brought us here. This post is my first baby step.

As most of you already know, you don't get any of the usual hard money, gold standard or gold bug arguments from me. I do not predict a return to the gold standard, I'm not opposed to fiat currency or central banking and I don't think the world is going to end. What you do get is my explanation of the changes that are unfolding right now in the international monetary and financial system, and how they could affect your savings.

That last part is important. How changes in the monetary and financial system could affect your savings. What are your savings? And why do we save the way we do today? Has it always been this way? Are there universal do's and don'ts when it comes to saving for the future or for a rainy day? Do systems ever change or implode, erasing people's savings? Is it ever fair to say "this time it's different"? These are interesting questions to think about.

And now that I'm thinking about it, does anyone even save anymore? If you've got a hundred grand sitting in a bank CD or savings account someone will likely tell you that you should invest it or else you're wasting money. So you invest it in what, mutual funds and bonds? In that case there will be people that will say you should be actively trading, because you're still leaving potentially rich profits on the table.

Have you noticed how many people think they are traders and investors these days? And with all the options to invest in and trade out there, who can blame them? But in reality they are not traders or investors. They are doctors, lawyers, businessmen… and savers. What we call investing today is more like speculating. So why do we "save" the way we do today, by speculating on things we know so little about?

I had an email exchange over the holidays with a reader who was home visiting his parents. He's frustrated because he's been trying to talk to them about gold for at least a year now. Here's what he writes:

"I had to bite my tongue last night because my parents told me of the results of their trip to a financial adviser. My dad has over a million in his retirement account. Thanks to this adviser they went to, 1/2 of that is going into low-yielding Muni-bonds, the other half is going into some mixed fund that my parents really have no idea what it is. I asked about gold and apparently the adviser said it was "too volatile", so zero goes into that. Great!"

I'm guessing this is pretty common, because I received an email from another reader, also during the holidays, that said almost the same thing about his mother's savings: mostly government bonds and no gold thanks to a financial advisor's advice. Is your life's savings so trivial that you will put it somewhere based on a mere recommendation? Do you feel no need to understand, no responsibility to personally protect the fruits of your own life? I'll tell you one thing, it wasn't always done this way.

A saver is different from an investor or a trader/speculator. A saver is one who earns his capital doing whatever it is he does, and then aims to preserve that purchasing power until he needs it later. Investors and traders aim to earn more capital by putting their already-earned capital at risk in one way or another. This takes a certain amount of specialization and focus. But this difference is a big topic for another post. And anyway, it doesn't matter so much in terms of the gold thesis for today.

Today the system is in transition, so you can throw your ideas about these differences out the window. There is no safe medium for simple preservation of purchasing power when the entire system shifts from the old normal to the new normal. When systems implode, the safest place to be pays off big time!

In hindsight, the stock market (represented by the DJIA) would have been a great investment or speculation from the 1970s until 2000. Since 2000 it has gone nowhere:

Likewise, bonds would have been a great trade from about 1981 until now. As I've noted before, you make capital gains in bonds while interest rates are falling. The real pros know all about this. And from 1981 to present, interest rates fell from 20% to 0%. Flipping the interest rate chart upside down shows how the bond king Bill Gross of PIMCO traded his way into a personal $2.2 billion fortune over the last 30 years:

But markets do change. With the stock market now flat and bond yields at zero, the market is about to change again. Those of you with financial advisors putting your money into bonds should pay attention. If you don't believe me, how about the bond king himself, Bill Gross? Here's what he wrote just last week (my emphasis):

How many ways can you say it’s different this time?” There’s “abnormal,” “subnormal,” “paranormal” and of course “new normal.”…

Interest rates were lowered and assets securitized to the point where they could go no further and in the aftermath of Lehman 2008 markets substituted sovereign for private credit until it appears that that trend can go no further either. Now we are left with zero-bound yields and creditors that trust no one and very few countries. The financial markets are slowly imploding – delevering – because there’s too much paper and too little trust. Goodbye “Old Normal,” standby to redefine “New Normal,” and welcome to 2012’s “paranormal.”

Bill is a billionaire himself. And he also manages more than a trillion dollars of other people's money, including millions of retirement savers, public and private pension plans, educational institutions, central banks, foundations and endowments, among others. So you can be pretty sure he doesn't use words like "imploding" lightly.

Remember, I'm talking about "how changes in the monetary and financial system could affect your savings." I don't want you to buy anything on my (or anyone else's) recommendation. I want you "to understand the reasons for the investment yourself." And I asked, "do systems ever change or implode," and "is it ever fair to say this time is different?" Well, you just heard a mainstream billionaire bond fund manager answer "yes" and "yes."

In fact, history is chock full of stories about financial and monetary crises and change, and there is a part of these stories that often gets only a one-line mention, buried in between the descriptions of the chaos and the subsequent resolution. That line usually reads something like this: "Many elderly investors lost their life savings." That line is from an actual American story. Here's another one: "[Group 2] got lump sum payments that roughly equated to 15% of the actuarial value of their [savings]. Group 3… got nothing."

So why buy gold? Why buy only discrete coins and unambiguous bars of physical gold? And why right now? A historical perspective is necessary for understanding the answers to these questions. Crisis resolutions always involve the sacrifice of someone. And that someone is usually the savers. But there are always winners and losers. Devaluations play out like a seesaw. There is a force (the crisis devaluation), a fulcrum (what is being devalued against), and a load (the beneficiary or the winner).

I think if we are going to try and talk about gold with gold-resistant savers, we first need to think about why they save in the way that they do today, pretending to be investors and traders, and how it wasn't always this way.

The Studebaker Effect

Most of you reading this in the U.S. probably have some sort of an individual retirement account. Maybe you have a Traditional IRA, or a Roth IRA, a SEP IRA, Simple IRA, a 401(k) plan, or even a Self-Directed IRA. Or maybe you don't have your savings tied up in a tax advantaged account but you still invest in the same way, relying on the advice of an RIA, a registered investment advisor.

If this is you, then you probably also have a diversified mix of stocks, bonds and cash or cash equivalents. Perhaps you even have some non-dollar investments, foreign stocks, commodity positions or fancy REITs. Maybe you've got a little in the tech sector, a little in the banking sector, some in the energy sector and the rest in mutual funds. But have you ever stopped to wonder why this is the way we save today? Was it always this way? No, it wasn't.

The 1970s were a pivotal decade of change in so many ways. The 70s were not only a decade of high inflation, it was also the first time the U.S. blew the lid off the idea of a "permanent" debt ceiling by introducing the concept of "temporary" increases (later made permanent) and driving U.S. debt into the $Trillions by the end of the decade. In 1979, the House of Representatives passed a rule to automatically raise the debt ceiling when passing a budget, without the need for a separate vote on the debt ceiling itself. This was just one of many big changes that came out of the 70s.

The 70s decade was also the pivot point at which the U.S. switched from a trade surplus to running a perpetual trade deficit. And it was when we changed from being the world's greatest goods producer into a service-driven economy. And in 1974 Congress passed a bill which President Ford signed into law that forever changed the way we save. A law that eventually exploded into the constellation of investment options I just enumerated.

That bill was the Employee Retirement Income Security Act of 1974, or ERISA. But like all of the systemic changes that occurred in the 1970s, the roots of ERISA can be found in the 1960s, 1963 to be exact.

Before 1974, most people's retirement savings were in the form of a "defined benefit" from their employer. If you worked for a company until a specified age, you were "guaranteed" a defined, nominal benefit for the rest of your life. This system was similar to the pension funds used mostly for union workers today, only back then pensions weren't just for unions. The bottom line was that the burden of saving for retirement was on your employer, not on you.

As a pensioner, the comfort of your future retirement was in the hands of a single counterparty, your employer. Post-ERISA, most people put their hopes for retirement in the hands of a more diversified group of counterparties. With a single counterparty, default, mismanagement or fraud was and is a big risk. Secondary risks were the systemic ones, like a currency collapse, because it was your benefit that was nominally defined. Post-ERISA most companies (and individuals) switched to plans based on employee contributions rather than defined benefits.

This was a dramatic shift of burden. By the simple addition of choice, the burden of retirement savings was shifted from your employer to you. You now had not only the choice of how much to contribute, but also where to put your savings. With the old system, the payoff was a fixed, nominal promise. Through ERISA, your retirement is no longer fixed at a certain number of dollars. It now varies based on the amount you save, how you choose to invest it, and how the market values those investments when it comes time for you to retire. This can be a good thing or a bad thing, depending on what happens between now and your retirement.

In many countries other than the U.S., countries that experienced a currency collapse during the last century, it was mostly the pensioners that were wiped out. Owing only a fixed, defined number of currency units to retirees turned out to be a blessing to pension funds in these countries. Pensioners could easily continue receiving their promised $2,500 per month forever, even well after the price of toilet paper had risen above $10,000 per roll.

But getting back to the roots of ERISA in 1963, it was mismanagement and default that destroyed the retirement hopes of many people. The collapse and ultimate liquidation of the Studebaker Automobile Company was pretty orderly on the surface. Production lines were consolidated, then closed, then sold off and renamed. But it was the loss of Studebaker's employee retirement fund that started a movement toward system-wide pension reform.

By the time Studebaker closed its South Bend plant in 1963, its pension fund was so poorly funded that the effect of its default would reverberate for the next five decades. Of 6,900 Studebaker employees that had not yet retired or at least reached retirement age, 4,000 received only 15% of what was the actuarial present value of their savings, and the other 2,900 got nothing. MF Global anyone?

So the Studebaker effect became a systemic transition shifting both the burden of saving and the responsibility of decision-making onto the people themselves. And out of this transition grew the whole financial services industry as well as the full menu of investment choices listed above. Incidentally, and speaking of MF Global, another child of the transitional 70s and the Studebaker effect was the Securities Investor Protection Corporation, or SIPC.

The SIPC promises up to $500,000 insurance for individual investors against broker-dealers that go bankrupt. That is, unless a loophole can be found. Unfortunately for MF Global's customers, the vibrant commodity futures market came later than the SIPC which was only written to cover financial securities, not futures. So while the 400 securities accounts at MF Global were covered by insurance, the other 50,000 or so commodities accounts were left hoping they'll get back more than 72¢ on the dollar. Oops. Oh, and the CME also decided not to back the accounts. It seems nothing is for sure when it comes to counterparties.

The Gold Thesis

The above is a brief description of how the 70s were a decade of many changes. And also how changes in the 70s led to the way we save today. This is important to understand because I think we are in the midst of another historic transition period right now. I think this present period will be viewed by history as far more dynamic than the 70s. And I think the lessons learned from the experience of the 1970s will ultimately prove to be a poor guide for financially navigating this transition.

The evidence is already in — physical gold is "the load," set and levered for revaluation, as in the illustration above. The fulcrum is all other hard assets. And financial securities of all types, the nominal promises of counterparties, bonds, cash and cash equivalents are all vulnerable to the devaluation force. It's a three-part dynamic with hard assets—the middle part—acting as the denominator for both a devaluation of paper promises from counterparties and a revaluation of physical gold (it should be telling that we need to qualify such an elemental word as gold) and physical gold only. And from my Euro Gold post, here's the lever in early action:

The way people save today is traceable back to the collapse of the Studebaker pension fund and the reform movement that followed. In its 50 years of making automobiles, Studebaker exploded into a large and diversified company that, by 1960, included a missile and space technology division, a home and office appliance division, a tractor division, a generator division, a refrigeration division, a chemical division, and even an airline division. But within a few years it was collapsed, condensed, consolidated, liquidated and closed. And in the process, the employee savings were erased. The savers were sacrificed.

Similarly, the investment landscape that followed has exploded in supernova fashion yielding nominal credits that number like the stars in the heavens. Today's savers have given their savings to every manner of counterparty who went on a spending spree, leaving only the illusion of a debt that is too big to even be serviced in real terms. We have spent the last 35 years exploring the Milky Way galaxy of investment options, pretending to be investors and traders, when all we really are is savers waiting, once again, to be sacrificed.

It seems to me that we are now in the consolidation phase of change, heading back down to Earth. And where you choose to land, to consolidate your savings, has never been more important than it is today. I believe we are in a new transition period that is necessary, natural and inevitable (unstoppable). And that is why I don't take the quixotic stance of an activist, fighting to change the world. The only action I advocate is personal action, like purchasing power preservation and the personal action of expanding your understanding beyond the standard dogma you hear everywhere else.

And for those of you who are also struggling through the frustrating world of the gold-resistant paperbug, I'm looking for feedback so I can continue this project. What anti-gold arguments are you running into these days? And also, what worked for you? Has anyone had success introducing a Western paperbug to gold? I thought Victor's comment here, on the permanent portfolio, was very good. Those are the kinds of solid arguments I'm looking for. Perhaps, together, we can come up with a few more!


Now that she’s back in the atmosphere
With drops of Jupiter in her hair, hey, hey, hey, hey
She acts like summer and walks like rain
Reminds me that there’s time to change, hey, hey, hey, hey
Since the return from her stay on the moon
She listens like spring and she talks like June, hey, hey, hey, hey
hey, hey, hey, hey

Tell me did you sail across the sun
Did you make it to the milky way to see the lights all faded
And that heaven is overrated

But tell me, did you fall for a shooting star
One without a permanent scar
And did you miss me while you were looking for yourself out there

Now that she’s back from that soul vacation
Tracing her way through the constellation, hey, hey, hey
She checks out Mozart while she does tae-bo
Reminds me that there’s room to grow, hey, hey, hey, hey

Now that she’s back in the atmosphere
I’m afraid that she might think of me as plain ol jane
Told a story about a man who is too afraid to fly so he never did land

Tell me did the wind sweep you off your feet
Did you finally get the chance to dance along the light of day
And head back to the milky way
And tell me, did Venus blow your mind
Was it everything you wanted to find
And did you miss me while you were looking for yourself out there

Can you imagine no love, pride, deep-fried chicken
Your best friend always sticking up for you, even when I know you’re wrong
Can you imagine no first dance, freeze dried romance five-hour phone
The best soy latte that you ever had . . . and me

Tell me did the wind sweep you off your feet
Did you finally get the chance to dance along the light of day
And head back toward the milky way

Tell me did you sail across the sun
Did you make it to the milky way to see the lights all faded
And that heaven is overrated

Tell me, did you fall for a shooting star
One without a permanent scar
And did you miss me while you were looking for yourself

nah nah nah nah nah nah nah
nah nah nah nah nah nah nah

And did you finally get the chance to dance along the light of day

nah nah nah nah nah nah
nah nah nah nah nah nah

And did you fall for a shooting star
Fall for a shooting star

nah nah nah nah nah nah
nah nah nah nah nah nah

Are you lonely looking for yourself out there


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Pete T said...

As ever, FOFOA's clear-sighted analysis and explanation cuts a spectacular swathe through the true perils of blind compliance to the current -but thankfully moribund- system. We are close, closer by the day to Freed(!) Gold.

DP said...


Anonymous said...


tudsy said...

The permanent portfolio can be a good
gateway, as you note. I found the modern portfolio arguments particularly compelling regarding the similar volatility and low correlation between gold, stocks, and bonds (see One important point is that one shouldn't rebalance this portfolio away from gold in the midst of hyperinflation!

The Dork of Cork said...

Former Silverbug - stellaconcepts is going for the diversification angle in his latest Utube vid.

I just see Europe giving the US extra oil to waste on 25MPG cars via its austerity thingy.
Beginning to agree with Steve from Virgina.
Parts of Europe are becoming $$$ised again.

AdvocatusDiaboli said...


For me, one of the most important issues I discovered about holding physical gold have been:

1.) quote FOFOA: "(when holding/receiving money) You have not been paid yet (its only half of the transaction)"

Really deeply understanding this statement rang the loudest bell for me (was like taking the red pill).

2.) The stock to flow ratio of gold, once really understood what it implies, it is the prove that especially with being technically useless, gold is already and always has been the focal point of store of value.
Especially in combination with the marginal use of gold.

For me personally the main justification for holding physical gold compared to "credit" savings:

1.) What is the worst outcome? That everything will settle out fine and gold crashes to mining costs (which should not be too bad, maybe -50%?) and the freegold story is a big hoax. I can live with that!
But can I live with 100% loss of FIAT/promises? What is the upside potential? Gold: no limit, FIAT: no potential ("Recovering deflationists" LOL)

2.) The physical gold I am holding can not been taxed (property taxes, heritage taxes). Today in the EU no (capital gain or VAT) taxes on gold sells.

This is my personal main reasoning which could be also reason for everybody outside the freegold world to hold physical gold, no matter if you believe in Eurogold, giants, flow of oil, debts extinguisher, collateral... and all the other stuff we learnt about physical gold.

Thanks again at FOFOA for this great blog.

Motley Fool said...

lovely song...

Converting paperbugs is hard work. Lately I have had some slight success by talking about diversification, and making a personal appeal to friends to throw away $1600, arguing that it's not a lot of money. :P


@mortymer001 said...

...of Monetary education.

AdvocatusDiaboli said...

The only point why NOT to hold gold:

How & when will there ever be a freegold price discovery mechanism without bullion banking involved?

I have never heard a really reasonable water proof explanation for that.

If somebody could help me on that, I would save far more than todays 60% in gold :)

Thanks, AD

Anonymous said...

Thank you for another interesting historical take on savings.

Over the holidays, I spoke to my brother about his savings etc. He does like economics so he understands the basics. I told him that I buy physical gold every month and will keep doing so as long as I am working. I also liquidated my pension paying punitive tax on it and purchased physical with it.

As he resides in the US, he was telling in detail about why Roth IRA is not good but some-other IRA is better. He found it difficult to accept that the penion wont be paid when he retires in 35 odd years.

His premise for the unfolding world events is confused and if he spends time reading FOFOA he would not be as confused.

He believes in gold and has bought some. He is a APMEX preferential customer.

He came up with the same old tired arguments you FOFOA have covered so eloquently on your blog viz Euro death, total US domination of the world using its standing army, sky rocketing gold, barter trade, confiscation, total unrest.

In my opinion 2 statements are enough to put your point of view;

1. Buy only as much gold as you understand

2. Ender's statement- Gold is an asset based currency, thus it represents payment in full,
where as fiat currency is a debt based currency that represents a claim in the system. In this light, the ‘preservation of wealth’ simply means - he who holds gold has already been paid.

Unfortunately you can lead a horse to the water but cannot make him drink it.

Sorry to say this, but I have given up educating people on this. I link your blog on my every out going email. Hopefully someone would have taken the red pill.

dave2004 said...

I am following a similar path to Advocatus and looking at the extreme outcomes of owning Gold (and yes, I admit, a little silver, but this is the 'speculative' part of my portfolio):

A) the economy recovers miraculously in the coming 2-5 years, nobody wants gold anymore. Well, my retirement is still 20 years or so away, so I still have a long window to sell if needed. But as the economy is back in business, I can earn a lot with my business.

B) FOFOA/FOA/A are right, Freegold is coming before I die, and I will be a rich shrimp ;)

If I don't own gold in case A, I would not have made losses. But the losses are acceptable as I still have 20 years to thrive with my business in a great economy. If the economy goes belly up and Fiat &Co become worthless I would end up in a very difficult situation without gold (independent on freegold 'bonus').

I don't think we can have a situation where the economy/fiat dies and gold goes down as well (the SHTF scenario), at least in the small alpine country where I live now.

Net, the upside to owning gold can be huge, the losses would be acceptable/livable...

It's maybe easier to "sell" gold to paper freaks using the 'insurance' aspects than trying to explain freegold. People spend so much on insurances against every possible thing, but not against a loss in Fiat value.

Thanks again FOFOA for your blog and patience in explaining Freegold!

Anonymous said...

Subscribing comments

Boefke said...

"The only action I advocate is personal action, like purchasing power preservation and the personal action of expanding your understanding beyond the standard dogma you hear everywhere else".

Not only bringing up this subject is what's making you one of a kind. There's more to it FOFOA.....

Thank you for starting this project, because it deals with a lot of problems PGA's face today.

Motley Fool said...


@mortymer001 said...

@mortymer001 said...


William C Dudley appointed Chairman of the Committee on the Global Financial System
9 January 2012

Agustín Carstens appointed Chair of the BIS Consultative Council for the Americas
9 January 2012

@mortymer001 said...

BTW: just about a week ago BIS had this doc I have not had time yet to check, related to the topic:

The sustainability of pension schemes
by Srichander Ramaswamy
Working Papers No 368
January 2012

Michael H said...

(Reposted from the end of the previous thread, and signing up for comments)

More thoughts on the Chris Cook article I linked above:

The oil market 'events' of 2008 gives me an idea for further interpretation of the silver 'events' of 2011.

First, here is Turd writing Monday:

"Silver was a runaway train back in April and the Comex was near collapse. Frightened, the criminal C/C/C orchestrated a $6 takedown on the night of Sunday, April 30 and followed it up with four margin calls in 8 days."
"2011 was a very, very scary year for the cartel of bullion banks, ... Faced with collapse and virtually unlimited losses, the banks took the only action they know. Namely, they criminally and selfishly rigged massive declines in gold and silver for the sole purpose of exiting as many of their short positions as possible. And it's worked! In April, the ratio of short:long silver contracts was almost 3:1. Now it's almost at parity."

Victor presents an alternative view, that the silver market was in backwardation because of perceived counter-party risk:

As further background, Screwtape presents a fictitious scenario to explain the 'Wynter Benton' series of silver postings:

Also, much of this is influenced by costata's scenario presented in his silver open forum.

Based on the above, these are my further thoughts on the silver price spike:

- The large silver short positions in the price run-up, and their subsequent decline, are not signals of BBs trying to cap the price and facing significant losses, but instead are caused by producers selling their inventory and their future production in a rising market.

- The April silver price spike was due to orchestrated marketing hype, as seen by WB, ZeroHedge, etc.

- Silver was in backwardation in the price run-up because the producers knew that it was a temporary spike and they were selling their forward production heavily. This depressed the future prices, while the hype affected primarily the spot price.

- The arbitrageurs were not able to close the price difference, as victor noted. Either a) the arbitrageurs were in on the sting b) the arbitrageurs and the producers are one and the same, or c) the arbitrageurs were overpowered by the volume of future selling.

Jeff said...

Where are the customers yachts?

"MF Global Holding Ltd.’s (MF) U.K. customers demanded their money back at a London creditors’ meeting as administrators KPMG LLP said they racked up 17.5 million pounds ($27 million) in fees since the broker’s collapse without returning anything to clients."

@mortymer001 said...

Next Generation System-Wide Liquidity Stress Testing
Authorized for Distribution: January 01, 2012
Summary: A framework to run system-wide, balance sheet data-based liquidity stress tests is presented. The liquidity framework includes three elements: (a) a module to simulate the impact of bank run scenarios; (b) a module to assess risks arising from maturity transformation and rollover risks, implemented either in a simplified manner or as a fully-fledged cash flow-based approach; and (c) a framework to link liquidity and solvency risks. The framework also allows the simulation of how banks cope with upcoming regulatory changes (Basel III), and accommodates differences in data availability. A case study shows the impact of a "Lehman" type event for stylized banks.

[Mrt: On Costata´s urge my comment - Why would somebody study so wide liquidity needs via global stress tests?]

@mortymer001 said...

Oh, the link is, of course here:

Michael H said...

Recently I had a brief conversation with my father, who has been in the paper investment business for over 20 years. He asked me how much savings I had and how it was invested. I told him how much and that most of it was in gold (and, yes, still some silver). He nodded and said "Well, there aren't any good alternatives right now."

Matt said...

I send people to Chris Martenson's crash course. The economic series in particular.

Polly Metallic said...

At this point, gold has developed enough of a track record that people are willing to concede that gold has been a wise investment/savings vehicle, but now they are afraid to buy, since they assume they’ve missed the run and it’s too late.
When we are asked WHY gold has gone up so much in the last 10+ years we explain that it is the anti-dollar, anti debt based (fiat) money in general. Our government and governments around the world have built up vast, unsustainable debts, with no end in sight. They bail out bankrupt banks and corporations. They expand the money supply for wasteful, ineffective economic stimulus programs. People nod and understand this, and when we say that gold is not likely to drop significantly in value unless governments stop doing these things and rectify the fiscal mess they have created, people nod again and sigh. They can’t dispute that logic. Many people agree that gold is likely to go higher. Even so, that does not mean they will buy any.
People do not buy because they are constantly bombarded with the fact that gold went to $850+ then crashed to $250. This sticks in the back of their minds and haunts them. Talking heads on financial shows convince people that gold MUST crash again at some point, and since people don’t understand what reversed gold’s price ascent the last time, in 1980, they are afraid that the same will happen again. They don’t know that it took a change in government policies and sky high interest rates in 1980 to bring down the price of gold. Our economy is nothing like it was in 1980 and the same scenario could not play out today.
The other main reason that people don’t buy gold is because people are uneducated about investments, just as FOFOA explains in this article. Even the people who actually DO save and invest (and they are a minority) principally do so by funding an employer-based retirement fund that offers few choices. People tend to select investments based on what has performed well in the past, and what is popular at the moment. They don’t analyze current trends and extrapolate what will perform well in the next year or two. They will always follow the herd and do what everyone else is doing because they don’t have enough knowledge to do otherwise.
There will be no widespread gold investment by the public (phase 3 of the bull market) until most mainstream financial advisors sanction owning gold. Then, and only then, will the people who understand and agree to the arguments for owning gold actually have the courage to buy some, assuming they have any funds at that point to deploy.

Michael H said...

Polly Metallic,

"There will be no widespread gold investment by the public (phase 3 of the bull market) until most mainstream financial advisors sanction owning gold. Then, and only then, will the people who understand and agree to the arguments for owning gold actually have the courage to buy some, assuming they have any funds at that point to deploy."

I agree with the gist of this, but I would add that there could be a sudden transition to freegold between 'bull market stage 2' and 'bull market stage 3'.

i.e. "widespread gold investment by the public" is not a prerequisite for freegold, as far as I understand.

Edwardo said...

Overcoming the anti physical gold ownership bias is very difficult. I say this because what one is confronted with is nothing less than the inability on the part of those who carry such a bias to understand gold except in almost exclusively counter-factual terms.

Here are a few of the most common misconceptions about (physical) gold listed in no order of importance.

1.) Gold is in a bubble.

Even if we regard physical gold as just another commodity akin to wheat, oil, lumber, etc. etc. - a view which is itself false- investment (there's that word again) bubbles rarely last more than a few years before they collapse. There are many examples that make the point, most recently the internet/ bubble, and the U.S. real estate bubble which followed it. Neither came anywhere near to lasting a decade, and the real estate bubble in the U.S. came and went inside of five years.

Clearly on those grounds the dynamic informing gold's rise is not one of an investment mania. Gold's rise has lasted too long and its profile is too stable to fall into the category of investment mania.

Equally, Gold is clearly not in a bubble since investment bubbles, or, more properly, manias, involve widespread and deep ownership that is characterized, especially in its late stages, as being rife with weak hands. People who buy physical, in particular, are not apt to be shaken out by fifteen to twenty percent corrections. In fact, they tend to be emboldened to increase their holdings. Which brings me to the next entry on the list.

No.2) Gold is too volatile.

Since everything is relative we must ask, Compared to what is gold too volatile? Common shares? Hardly. A quick glance at the S&P 500's chart will reveal a literal and figurative roller coaster ride that makes gold's chart over the last twelve years look positively sedate by comparison.

If we compare physical gold's performance to bond performance, broadly defined, as opposed to say, just U.S. Treasury bonds, well, here again, the volatility argument begins to fall apart like a cheap suit in the rain. And I haven't even discussed return as it relates to volatility.

3.) Gold is too difficult to acquire as well as store.

For the vast majority, even those who are seeking to convert hundreds of thousands of dollars into gold, such an assertion is patent nonsense.

The above misconceptions about "gold" are precisely what those who already own gold, and have decided to attempt to broach the question of physical gold ownership with those who don't, are faced with.

If one can point to the sky on a clear day and not come to agreement with one's friend or loved one as to the color of said sky then one is, indeed, hard pressed to get anywhere at all.

Getting the color of the sky right must come before one has any hope of helping a friend overcome objectively grounded reservations regarding physical gold ownership, i.e. taxation, which is, to my mind, a legitimate concern. There is, to my mind, less merit regarding fears of out and out confiscation, since, clearly, high taxation rates on physical gold sales already act as a kind of proxy for confiscation.

Anonymous said...

I find the only people that can be reached are the ones that are already looking for something because they sense there is something important happening. My success has been pretty good when someone says something like "wow, tell me about gold."

I find it useful to describe the problem before broaching the topic of Freegold. I also point people to Chris Martenson's Crash Course as well as some classics on the mechanics and history of the Fed. I like the Creature from Jekyll Island as good intro to the Fed, then Murray Rothbard's Mystery of Banking for a more rigorous approach to fractional reserve banking.

The message gets delivered that our debt based monetary system is unsustainable and will fail. Then when the feeling of resignation and hopelessness is the strongest, it is time to explore the concept of money and RPG-Freegold. Most grab tight like it is a lifeline after so much "bad news" regarding the sad state of affairs the world finds itself in.

I have been working on a project of my own. I am taken some of FOFOA's most key posts and combined them into a large PDF file that can be read on a laptop without an internet connection. I also made a Kindle friendly version (larger font) to load on to a Kindle. I find most people feel overwhelmed when they go to the blog and realize how much content is there. The PDF file gets them started.

I recently discovered Blondie's FOFOA Summary and I think it is an excellent intro. I have converted it to PDF and have it ready to go for my next newbie. So my approach for RPG-Freegold will start with Blondie" Summary, then the PDF file with FOFOA's "power" posts. Hopefully when they get beyond this point they are self-sustaining learning machines ready to digest the concept in its entirety and then pass it along to their friends and loved ones.

I would like to see something like a PDF digest somewhere on the blog. It is such a powerful tool for ipads and Kindles.

Anonymous said...


Max De Niro said...

I have found the single largest stumbling block, outside of the MSM propaganda (ie irrational dogma), to be the fact that gold is "useless".

Even once I've got over the hurdle of convincing them that there is a serious problem and that "normal" investments are all very susceptible to big declines, they cannot get their head's around why they should buy gold.

These are intelligent people, not numpties. They cannot bring themselves to put their wealth into an inert metal that nobody uses for anything.

I have tried to convince them that price or demand follows function and utility, and that this doesn't necessarily require a traditionally productive use, but there is a mental wall there which I cannot leap over or smash through.

Interestingly, I have managed to get quite a few people to stock up some food now, so it's not that they deny potential problems, they simply do not understand how gold can possibly have any value, let alone how it could skyrocket in value.

KJ said...

first time posting, cheers to a/foa/fofoa and the frequent contributors; I see differently/correctly and for that, there is no price tag. Thank you.

Have had discussions with friends/family. The reality is there are various pieces to the puzzle that once sufficiently understood, lead one to physical gold; by puzzle piece #3, they've stopped listening. It is too much. Even if they do agree and are aware of the problems with USG debt/deficit, QE, etc. they nonetheless conclude it'll all work out and it is clear they want to move on to the next topic.

One option is to print off the recommended articles as identified by JR and pass them along. It was only when I read and continued reading did it lead to sufficient understanding; I do not know if I would have been receptive to a friend essentially outlining freegold. Who knows, perhaps the reading list coupled with the web address for this blog will be best birthday/christmas/etc. gift ever received :)

enough said...

dont know if this was already posted....

Gasparino: Break-Up of CME on the Table

Hill C said...

I have gained some traction by asking the following question:

"Do you believe China would exchange its current multi-trillion dollar reserves for all of America's gold currently valued at $419 billion?"

The answer is almost universally "Yes or probably".

At that point, you have established that gold might be undervalued after all even at these levels. From there, you pivot to a discussion where gold is a solution to the world's problems. Greece could pay off their debts if their gold assets are revalued to $83,000 (or so); Germany at $58,000; Italy at less than $30,000! And so on. It is not only a solution, but a pretty good one!

Edwardo said...

Gold's lack of utility is, indeed, what makes it so useful, so perfect, as a reference point for valuing all other items that exist in the physical plane. And the fact, and it is a fact, that gold can function better (than any other item) as the reference point for valuing other items is a large part of why it acts as the store of value par excellence.

Yes, that is a concept/construct that amounts to a great stumbling block for many.

"Yes, it's true, John, you can't eat gold, burn it for fuel, or wear it as clothing, and, because it doesn't really function as part of the great global stream of economic activity, it can maintain a relatively stable supply. And, thrown into the bargain gold is unlike pork bellies, orange juice, wheat, corn, cotton and oil as it is relatively indestructible, easily stored, and amenable to being labeled, serialized, and standardized through minting. How about that, John, are you beginning to get the picture regarding how valuable this non edible, non wearable and non burnable hunk of metal called gold might be given its unique properties?"

"So, Bill, it isn't just tradition, like Ben Bernanke said it was, that dictates why Central Banks keep gold in their vaults?"

"That's right, John, gold held in Central Bank vaults is not a practice akin to the tradition of serving Turkey for Thanksgiving dinner."

Anonymous said...


here are some ideas for the argumentation:

1) Gold is in a bubble.

(a) Think about the other well-known bubbles: dot-com bubble, Japanese housing bubble, US real estate bubble. There are two effects at work when the bubble bursts:

(A) There is an arbitrage that undermines the elevated prices. For example, in the late 1990 all sorts of bogus companies were taken public in order to profit from the bubble. As a result, an overcapacity was created. Same with US real estate. In 2002-2007, the property developers produced new houses like crazy. With tulip bulbs, that's also obvious. Everyone can grow some in their garden. With gold, the arbitrage against higher prices is tiny. Even if mining output is doubled (already questionable), the above ground stock of gold grows only by some additional 3% per year.

(B) People purchased the inflated assets with borrowed money. This applies to the stock market bubbles 1929 and 1999 and to basically all real estate bubbles. It is a potential issue with gold and may contribute to the volatility we presently observe.

(b) Counter-argument: Your $50 note is also in a bubble. You have to hope that someone, some 20-30 years in the future, gives you something useful for your $50. You need a 'greater fool'. Same with gold. This is because both the US$ (still) and gold (always) are money.

(c) If you talk to someone and they are worried they might pay too much for their gold when they buy today, the usual gradual entry might work:

Put some small proportion of your net worth into gold immediately. If the thinking here at FOFOA is right, already 10% should work as an insurance.

Then, wait a couple of months. If you look at the price chart of gold in US$ since 2002, you see an extremely accurate (probably engineered?) rising trend increasing about 15% annually. Whenever the price breaks through the top of the channel, it magically collapses back into the channel, and whenever it drops though the bottom, it re-enters the channel after a couple of weeks. So it is extremely likely that the people you are trying to convince have a healthy (nominal) paper gain already after a few months. Then your target probably feels much better and you can tell her or him to buy more.

2) Gold is a commodity

Think about wheat, copper and iron ore. There are producers and consumers. Nobody stores this stuff for longer than a year (wheat perhaps). So the price is determined by supply and demand (and by the storage facilities that operate depending on the term structure of the futures prices).

Not so with gold. There are about 100000 tonnes of financial gold above ground (jewellery in many countries is an investment). Only 2600 tonnes are minded each year. So the price is made by trading the above-ground stock rather than by the commodity 'supply and demand'.

Nobody has 40 times the annual production of iron ore in stock and uses this as a store of value and trades it.

By the way, I think this is the main reason why all the gold bugs whose background is commodity trading (GATA, TF etc.) don't get it. They think COMEX is the centre of the market, they watch open interest and volume and think they understand the market. With iron ore, this might work, but not so with gold. The OTC market for gold is many times bigger than COMEX. Viewing gold as a commodity keeps confusing people.

3) Gold is too volatile.

(A) Take a look at the stock market.
(B) Take a look at the permanent portfolio.


milamber said...


My apologies! I didn't see your reply back on November 28th, until today 1/11/2012, to the questions I had asked in regards to the Rickards/Discussion post.

I think I am engaging in proper etiquette by putting my reply here (instead of replying to the 2 month old post), but if this should go back to the older post, someone please let me know.

(Quoting FOFOA)

You wrote: "2. At the end, he posits three possible scenarios:"

He actually posits four scenarios which he calls the Four Horsemen of the Dollar Apocalypse. You left out the one he calls Multiple Reserve Currencies.

(End Quote)

Thank you for correcting my error. For some reason, when I was thinking on what he wrote, I could only recall three scenarios, but he did indeed outline the four that you listed.

Since that post back in November, I have gone back and reread (or at least tried to) JR's recommended reading list, as well as the posts you linked to from Aristotle (From your suprises post), and my mind is still whirling.

- As a side note, I am happy to see that all of the posts that you referenced in your answer to me, I read (or reread) before I knew you were going to tell me to read them. Maybe I am getting it :) -

Aristotle's discussion on how someone long gold could destroy my mining companies really caused me some heartburn! Not that it was wrong, or that I disagreed with it, but it made me realize (again) how owning mining companies is NOT the same thing as owning the metal.

As a poster boy for J6P (as I was told I was on ZH), I don't know what is going to happen. I can see & I think understand the cases made for why different people think the different things are going to unfold in the future.

So, when I say that you and Rickards sound similar, I mean that from the point of view that the actionable intelligence that is presented here (and in Currency Wars) both tell me (a shrimp) to do the same thing: Buy physical gold and own it (unambiguously) outside of the financial system.

Hopefully, I am making sense.

Anyhoo, in an effort to see if I am understanding things, I have put together a few statements for you (well really anyone that would care to) to consider:

1. What you are writing is what you (Another, FOA/Trail Guide) think HAS to happen, eventually. (Time will answer all questions. We just have to wait on the front lawn for the dump truck!)

2. Rickards writes what he thinks the US should do, versus what he thinks will happen. IE he prefers that the US should move back to a gold standard with an immediate revaluation of gold north of $10K, and (if necessary) confiscate gold that is needed. He thinks that the IMF is going to try and manage the transition away from the dollar by moving to SDR's to take the place of the dollar as the reserve currency.

3. The current international financial sytem (IMF$) is coming to an end. Exact date, and method won't be known until *AFTER* it occurs. But it will occur.

4. Gold is the best asset to store wealth (as long as it is owned unambiguosuly) to see one through this transition period.

5. Rickards thinks that the US gov't could put a 90% windfall profits tax on gold ownership it if is necessary

6. Even though several European govt's are broke (the PIIGS) and the politicians have promised the moon (benefit wise). The Euro (the currency) and the EU (the policial cooperation zone) are going to survive because they have severed the link between the nation state and the currency. What is happening right now is the negative feedback loop forcing them to come to grips with their budget issues? And at the same time, the US is building a bigger imbalance because nothing is forcing it to get back into balance.


Max De Niro said...


"Gold's lack of utility is, indeed, what makes it so useful, so perfect, as a reference point for valuing all other items that exist in the physical plane. And the fact, and it is a fact, that gold can function better (than any other item) as the reference point for valuing other items is a large part of why it acts as the store of value par excellence."

After giving this explanation, I always get the same response - they scrunch up their faces, they nod their heads off to one side, maybe they do that 'tschh' thing, sucking air through their teeth and say "yeah, I get that, but it sounds too good to be true. It's too simple, how come nobody else has figured it out, but you have?"

I think the perceived crediblity and standing of the messenger has a lot to do with it. People nowadays rely on the cult of celebrity, not the power of thought and knowledge. I think that this is the reason why no well-known gold gurus ever talk about Freegold, as they don't want to be associated with a decade-old anonymous internet source. They know how people will react to it. If you don't put in the time and effort to learn, understand and evaluate, it's very easy to dismiss. People don't like to put in time and effort.

And that's the ones who get that there is a bloody catastrophe in the works.

The propaganda crack-whores don't even get to that point.

My own family (yes, I just called my own family a bunch of "propaganda crack-whores") look at me with a pitying expression and say "so, you think that you know better than the markets do you? (RE: UK as a safe haven) You know more than Robert Peston on the BBC?".

The rest of the conversation doesn't go well.

Lots of red wine doesn't help either.


So, I've given up, officially.


Polly Metallic said...

@ Michael H

Yes, absolutely. Freegold could occur before phase 3 of the gold bull market. Sadly, it is likely that it will. If that's how things play out, there will be a lot of frustrated people who will have missed a once in a lifetime opportunity, and they'll have the "You Can't Eat Gold," myopic "financial experts" to thank for it.

I never discuss the Freegold concept with anyone who isn't already invested in precious metals. The idea that gold could be revalued out of the blue to multiples of it's current price (which many people think is insanely high now!) sounds too much like a crazy theory to people who don't know anything about gold. If they have a foundation of knowledge to build upon, I have no problem discussing the potential of Freegold.

Robert said...

Great post! And the proof that it is a great post is the comments actually discuss and reflect on the post this time, rather than just continue the running thread of stream of consciousness comments wholly unrelated to FOFOA's most recent entries. This is the first post in awhile that has distracted the peanut gallery.^^

Robert said...

One more question, FOFOA. Why missionary zeal? Why do you care whether ignorant savers get sacrificed? Isn't this a recurring theme of history, something doomed to repeat again and again and again? All of this has happened before, and it will all happen again. So why bother to persuade the heathen? Why waste all that energy, when most of the time it will feel like talking to a wall? I can understand the human instinct to figure out the reality and to be validated through confirmation. I can understand the desire of one commentator to convince other commentators to receive valuable feedback and confirmation. But why the unwashed masses who have nothing to give back to you? Why bother? In the future will we refer to you as St. FOFOA?

Edwardo said...

Well, Max. It sounds to me as if you had your shrimps ready for the net since the idea that nobody else has figured it out is patently false. Central banks around the world and the very wealthy- Charlie Munger excepted- have long since figured it out. But, for the most part, they don't take out ads except in very select venues.

I am, of course very sympathetic to any and all who have ceased attempting to help the benighted see the light.

Michael H said...


"Why do you care whether ignorant savers get sacrificed?"

I imagine that, like most of us, FOFOA has a personal interest in the survival and well-being of the subset of these 'ignorant savers'/'propaganda crack-whores' who are dear to him.

DiverCity said...

FOFOA, I believe. Help thou mine unbelief!

Anonymous said...

Hi again,

concerning the possible revaluation target in terms of today's US$.

One argument that I have found to work well is to ask "imagine they would still settle international trade balances in gold". Then, when you calculate what the Chinese trade surplus or the US deficit is worth in tonnes of gold at the official government price of $42.22 per ounce, the figure you get is going to kick you out of your socks. Even at the current market price of $1640, the US would lose just under 1000 tonnes per month!!!

Another argument that gets you towards the relevant magnitudes is the old hard-money argument presented, for example, by Mike Maloney, that (1) base money is effectively backed by gold at about $15000 or the foreign held US debt is effectively backed at a similar price. Then, historically, in 1980, the market had forced both targets. So, even the (wrong) 1970s argument gets you substantially higher figures.


Max De Niro said...


Of course I did mention the central banks and the multitude of good fellows here and elsewhere, but what the propaganda crack-whores mean by 'nobody' is the talking heads on TV.

I am vanquished in this battle. My skills of persuasion are but a flea on the hide of the MSM buffalo.

Anonymous said...

Depending whom you are talking to, you can also

a) show them the minutes of the Fed meeting when the FOMC people made fun of the most recent aggressive mortgage products (some time in 2005? - I don't have the link to the right set of minutes, but GATA have probably documented it). Then you ask them "Why do you think the Fed did not act and let this happen?"

b) show them a GOFO chart of 1997-2001 and say "this is when LTCM blew up" and "this was the Washington Agreement". Then they go ???? and you explain what GOFO is. Then they ask "but I thought that LTCM screwed up because of the Russian default", and there you go.


Edwardo said...

Yes, you really do seem to be surrounded by MSM dupes who have, ahem, been buffaloed by the organs of mis and disinformation. It probably wouldn't help to point out the following:

The MSM never saw the financial crack up coming, and, even when it was underway, they systematically dismissed or vastly understated its effects.

Perhaps one day one of your coterie of the buffaloed will tune in and catch a Kyle Bass interview which might create a ripple on the surface of their impenetrable anti- precious metal pond.

Polly Metallic said...

Another argument for gold that people can grasp is that we're seeing an economic power shift from West to East, and India, China, etc. have a long history of valuing gold over fiat currencies. So, even if we "enlightened Westerners" think our eastern counterparts are silly, backward savages for prefering gold over pieces of paper with ink printed on them (or electronic digits representing paper with ink), there is no fighting the fact that the emerging market economies intend to accumulate more gold and less dollars.

Piazzi said...

One question that I have had for long is: what would happen to debt issued by banks like mortgages?

Who would be the end winner of that debt, the borrower who stands to possibly gain on physical re-pricing of land or property or business in place on a bank-loan or the bank somehow being able to re-price the nominal value of the debt to a new currency or a re-valued currency.

I know from many 3rd world countries that whoever owed to banks on a loan, like owning property, ended up running away with the property and owing to the banks almost nothing after currency crashes and stuff like that

But, also from 3rd world countries, not many had the ability to borrow for mortgages and stuff which is very different from many western countries where almost anybody could secure a mortgage

So, any idea, who will be the eventual winner of that debt to the bank that is at a certain nominal value of a certain currency

Boefke said...

One of the biggest problems I personally faced during the discussions about gold was the "medium of exchange" issue. People always come up with the argument that it isn't easy to pay each other in gold coins again.
So the link in people's head: Gold is money, is very, very hard to clear.

Even when I try to explain that the value of the Mona Lisa to the Louvre isn't measurable in price, it's hard to grasp.

Max, I had the same experience as you had. It's hard to sit in silence when you grasp a little piece of the "freegold puzzle". It gets you excited, and eager to share. But there are not many people ready for this explosion of emotions....yet.

It will come. The most important thing to do IMO is mention the existence of gold. Period. Than, just keep smiling year in, year out......and the questions will come up.

Don't get angry or frustrated (It's hard when it's about people you care most).

It takes time for the receiver to process, for the sender to find the correct wavelength.

JR said...


"Here are a few simple principles that will save you the hassle and embarrassment of constantly being surprised by the actions of politicians and central bankers. They will never sacrifice the system to preserve the value of the currency. But they will always sacrifice the currency to save the system. And there is a very simple formula for how they do it.

There are four players to keep in mind; the debtors, the savers, the banks and the printer. They never print and give the money directly to the debtors to pay off their debt. Instead they print and give the money to either the creditors (banks) or the savers (e.g. pension funds) in exchange for the older bad debt which they then put on the public balance sheet to socialize the lost value.

So they "bail out" the banks and the savers nominally, which in turn (through currency debasement) actually bails out the debtors and screws the savers. The banks come out even because they only require nominal performance. But the retirees and pensioners that require real performance at the supermarket get screwed."

Euro Gold

JR said...


also consider:

"...And with the proper view of who Smith's Elite CONspirators really represent—the easy money camp, the debtors, the hungry collective—the answer to his question begins to develop. It is the opposing camp, the savers, that will be most-punished by hyperinflation and it is Smith's Elite that will profit the most during the race to spend.

If you can start to think of the administrators of the $IMFS, the "banksters", politicians and Western Capitalists in charge of the system as being firmly entrenched in the Debtor camp, you are well on your way to a very rewarding enlightenment. I realize this is counterintuitive, and counter also to much of the baggage that accumulates while reading other "hard money" writers on the Internet, which is why I spend so much time on it. But once it clicks, you'll be like, "OMG! WTF was I thinking?" I have conversed via email with many extremely intelligent people that have had this momentous "click", so I am tempted to consider that I may be on to something.

So call me overconfident if that makes you feel better, but I'm not going to be wishy-washy about what I can see. I'm certainly not of two minds on this.

How will "the Elite" profit from hyperinflation? By being the first to spend the bills with new zeros added and thereby outrunning the rest of us in the race to spend and winning the competition to retain standard of living. Hyperinflation is the end result of the dollar-debt timeline, there is no other way it can end. Only the severity is a variable to be considered.

Rick Ackerman and other deflationists agree with me that the unsustainable, unstable mountain of debt must and will collapse. And they view "the Elite" as the capitalist creditors and the rest of us poor working saps as the proletariat debtors. Therefore they believe that when the debt mountain collapses, their version of "the Elite" will not print Zimbabwe-style because, even though they just took a tremendous haircut on their bonds, they want to be sure that the super-saps among us, the proletariat that are still working, will continue to service the remainder with dollars of today's purchasing power.

This is a bass-ackward view in my opinion. The hungry collective provides ample political backing and sufficient naiveté for "the [Western] Elite" to print the full face value of their bonds and dump that worthless paper on the public's front lawn. Furthermore, deflationists like Ackerman as well as practically all mainstream economists provide plenty of cover in the form of plausible deniability that hyperinflation would be the inevitable result.

But the story runs deeper still. ..."

Deflation or Hyperinflation?

Max De Niro said...


I appreciate what you are saying, but the problem is not gold per se. The problem is the unwillingness/inability to think for oneself and to not be swayed by the opinions of others, but to look objectively at facts and make one's own inductions/deductions.

This behaviour is not something that emerges spontaneously over time.

It would appear to me that either this is a person's modus operandi and always will be, or it is not and it never will be.

Yes, that's a generalisation and not entirely accurate, but if there were such a thing as being nearly true, then it would have to be it.

Edwardo said...

VTC wrote:

"Show them a GOFO chart of 1997-2001 and say "this is when LTCM blew up" and "this was the Washington Agreement". Then they go ???? and you explain what GOFO is. Then they ask "but I thought that LTCM screwed up because of the Russian default", and there you go"

Perhaps you, or someone else, could create another version of one of those charming cartoons where a sophisticated animal character speaks with another less sophisticated animal character in a computer generated voice about abstruse financial matters.

Michael H said...


Brian: Please, please, please listen! I've got one or two things to say.

The Crowd: Tell us! Tell us both of them!

Brian: Look, you've got it all wrong! You don't NEED to follow ME, You don't NEED to follow ANYBODY! You've got to think for your selves! You're ALL individuals!

The Crowd: Yes! We're all individuals!

Brian: You're all different!

The Crowd: Yes, we ARE all different!

Man in crowd: I'm not...

The Crowd: Sch!

Piazzi said...



My question is very simple

Say, I borrow 170k dollars and buy a house that is 100 ounces of gold with gold at 1700 dollars

Now let's assume that I have a 100 ounces of gold in addition to the house and I have it buried under some tree somewhere that only I can find

Now, the final purge and revaluation happens and the I dig my gold out from under the tree

What do you think I will owe the bank for my mortgage?

Max De Niro said...


The Life Of Brian is one of my all time favourite films. It has a number of themes, including the one that you highlighted, that are particularly close to my heart.

Michael H said...


My understanding is that, the likeliest outcome is that you will owe your full mortgage in nominal terms. So in theory the repayment is easy.

Still, hyperinflation won't be a walk in the park for debtors. Keep in mind that costs will lead, and wages will lag.

Further, there is a chance that mortgages may be 're-indexed' to the new currency, i.e. if you borrowed 170k 'old dollars', you may owe 170k 'new dollars' even if 1 new dollar = 1^10x old dollars.

If such a conversion is attempted it may not be effective across-the-board. Perhaps only mortgages taken out in the last years of the inflation will be re-indexed, or those not paid off by the time the inflation ends, or those entered into on the third Tuesday of the month ...

Another thing to think about is that your borrowed 170k will require a down payment to go with it. How much gold could you have bought with that capital? How many houses would it purchase outright post-freegold?

Clyde Frog said...

Perhaps an ounce of gold.

Piazzi said...

Thanks Michael

That is what has happened many times in many countries like Turkey, Argentina, Iran, many to name

those who had hard assets like gold that could easily be sold ended up paying off debt pennies on the dollar

JR said...


"...And I can almost hear some of you out there screaming, "but but but… house prices DID collapse… d… d… DEFLATION!" Wrong. Sorry. Residential real estate will ultimately crash to its non-leveraged cash price as credit disappears, just like the deflationists think. But that ultimate cash price, once reached, may actually be higher than today's leveraged prices and be outrunning the availability of cash needed to clear the market! And all the while real estate will keep crashing in real terms (gold).

There is always a shortage of cash during a full-bore, in-your-face hyperinflation, which is why the printer has to keep adding zeros. His press simply cannot keep up with prices at established denominations. It is also why the first to touch the new cash (the "elite") have a very valuable advantage. Hyperinflation is a grand competition for lifestyle retention in the face of forced austerity, just like a race! Here, look at this from the excerpt:

"Honey, I talked to Fred again, he can't sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that's not so bad, we had to jump ours up three times before selling."

I'll bet the deflationists were thinking in terms of deposit+loan=price, rather than cash. Wrong paradigm. Sorry. When the hyperinflation hits in a reference point purely-symbolic fiat currency paradigm, the market will try to clear for the rising symbolic cash price while the hard currency price (denominated in gold) continues to drop like a stone. Deflationists do have one thing right. Real estate is not a very good investment when preparing for what's coming. That doesn't mean home loan debt won't be hyperinflated away though. It most likely will be. And if you are lucky enough to catch the bottom in the reference point gold paradigm during the crisis, bless you. But it's still a poor investment choice right now, even at 5% down, compared to putting that same cash into physical gold.

Deflation or Hyperinflation?

Piazzi said...


I am not talking about a debtor, but about a person who has assets that include property, gold, socks, and others stuff who also happens to have some lines of debt like a mortgage with the value of the debt well below the net of his holdings

debt can sometime be a great tool depending on circumstances and timing

I just wonder if bankers can somehow reprice and say that 170K of mortgage is now must be paid in 100 ounces of gold, something like that

Piazzi said...


you are getting too specific. My question is broad and mortgage was just an example

Simply, If I owe one current US Dollar (or one current Euro), what will I have to pay when the system resets?

Michael H said...


If you owe a debt to someone, you are a debtor. It does not matter if you have a positive net worth. The word 'debtor' doesn't need to have a negative connotation.

Yes, those 'socks' will be a valuable asset indeed!

"I just wonder if bankers can somehow reprice and say that 170K of mortgage is now must be paid in 100 ounces of gold, something like that"

As I said, "something like that' is a possibility: they could re-denominate mortages/debt not in gold-ounces (any more than they would force you to pay a mortgage in tractors), but in 'new dollars', when your original contract was for 'old dollars'.

Further, (and I mean no disrespect), you sound like you have your mind made up already. JR's comments to you are worth a re-read.

Edwardo said...

"I just wonder if bankers can somehow reprice and say that 170K of mortgage is now must be paid in 100 ounces of gold, something like that."

Here's the short answer. NO!

Gary Morgan said...

Happ New Year to FOFOA and all on the blog.

The easiest way I have found to persuade others to buy some physical:

--govts are trapped, they cannot afford to allow interest rates to rise.
--they are already, and will continue to, create electronic money out of thin air to buy their own debt.
--this will eventually lead to a currency collapse.
--savers will potentially be wiped out.
--everyone needs some insurance, and gold is the only option.
--freegold=the method by which the world recapitalises itself.

Fear is a great motivator (so too is greed!).

I don't feel bad about frightening people, as they really should be frightened.

ChrisF said...

My most convincing suggestion to people has been to ask what they would
put in a safe deposit box for their
kids that can only be opened in 20 years time.
Even hardened dollar-bugs say gold after some thought.

Anonymous said...


ask what they would
put in a safe deposit box for their
kids that can only be opened in 20 years time.

That's the best one so far IMHO. It nicely illustrates the credibility inflation that people still suffer from. Although they admit that currency and debt are too high a risk on a time scale of 20 years, they still think they can do better than the price of gold in US$ in the short run.


enough said...

If my math is correct, I get a GLD puke of 1.001% today

Texan said...

FOFOA, this is a great post. I think however there are a few simple reasons beyond what is already stated as to why most "paper savers" don't embrace gold. And never will.

First, most savers made their savings in the fiat paradigm. Highly nuanced FOFOA arguments aside, gold is sort of the "anti fiat". It is very difficult to internally reconcile the notion that one's whole life has been effectively rewarded by the fiat system, and then suddenly "bet" on that same system to collapse. I think in most well-to-do Americans' minds, the notion that the USD would collapse is simply preposterous. It is akin to saying the world will end. A very, very low probability bet. And a lot of these mom and pop savers have actually done ok in stocks and bonds. Why switch now?

Which brings up the second problem. When is it going to end? There are a couple of issues within this category.
The first is that most savers, being successful, probably think they are smarter than the average bear. So if the currency collapses, they think they'll buy their gold just
before it happens. But the far bigger issue is the savers age. Most savers are old. I think I was reading somewhere
that something like 75-80% Of all savings in the US are
held by the over-55 cohort. Now obviously even 65 these days isn't "old", but life expectancy at tha ageis only an
average probably another 20 years or so. So to convince someone to take a meaningful portion of their paper savings
and chunk it into gold requires some thought about "when" the binary event occurs. If i was 65, and you said "by 2035 the US will be broke", well I doubt I would much care. I
need cash until 2035, and then I am probably dead. Working strongly against your date prediction as well is the
fact that most people in this age cohort are on some level aware of the 20 year bear market in gold, and may have already been burned once by gold.

Which brings up the third major issue. Gold is kind of "icky" in the States. It is promoted by some serious "outliers" from a MSM perspective. Glenn Beck, Ron Paul, Peter Schiff, Jim Rogers, James Grant, etc. There are weird cash for gold ads, or call monex now and get your free kit to buy gold
now, etc. And there is really nowhere to buy it but online. There are shockingly few real "dealers" ( and think about those connotations), and plenty of them I sure charge horrific markups. Plus is it "safe" to hold physical, etc. It's just sort of viewed as "shady" and against the grain.

I am sure I could up with some more big categories, but let's just call all of the above as "strong cultural bias" in favor of fiat in the US. That is not going to change no matter how bad it gets, except on the margin.

Which Is why I keep harping that the primary buying impetus (and thus the political impetus) will not come from the West. I will concede for now that maybe Europe is somehow "different" (just for the sake of this discussion) but I know that the US has no interest in RPG, and neither do 99% of its savers. It's called "The Almighty Dollar" for a reason.

Texan said...


The IRA thing is another great point. For most "shrimp savers", their savings is trapped. They can't buy physical.

There just isn't much "unencumbered" cash in the US to buy gold, and it's highly concentrated.

KJ said...

what about starting off by highlighting the underlying economic/debt problems in major countries/zones; i've found people at least listen/understand to common sense math.

Perhaps a map - if you click on the US, shows for example a) revenue b) expenses c) deficit d) trade deficit e) QE f) total debt g) total debt obligations h) interest on debt i) % of interest on debt j) UE rate k) growth rate i) interest rate

That could lead graphs showing the trend of a) deficits b) debt c) trade deficit d) aging population e) derivatives f) etc

Perhaps then leading to the question of how will this debt be paid/how has this ended in the past/how will this end...

Victory said...

How to get as close to ‘Gold in Hand’ as possible with a tax-sheltered individual retirement account?

I’m not an investment adviser but I was looking for the answer to this question and here is what I found. Mind you I don't work for these guys or have any affiliation with them, just figured others might have asked the same question. I’m also putting them out there for scrutiny, if anyone cares to due further diligence. This applies to all with the flexibility to chose the custodian of their self-directed tax-sheltered individual retirement account.

GoldStar Trust Co

From what I can tell you pick your own dealer, you choose your form of bullion (you actually place the order with your dealer) and your dealer delivers your gold to a non-bank metal depository in Delaware (the Delaware Depository Service Company). When you wind down your retirement account you can even have your actual gold, that you bought when you opened the account, shipped to your door. For gold accounts you can chose segregated custody but for silver they only do co-mingled.

This is from the website of the Delaware Depository Service Company:

‘All precious metal assets held at DDSC are maintained in customer-specific custody accounts, on a fully allocated basis, and off of DDSC's balance sheet. They are not held as deposits or consignments.’

FOFOA has thought me the value of personally controlling your gold savings as actual gold in hand, not almost gold in hand, but for those choosing to hold some or all of their portfolio within the tax-sheltered retirement system/scheme, this might be a close second (then again you could always close your IRA now, pay the taxes and actually get gold in hand.)

Unfortunately for the people having their employer make contributions towards their tax-sheltered retirement accounts they are probably locked into using the custodian that their employer has subscribed to, in which case the majority of (would be)savers are forced into investors/speculators because the largest custodians (the Standard's and Valic's of the world) limit available investments to traditional brokerage accounts such as stocks, bonds, and mutual funds. Even the most conservative (would be)saver can't opt out of the market(system) by choosing cash, as the closest they offer is the money market, which has counterparty risk and in today's interest rate environment a carry cost. …sucks☹

FOFOA, great piece I just sent it to a couple of loved ones!

Nickelsaver said...


Goldilocks said...

I find that people are most concerned that gold is speculative and they will lose money. Secondly they are concerned it is illiquid. Lastly the issue is of safe storage [When you are talking about storage you know you have their attention]

The first issue I deal with through an illustration of burger and chips in gold vs fiat over a 40 year period. The Wimpy Chain is well known in South Africa and has been around for a long time. I tell a story something like this, with links if they ask.

In 1972 a Wimpy burger and chips combo cost R0.35

A Krugerrand cost R35

You could buy 100 Wimpy and Chips for your krugerrand in 1972.

Put your R35 paper and a krugerrand in a shoebox and put it away until 2012. Haul it out and go down to your local Wimpy.

In 2012 a Wimpy and Chips costs R34.95

A Krugerrand is worth roughly R13500 today

With your paper rands you can now buy 1 Wimpy and Chips.

With your krugerrand you can buy 386 Wimpy and Chips

People always reel when they see the figures, it comes as a shock to them. The forty year period is important because of the consistent gain. The concept of losing 99% of your purchasing power vs almost quadrupling it, isnt lost on anybody.

Of course I should adjust the story by putting the R35 in the bank and earning interest but its more effective in a shoebox. More lo-fi.

The liquidity issue I deal with by explaining that by law you can go to the SA Reserve Bank with a krugerrand and your ID and you will be paid in paper rands at the current exchange rate. Or you can go to your local gold coin exchange.

People are more concerned and motivated to resist or act by potential loss than any potential gain. This is well known in marketing.

Focus on the potential loss in holding fiat more than the potential gain in holding gold. Most people are more interested in security than speculation.

for the idea

Polly Metallic said...


I like that illustration. We have something similar that we point out to people who show us collections of old US paper money. A $100 bill saved from the 1930s has to be crisp uncirculated to be of any interest to collectors. A slightly worn one is barely worth more than face value. What could you have bought with that $100 back in the 30s compared to what $100 buys you today? That is a sobering thought. It was a real waste to save that $100 bill for the grandkids. But that example isn't nearly as eye opening as when someone has a $20 gold certificate. Then we point out that the gold certificate is worth marginally more than $20 as a collectible today and $20 won't buy you much at all, whereas if instead of saving that $20 the person had redeemed it for a 20 dollar gold piece, they would now have something worth over $1600.00. The light of understanding always comes on in their eyes when they hear that.

Anonymous said...


Which brings up the second problem. When is it going to end?

It is true that probably nobody here can predict it. But is this the right question? If someone buys gold now rather than one second before HI, what do they get? A pretty reliable 15% annual gain - even using the (paper) market price without freegold.

This is a fantastic performance. Even more so because it worked consistently every year since 2002.

Tell me one hedge fund with a better and more consistent performance!


milamber said...


Your comments mirror conversations within my extended family almost verbatim.

Asking someone to believe in something that destroys their very existence is asking an awful lot.


Wendy said...

I posted this back in Nov. when this question came up:

"If I wanted to demonstrate the value of gold to someone, I would talk about something they understand. Most of us drive and have to buy gasoline. Quicky back of the envelope calculation (all numbers are close approximations):


March 2008

Oil $100
Gold $1000
Gas $1/litre
100L Gas $100 or 3 grams of gold


Oil $100
Gold $1700
Gas $1.30/litre
100L Gas $130 or 2.4 grams gold

This demonstrates inflation and the errosion of purchasing power, AND that gold is doing much better than just presearving purchasing power"

Well since Nov, gas and gold have dropped a bit, but it still costs 2.4 grams of gold for 100 litres of gas.

I also use this short time frame for a reason..... nobody really cares about lost purchasing power of their dollar that has happened over decades. In north america we care about events of the recent past and how that might impact our medium term future. We are very short sighted and demand instant gratification.

I also point out that in 2009, after 20? 30? of being net sellers of gold, central banks around the world are buying gold, and buying alot. I say that I suspect they know something that I don't and if gold's good enough for them, then it's good enough for me.

Nickelsaver said...

I showed three charts side by side to a friend and it blew his mind.

The Germany Weimar Hyperinflation, the 10 year gold price chart, and the US national debt.

Then explained that latter two are going the same direction as the former - vertical.

Anonymous said...


I also point out that in 2009, after 20? 30? of being net sellers of gold, central banks around the world are buying gold

I fully agree with the spirit of your comment. Just to make it precise, I think, the situation is a bit more subtle.

The CB sales of gold effectively occurred before 2000. At that time, however, it was called leasing. Only after the Washington Agreement on Gold, they officially sold what they had lent and could not get back without destroying the BBs. At least for the major European signatories of the WAG, all the leased gold that was eventually sold, had already left the vaults before 2000.

So the turn around in the gold price around the year 2000 coincides rather precisely with the reversal of the CB actions (in aggregate).


costata said...


Some posts just strike a chord don't they? Very good post and it has sparked an excellent discussion.


Victory said...

I read a few speculations here recently on the when and why factor(s) that will usher in freegold? Maybe I've missed it but here's a pretty precise when and why? Rop Paul wins the 2012 presidential election, is that soon enough for everyone :)

This is from a RP speech to the
U.S. House of Representatives
February 14, 2002

'...Federal dealings in the gold market have the potential to seriously disrupt
the free market by either artificially inflating or deflating the price of gold.
Given gold's importance to America's (and the world's) monetary system, any
federal interference in the gold market will have ripple effects through the
entire economy. For example, if the government were to intervene to artificially
lower the price of gold, the result would be to hide the true effects of an
inflationary policy until the damage was too severe to remain out of the public

By artificially deflating the price of gold, federal intervention in the gold
market can reduce the values of private gold holdings, adversely affecting
millions of investors. These investors rely on their gold holdings to protect
them from the effects of our misguided fiat currency system. Federal dealings in
gold can also adversely affect those countries with large gold mines, many of
which are currently ravished by extreme poverty. Mr. Speaker, restoring a
vibrant gold market could do more than any foreign aid program to restore
economic growth to those areas..'

costata said...


Take a look at this paper over at VoxEU. Extract below (my emphasis).

Figure 1 shows the cumulated interest rate and inflation differentials (relative to German) over the period 1999 to mid-2011 for 21 industrialised countries. The correlation between the two series is above 90%. In contrast, the relationship between the cumulated interest rate differentials and debt-to-GDP ratios is non-existent (Figure 2).

No correlation between debt-to-GDP and cumulated interest rate differentials. Food for thought.

I am interested in your interpretation of the implications for the USA given Fed policies. (And others are welcome to comment of course.)

My take on this is that if the authors are correct then keeping interest rates artificially low while attempting to pump up inflation could be an explosive combination.

If this is a correct view (and I concede it may not be) then folks attempting to time the transition shouldn't be watching debt to GDP as a key indicator of big trouble looming (or breathing space before the onset of crisis).

@mortymer001 said...

@costata. FOFOA & others:
"Some posts just strike a chord don't they? Very good post and it has sparked an excellent discussion."

-> It just calls for someone to make a "Aha! questionnaire/test" for investment in *** (gold - without mentioning it straight/make your personal Aha moment)... enough material here :o) Thanks all!

1/ Everybody is "in a way" a saver, even if you are atm burning down your accumulated wealth you are just temporarily dis-saving to accumulate later. So, what do You think?:

X. There is an outflow of production to East from West. Those workers who can save save in:
- Real estate
- Local Currencies
- Dollar denominated assets
- Gold
- else

X+1 Most production depends on valuation of oil. Oil roughly keeps its value if compared to:
- dollar
- some of other commodities needed for production
- gold

X+2 The West is experiencing aging population, most savers with accumulated wealth are 50-70 y old. They are invested in:
- paper/debt denominated wealth.
- gold
- etc.

Fine tune it, play with it. Get it.

2/ Here is another "follow-up" one more gold centric, debunking silly misinformation and memes:

Y Gold bull started when:
- WGA has been signed
- Leasing of gold stopped
- CBs became net buyers

Y+1 Price volatility of Gold debunk...

Y+x etc

3/ Charts test. Presenting graphs. Comparison of gains/losses in 1y, 5y, 10y, 20y (stocks, bonds, commodities, etc).
Only one question here, open question: What do you want to invest/save Your purchasing power in?


@mortymer001 said...

Costata, interest rates, Debt to GDP, etc... interest rates down to floor, debts maxed and falling, nowhere to go, it is about CBs. They are net buyers, they have to!

Kieran O B said...

While i was never a paperbug, FOFOA's writing in other posts warranted me to post the following to my blog:

From: Bondage or Freegold

If we hold gold as a wealth reserve instead of A SPECIFIC ENTITY'S bondage, we have exchanged SPECIFICITY for DIVERSITY. We now hold a claim on the future services of ANYONE IN THE WORLD who is willing to work for us (for gold)!! We eliminate the risk that our PERSONAL, SPECIFIC SERVANT may fail to perform for us in our time of need.

In the opaque world of paper investments we must CHOOSE which entity we want to service us in the future. Perhaps we choose a Vanguard Mutual Fund. Or a global company like General Electric. But how do we know they will perform for us when we need them.

With gold we have eliminated the risk of choosing the wrong entity. Instead, we have our own small share of a future claim on the entire workforce of the planet!


From: Gold is Money - Part 3

How about the banks? Who's debt do YOU hold as wealth? How is THEIR balance sheet doing? Do you have any idea?

Gold is pure equity... no one's debt. No one to walk away. No one to default in bankruptcy. Nothing to liquidate in an attempt to recapture 10 cents on the dollar.
The entire US banking system today is built upon the idea that debt-slaves will continue servicing their debt on millions of underwater houses marked to mythical values at which the loans were established. If you hold your wealth within this freakish system... all I can say is good luck!


Anand Srivastava said...

First time poster. FOFOA has changed my outlook on investment. I have always been very leery of stock market, because I do not understand it :-). Now this site has given me some understanding on the system. And maybe after the crash I will be able to invest in stocks.

I can understand the frustration people feel here, about being able to tell their friends and family to invest in gold.

I guess this is the second thing for me to feel frustrated about. The other thing is health. I have found by experience that nobody wants to understand anything that is not in their immediate expertise. They will prefer the expert advice which so very wrong.

Gold is actually not that important in the scheme of things here in India, but health is paramount. We probably may not be affected too much due to the crash, but yes any investment in gold will be Golden, as I have understood here. Also Indian people are very gold friendly. So it is not as difficult to tell people that gold is going to go up.

Let me just put a little offtopic info about health/diet/lifestyle that frustrates me. Only a few lines. Hopefully it doesn't offend people.

Understanding Evolution is very critical to health. Particularly that it takes a number of generations to adapt to a new food. And that we are more adapted to the lifestyle in the Paleolithic era than the present times. Of course the diet/lifestyle of paleolithic people is not known to any certainty, and there must have been a lot of variations. But it is very distinct from the current diet/lifestyle of people. The trick is to understand and move towards that diet/lifestyle, based on feedback from our bodies.

Of course experts believe in prescribing their pet diet to people, and will not acknowledge that some people may not react well to their diet. But paleolithic principle is the only thing that actually makes sense.

Texan said...

VTC, trust me, I understand. It was my own strongest internal argument when I first bought gold (expansion of money supply by x% = increase of hard assets by x% , give or take, over time). I actually started assuming 5-10% annual return and that seemed good enough to me compared to cash in a bank after taxes (this was back when the banks paid interest).

But money supply expansion is not discussed on MSM. "inflation" is, somewhat, but that's obviously a highly distorted number. There is never any reported "inflation". So in most people's minds, why would the gold price go up year after year? If anything, it's in a "bubble" is the classic response. Ie, it's going to pullback, why buy now. Of course it doesn't, but it will! Etc.

Look, it was famously once said (accurately i might add) that Texas is a state of mind. So is gold. It is a very, very peculiar asset for "the western mind" to own (I seem to recall Another said something like that). I think even many of us who have bought gold are still at heart "paper bugs", viewing gold as " insurance" or an " option". It's a very simple concept that gold is the only "claim free"and fungible store of wealth that has ever or will ever exist, but it's very difficult to actually believe it.

Texan said...

Milamber, I sympathize!

Edwardo said...

I think it's worth pointing out that the "western mind" is a most peculiar state of mind indeed, in particular, the U.S. state of mind, if one can generalize for the purpose of discussion.

I submit that the U.S.' place in the world is something of an aberration, even an anomaly, made possible by Europe's decades long odyssey in self immolation. A massive vacuum was created as the result of WWII and the only great nation that avoided the ravages of warfare on its own soil assumed preeminence as a result. But, here we are some seventy years after the U.S. bestrode the world like a colossus- the ultimate victor of WWII- and its great advantage has been mostly squandered.

Gold's rise is a marker of this evolution. So, yes, accepting a number of inconvenient, even painful realities is a part of the mental process the American mind must engage in order to overcome the cognitive dissonance that acquiring physical gold engenders.

Unknown said...

Hello FOFOA et al. ☺

I’m enjoying the discussion of how to talk to non-Freegolders. I pretty much don’t discuss money or politics with anyone but my husband, and my kids are still teenagers so they let me decided what to do with their money. My is, percentage-wise, still holding more paper than I am, but I found I could use his competitive streak in order to change his behavior. When he saw the sock drawer filling up with the kids’ rainy day fund, he started asking “Where’s mine?” – and became much more convince-able about trading paper for real wealth.

I’ve found that the biggest hurdle is the prospect of dealing with “professional” money managers – there is no substitute for being clear and direct. In theory, they should be willing to do whatever I ask (buy, sell, etc.) but if I give them half a chance they will start asking questions (“Have you read our brochure? Have you listened to the podcast?”) and try and convince me that I don’t know what I’m doing. I know that my husband is intimidated by these people, and has a hard time saying “No” to their plans, but he did manage to get some money out, even though he had to take a big cap gains hit as a kicker.

I’m a Saver that was raised by Savers (my father is a Superproducer who invents things in his spare time and for his retirement bought a 500-acre farm with a working cattle ranch) but for me I think the seminal financial experience was what my grandfather did for me (and for all the grandkids) – he used to hand out gold coins at Christmas. I know, I’m lucky he could afford it (this was the 80s) but I have to say the there is NO SUBSTITUTE for actually physically touching and holding the coin itself.

There is something so instinctual about the response to holding REAL WEALTH, especially at a young age. When I want to give someone the little push they need to understand the reason for holding gold, I give them a little – a tenth, a quarter, a half-ounce – and the light goes on. And if they keep that little item in the sock drawer or the jewelry box, they will see it again and again, and the little voice of human history will speak to them gently, reminding them what is eternal in this crazy synthetic world we live in.

@mortymer001 said...

I hope it is appropriate here to show what BdF (a giant) think about gold (to put also other perspective in view):

Hervé Hannoun: The Banque de France’s view on gold and comments on the euro
Speech by Mr Hervé Hannoun, First Deputy Governor of the Banque de France, at a dinner organised by Goldman Sachs on the occasion of the Financial Times Gold Conference held on 26 June 2000.

[Mrt: This above is extract, so important for the freegold so I decided to put this in gold font, smile. For exact data check original bellow.]


Michael H said...

Anand Srivastava,

I agree that common dietary advice is way off base. I cringe every time I hear 'healthy, low-fat diet'.

I'm a follower of the Weston A Price foundation, which has some overlap to the ideas behind the paleo diet. But I must warn that they tend to have a self-righteous tone that can be off-putting even to those who agree with them!

Further, not all their contributing authors are worth reading.

Politics, economics, health ... pretty much everywhere one turns his/her attention, one will find that the conventional wisdom is about 100% wrong.

Texan, Edwardo,

"Look, it was famously once said (accurately i might add) that Texas is a state of mind."

I agree. Gold ownership isn't simply an investment decision, but a cultural shift.

J said...

Great post FOFOA. Thanks for the education on savings. I never even gave a thought to what brought us to this point before.

And to share my story. I've pretty much given up on introducing people to gold. I do not come from money and the ones closest to me don't have a whole lot to protect. I give hints and drop links when I can and I will introduce freegold and your blog to those I come in contact with who are already "invested" in gold (which 90% of the time is paper) but I'm tired of being looked at as a lunatic for telling people that they should buy some physical gold.

It's easier for me to put the burden on my own shoulders and earmark a certain percentage of my holdings to go to those closest to me. If they had much to protect I'm sure I would take a different stance but my income far exceeds anything those closest to me have ever made (and that's not saying a whole lot) So it's just easier this way.

Mrt - Excellent find!

Anonymous said...


I’m not an investment adviser but I was looking for the answer to this question and here is what I found. Mind you I don't work for these guys or have any affiliation with them, just figured others might have asked the same question. I’m also putting them out there for scrutiny, if anyone cares to due further diligence. This applies to all with the flexibility to chose the custodian of their self-directed tax-sheltered individual retirement account.

GoldStar Trust Co

From what I can tell you pick your own dealer, you choose your form of bullion (you actually place the order with your dealer) and your dealer delivers your gold to a non-bank metal depository in Delaware (the Delaware Depository Service Company). When you wind down your retirement account you can even have your actual gold, that you bought when you opened the account, shipped to your door. For gold accounts you can chose segregated custody but for silver they only do co-mingled.

I can verify all that, I have used GoldStar for a couple of years as an interim step to move retirement funds out of paper as I was learning more about Freegold. Prior to GoldStar my funds were invested through a brokerage account linked to my employer sponsored retirement accounts. The closest thing I was able to get to physical gold within the brokerage account was Sprott's Physical Gold Trust (PHYS).

So my metamorphosis from paper to physical occurred in steps, first from stocks to an allocated gold fund, then to physical bullion within a self-directed IRA, and now to gold bullion in my possession as a result of taking delivery of my IRA gold through early distribution.

I was able to roll over a terminated retirement fund (result of company bankruptcy) into an IRA plus half of a substantial sum that was deposited in my 401k as a result of the bankruptcy claim payout by my employer. I then rolled this IRA's cash balance to GoldStar. When the check cleared I bought gold coins from my dealer, who coordinated with GoldStar for payment and then delivered to the depository in Delaware.

I elected to have my gold commingled with other like kind allocated holdings, for instance my Eagles were combined with other Eagles, Buffaloes with Buffaloes etc. However, you can pay extra where they will segregate your individual gold, in which case you will receive the identical coin or bar that was deposited.

This is a good option for those who cannot stomach the atrocious tax and penalty hit and/or believe that that an allocated government sponsored retirement account is safe from a liquidity aspect or confiscation aspect.

I am certain that liquidity could become an issue because when you take delivery, they liquidate some of your holdings to pay the penalty and taxes (I believe 25%). To do this you need a functioning and liquid market to sell in, and that may be impaired when you want to take delivery. The confiscation issue, either outright or through onerous taxation, is something I go back and forth on. It is simply possible, and that is enough to convince me to take the hit.

Sadly, a substantial and majority amount of my company sponsored retirement is locked up in the remaining portion of my 401k, where I obviously make no contributions but the company deposits 2% of my gross, and in a defined contribution retirement account where my company deposits 14% of my gross pay annually! The best I can do here is put in PHYS and hope for the best. Sickening.

@mortymer001 said...

Michael H said...


Nice link.

Ben Bernanke may want to read your excerpt, so that he has a better answer to hand next time someone asks him 'why do central banks hold gold?'

It is also relevant to the discussion at hand, since the reasons a CB holds gold overlap with the reasons individuals hold gold.

For example, liquidity:

"Certainly, in circumstances of orderly financial markets, gold is not the most liquid of assets (even though it is probably the most liquid of commodities). But its liquid quality becomes apparent and increases as uncertainty grows."

"... the absence of a return on gold can be viewed as the price of its “option component”: contrary to most other assets, gold prices go up when things go wrong."

"Indeed in the long run, the price of gold has shown a very low and even a negative correlation with the dollar (the first-ranking reserve currency) and with US Treasuries. So gold is very useful to build a diversified portfolio as it enables you to improve your risk/return profile."

"Central banks are typically “risk averse” when investing their foreign assets on the financial markets;..."

And this tidbit should resonate with victor:

"It is true, however, that the initial market reaction to the joint statement (MH: WAG) was extreme. The immediate impact of the Washington Agreement was all the more dramatic as a number of market participants (gold mines, hedge funds) had accumulated big and, I would say in some cases, excessive, short positions. The fact that the short sellers had to rapidly square their positions induced a brief period of higher volatility, but also created the conditions for a more orderly market and thus, during the last months, gold prices have fluctuated in a relatively narrow range."

Nickelsaver said...

This is my simple answer to those that see gold as a bubble.

Unknown said...


HERE IS A POWERFUL ARGUEMENT FROM KYLE BASS. It's a snippet of Kyle Bass being asked about gold. You will like his answer!

Biju said...

I understand the complexity faced by western folks who cannot understand saving in Gold.

I know it is very easy for me since I see my society and parents/grand parents do it and so it is very easy for us. These are traits handed by our fore fathers and so it is easy for us.

I use the following logic
To less sophisticated western minds:
- Gold has been up for past 10 years compared to stocks/real estate. so buy Gold.
- Gold is up from like $20/oz to $1700/oz(basically tracking dollar inflation).
- why do Central banks own Goldif it is so useless ? we need to also.

For more sophisticated western minds:

- Gold is has high stock flow ratio. and even when price increases flow does not increase unlike real estate.
- more paper claims on Gold than physical, which can cause problems down the road.
- Gold is totally useless so it can absorb all money printing and people will not be effected by Gold price increase.
- Nations can use Gold as wealth reserve because of it's high stock/flow ratio and settle debts/trade.
- When dollar loses the reference point for trade and savings(bonds), the only other thing that can replace it will be Gold using game theory mentality of society. People experiencing hyperinflation convert to Dollar and Gold. what happens when there is no dollar - only Gold will become the reference point for savings and trade settlement

Jaqship said...

Costata etc.:

Eduardo wrote that
"There is, to my mind, less merit regarding fears of out and out confiscation, since, clearly, high taxation rates on physical gold sales already act as a kind of proxy for confiscation."

Given that "the Right People" control policy, what's to stop them from the proxy confiscation
of draconian tax rates in the US (enforced upon all but themselves and their friends)?

Precisely because gold is "useless", such taxation of it wouldn't put what's left of the economy at the sort of risk that such taxation of industrial metals like silver (and maybe platinum) could cause.

If so, moving much capital immediately post-Freegold into silver might be the wise course for Americans.
Am I missing something?

sean said...

Nice post and very interesting comments from everyone.

One approach I've tried to try and get people at least curious about the role of gold is to show them this chart: pointing out the links between loss of purchasing power and the relationship with gold.
Another fantastic graph shows the link between US debt limit and gold price. Ask them what they see as the future projection of the US debt limit... and what they would then conclude will happen to the gold price.

By the way, the volatility "issue" confuses me. Perhaps it's because I'm not financially "educated", but the crude measure of volatility seems to be related to the absolute % change from year to year (ignoring sign)... so as long as the sum of the changes are +ve, well, that's just fine with me!

Michael H said...


Any draconian gold taxes that the USA imposes are likely to be relatively short-lived. Once the USA seems capital escape to locations where gold is bought and sold sans VAT (*cough*Europe*cough*), the USA taxes will be repealed.

So, for an American to sell gold to buy silver right after freegold is probably the worst move he/she could make.

Besides, remember that freegold will be driven primarily by the giants.

Clyde Frog said...

Post-Freegold transition, currency will be better managed. So why mess about with piles of silver? Just buy useful assets (income-producing property/stocks/etc), or keep your savings in currency and/or gold. Why would you want silver? What will you DO with it. Life will be too short for the average person to bother with speculating IMO.

Aiionwatha's Nation said...

Volatility, the 80's price collapse, the lack of visible proof for the average person that gold still plays a role in the financial system and a general misunderstanding of what money, debt and the dollar are, are always big points of contention.

Volatility is simply the differential in given returns versus those that are expected on average by observing price points over a given historical timeframe.

In standard financial terms higher volatility is associated with greater expected returns gained by taking on additional risk. Thus volatility in a safe haven asset would be out of character.

This excerpt is from today's trade journal and I thought it was interesting. Could just be tit for bailout tat, cost benefit or more legal problems, but why now?

"JPM Chase Quietly Halts Suits Over Consumer Debts

ByJeff Horwitz

JAN 10, 2012 5:55pm ET

JPMorgan Chase & Co. has quietly ceased filing lawsuits to collect consumer debts around the nation, dismissing in-house attorneys and virtually shutting down a collections machine that as recently as nine months ago was racking up hundreds of millions of dollars in monthly judgments."

Jaqship said...

Thanks for comments, Michael H and Clyde Frog.

"Once the USA sees capital escape..." assumes that such escape will not be blocked for all but "the Right People" (who would be allowed to duck the harsh taxes anyway).
Italy has already introduced draconian capital controls.
The IRS and DHS may enjoy working together to crush any gold etc. Black Market that tries to emerge.

My guess is that much of US policy in recent years is driven by the aim of the Elites to stealthily reduce the masses to peonage, preferably without crashing the whole economy.
If this is right, silver (because it is so used in industry) may be the only safe haven which the Elites may hesitate to harshly tax.

Edwardo said...


What has been asserted, going back to the posts of Another, is that mining company profits are likely to be windfall taxed, but not sales of physical itself since that would be entirely counter-productive to functioning of a freegold system.

Gary Morgan said...

It may have been discussed here previously, but some inside knowledge leads me to understand that Iran will be attacked by the US/UK/Israel combo within a month or two.

It is fascinating to speculate why. We know that Iraq did not have weapons of mass destruction, but was starting to trade oil for Euros. We know similar events were beginning in Libya (I believe oil for gold was the deal).

And I found this link:

It all ties in with the real war that is being fought now, to preserve the $IMFS at all costs. Sad that innocent people have to die for such a shitty cause.

Just a matter of time though before the game changes.

Jeff said...

Counterparties, aren't they great?

Jan 12 (Reuters) - Former customers of MF Global Holdings Ltd's collapsed brokerage were disappointed to hear on Thursday that the trustee hunting for funds missing from their accounts has no immediate plans to transfer more money to them.

costata said...

Deficiency Judgements


Per your snippet about JP Morgan shutting down their consumer collections division.

JPMorgan Chase & Co. has quietly ceased filing lawsuits to collect consumer debts around the nation, dismissing in-house attorneys and virtually shutting down a collections machine that as recently as nine months ago was racking up hundreds of millions of dollars in monthly judgments.

Perhaps others can do the job more inexpensively (my emphasis).

The increase in deficiency judgments has sparked a growing secondary market. Sophisticated investors are "ravenous for this debt and ramping up their purchases," says Jeffrey Shachat, a managing director at Arca Capital Partners LLC, a Palo Alto, Calif., firm that finances distressed-debt deals.

He says deficiency judgments will eventually be bundled into packages that resemble mortgage-backed securities.

Because most targets have scant savings, the judgments sell for only about two cents on the dollar, versus seven cents for credit-card debt, according to debt-industry brokers.

Silverleaf Advisors LLC, a Miami private-equity firm, is one investor in battered mortgage debt. Instead of buying ready-made deficiency judgments, it buys banks' soured mortgages and goes to court itself to get judgments for debt that remains after foreclosure sales.

Silverleaf says its collection efforts are limited. "We are waiting for the economy to somewhat heal so that it's a better time to go after people," says Douglas Hannah, managing director of Silverleaf.

Investors know that most states allow up to 20 years to try to collect the debts, ample time for the borrowers to get back on their feet. Meanwhile, the debts grow at about an 8% interest rate, depending on the state.

Anonymous said...


I thought you had given up hope on gold-resistant paperbugs, that their fate was predestined. A post that stuck with me over the years had a few paragraphs that said:

"Here is the problem though, kids. Most mature investors retain their life savings fully invested within the financial industry, denominated in dollars, and will not get off these tracks even when they see the train coming. They will stay there because it is impossible for them to believe they occupy the wrong position! Who can blame them or call them fools? They have been trained their whole life to believe in saving for the future inside of a monetary system that serves no purpose other than as a medium of exchange.

Worse, they perceive that all of their assets are correctly valued by this system that does not care about the value of a digit. How can they possibly be correctly valued in a system that only functions properly as a medium of exchange, not a store of value? How can assets meant to be stores of value be correctly valued when denominated in a unit whose value DOESN'T EVEN MATTER in the context of its primary function? They can't. They shouldn't. They aren't. And soon this FACT will be known by everyone."

It helped convince me that in the end, the free lunch wouldn't be there.

Wendy said...

vampires .................

Anonymous said...


Take a look at this paper over at VoxEU

Thanks for the link. First, I find the observation plausible that the cumulative inflation differences indicate the imbalances. During 1999-2008, the credit volumes in the peripheral countries expanded a lot while credit was quite restricted in the core countries. The first order effect of the credit expansion (given that it was government spending [Greece, Portugal] or mortgages [Spain, Ireland]) should be consumer and real estate price inflation. Check.

But I cannot follow them as far as 'solutions' are concerned. Keeping interest rates down (which the ECB has so far not done - very wise!!) would not reverse the imbalance, but rather paper over the symptoms. Surprising and disappointing that they take that seriously at all.

Secondly, from their analysis it is quite obvious that the solution is direct control of the credit volume. Why did the credit volume expand three to five times as fast as GDP in the periphery while it lagged in the core?

Well, as I said before, it is my belief that it did so because the ECB arranged it that way or, at least saw it, liked it, and let it happen (ECB=France, Germany, Italy). The solution is so easy. Just watch and control the credit volume next time. Dead easy for the ECB. Deliberate omission by Corsetti-Pesaran in my opinion.

By the way, Soros said it in 2007 or 2008 during some talk at the Central European University in Budapest that the crisis would be resolved only when the governments realized that they had to directly control the credit volume. Also by the way, this is what Japan and Germany, for example, practiced after WW2. They fine tuned their credit volume in great detail. And look how it worked!

Now the USA. Given that US$ and Renminbi have a roughly fixed exchange rate and US$/Euro have been range bound for a couple of years, the global situation is very similar. Holding down the interest rate by the Fed (and the BoE) does not counteract the imbalance, but rather postpones the inevitable adjustment.

The adjustment follows from the collapse of the credit volume and the associated deflation of asset prices, wages and consumer prices. Yes, this is indeed happening right now, but the Fed counteracts this effect with their QE policy.

I don't think this helps you with the timing though. As I understand it, the question is whether there is a drop in 'liquidity preference' or an increase in velocity. If yes, then game over.

Debt to GDP ratios are just a very coarse indicator. Historically, when public debt/GDP reaches 90%, growth is permanently lower, and the marority of countries did not turn the corner anymore. On average, within 3-5 years, they either had at least a partial default or 20% annual consumer price inflation. But the 90% is just a rough estimate, averaged over some 20-30 financial crises in history, and there are plenty of exceptions in both directions. Particular circumstances matter, of course.

So I think exceeding the 90% public debt/GDP threshold just tells you that the needle is in the red range. But this does not tell you exactly when the system is going to crash.

The best leading indicator is probably some measurement of velocity, for example, failure to sterilize by the ECB or no interest in reserve repos in the US. But here I have to guess.


costata said...


Thank you for your detailed response on that paper and related issues. I agree that their "solutions" are unsound.

Again I agree about R&R's 90 per cent threshold - it's a useful indicator of being in some degree of danger.

I have another paper I want to present to you but I'm a little pressed for time now. I will find it and put up a link tomorrow.

If you think the analysis of the three papers in combination is sound then I want to table a method that might deliver a ball park estimate on the outer limits of the timing for a crisis in the US bond market.

I'm more confident that the three papers in combination will support the contention that the onset of the crisis will be sudden and unknowable with any degree of precision.


@mortymer001 said...

TPS: "...This is not a crisis in the system this is The crisis of the system..."


@mortymer001 said...

"US to withdraw 7,000 troops from Europe
The United States plans to withdraw some 7,000 of the 81,000 US troops currently based in Europe, US Defence Secretary Leon Panetta told reporters in Washington..."

[Mrt: Is this all/pilot/more to follow? First bricks of *** (Fill in name = US-alias-Berlin wall?) *** falling?]

@mortymer001 said...

EU ministers look to Israeli grab of Palestinian farmland

[Mrt: Is it just me who has the feeling that the tide is turning? Taboos are broken?]

@mortymer001 said...

FOFOA sent me this:
"Nice catch!! Great quote!!
He probably would have loved to have been able to say, "this is THE crisis of the $IMFS system!" ;) "
[this was about:]

My answer:
He said it! Look here:

"TPS: First it is a global crisis that will heat every country just like an epidemics heats the healthy and the weak people but I think that those who will come out better are the countries which have little debt, little private and little public debt because essentially this is a crisis of too high indebtedness particularly in the United States.
Q: So therefore the united states are the most vulnerable, do you think?
TPS: Not necessarily, it is very resilient economy and there are economies which may be hit by the crisis and by the end hit even harder but certainly the crisis starts in the United states and comes essentially from the equilibria that have developed in the United States so get out of it will be hard for US at least as much as for many other countries..."

[Mrt: Then he speaks about Italy, Euro, policies...Note: recorded 20 Feb 09]

Frost over the World - Financial crisis
1:32 min

@mortymer001 said...

Q: At Davos both China and Russia seem put all the blame on what was happened on the western countries and it is up to US to fix it. Do you think that was a fair indictment?
TPS: Well when a problem becomes a general problem to fight about where the origin was does not help very much. It has become a general problem and it requires a global approach. I do agree that the origin of the crisis is in the too long period in which growth in the US was based on consumption and debt. And I think this is a non healthy path that sooner or later had to produce sharp adjustment like the one we are seeing.

@mortymer001 said...

[Mrt: A bit older news but still news for some]

"Germany resists demands to make gold reserves into euro-collateral

07.11.11 @ 09:27

BRUSSELS - Germany has rejected demands by France, Britain and the US to allow national gold reserves to be put as collateral for the eurozone bailout fund.

"German gold reserves must remain off limits," German economy minister Philip Roessler told ARD radio on Monday morning.

Both the Welt am Sonntag and the Frankfurter Allgemeine Sonntagszeitung reported a day before that Paris, London and Washington had pressed German chancellor Angela Merkel at a G20 summit in Cannes on Friday to allow the controversial move, which would have increased Germany's contribution "through the back door."

Proposals to sell about €15 billion of Germany’s gold reserves, worth a reported €139 billion, were dismissed by Merkel's spokesman on Sunday. “Germany’s gold and foreign exchange reserves, administered by the Bundesbank, were not at any point up for discussion at the G20 summit in Cannes,” he said.

The involvement of the International Monetary Fund (IMF) in the envisaged one-trillion-euro rescue fund is one more reason for Germany to say 'nein', as its gold reserves would also be tapped by the Washington-based body, central bank chief Jens Weidmann warned Merkel, according to the Irish Times.

A Bundesbank spokesperson said the institution “rejected” plans to touch federal reserves..."

Anonymous said...

Trying to convince others to buy gold:
I’m British living in Switzerland, retired now. I’ve been buying gold on and off since well before 2000 – such that for a while I saw the price dropping on me between 1995 and 1999.
Well, in the German-speaking office where I worked before I retired a couple of years ago the 7 or 8 young men in the office over the years had learned that I was a gold bug.
Wondering how to convince them of the soundness of buying gold to put their savings into I evolved a long-term plan.
Now in Swiss offices it’s generally accepted to have a 15 min. coffee break starting at exactly 9 am. Whenever anyone has a birthday or comes back from vacation it is normal to buy a round of croissants, chocolate buns or some other cookie or other.
At the time the gold price in SFr. per kilo had just hit 20,000 Fr./kilo (that’s how it’s measured here). So I bought a round of goodies and they asked “Your birthday John?” No, I said, “The gold price has just hit 20,000.” “Oh!” they said to a man.
My plan was - and for the next number of years dully carried out - was to buy another round of cookies every time the gold price rose by another SFr. 2,500.
What with the gold price’s continuous rise it was not long before it was clear to all what was happening – to the point where they would watch the gold price to remind me to get the goodies in.
As gold rose through 30,000 to 40,000 I was continuously hearing their regrets that they had not done as I had and bought some gold too… “but it’s much too late now to do the same.”
I’m still not sure if anyone actually DID buy any gold but I must assume they did not since no one ever mentioned it. By the time the gold price was heading for 50,000 I retired though I still see the group. One day I must ask them…

@mortymer001 said...

[Mrt: this is really a not source I typically take news from but anyway, it is important if true, could somebody confirm from more reliable source?]

"In Greece collapses funding, drugs are only for cash

Greeks feel the debt crisis and signs of possible collapse of the domestic economy and in pharmacies. Already nearly two weeks pharmacists refuse to give them the medication after the submission of the recipe for an insurance company for them and require payment in cash..."

[Mrt: Not enough money? Where have I heard that? Hmm, was it, during, inflation, deflation or hyperinflation...]

Winters said...

This is a conversation that a shrimp like me can participate in :)
well...I am from Australia and our currency has always been stable so people here don't think like (how i think) German's say think about the risk of currency failure. Hyperinflation is something that happens to poor countries in Africa. Not here.

It was a big thing for me to buy my first few oz's. I am risk adverse and it felt very rash.
The accepted thinking is you 'put your money to work' in one of three areas

1) real estate
2) high interest account like ING Direct
3) stock market

Buying gold is a speculative play is the perception among most people.
This was how I understood it too - but through ZeroHedge I came across some FOFOA articles and then I started to go deep.
I don't think like that now and while many are impatient I am thankful that the world didn't reset before I came to my level of understanding as I would have been utterly wiped out.

I'm well known as a pessimist and have convinced some friends through my rants to get some insurance.
Talking about the US Govt debt, one argued back "but the USD is backed by gold!" once corrected, he bought some physical.
Another friend agreed world finances are a mess and is going to crash but figured there was nothing a shrimp could do but watch.
They were quite amazed when told I possesssed physical as a strategy (such a bizarre concept!) but they now own some physical themselves.

My mother is very sceptical. She read about Warren Buffett in who "likes to invest in productive businesses!"
Not to mention she has no clue about 'investing' money and would not have the first idea how to put her savings in a productive business! is also fairly anti gold - especially journalist Michael Pascoe - which doesn't help. I mean what would I know - he is paid to write about finance!
It frustrates me that she is unwilling to do more to understand the money system when she has to make some big decisions in her life right now.
She wants to 'have an income' so 100% cash is how she will do it if I am unsuccessful.

My grandmother has carried her life savings in term deposits for the last 20 years.
Gold ownership is also a foreign idea to her - as is the stock market.

Some people tell me gold is in a bubble. I counter that the last 40 years has actually been the bubble but to understand that point requires a lot of FOFOA foundation.

One friend argues from personal incredulity. There is no way the USA (his own country) could ever default.

Another thinks that there is no way little old me can front run professional traders - so freegold must be wrong.

Some think the world leaders would never let something like freegold happen. Whats in it for them?

It is incredibly frustrating at times but I've decided to just be more low key about my ownership anyway for the obvious reasons.

My current level of understanding only came after *A LOT* of FOFOA reading and other sources. God knows how much time FOFOA spent writing all that material because it takes a long time read, read again and digest. It is a far bigger committment than most people are willing to make. Best just watch some telly and tune out unless you are borderline autistic obsessive about such things.
Also - I think a lot of people would be caught wrong footed with their big fat mortgages so to acknowledge the financial system is screwed is to acknowledge that they too will be. Confirmation bias stops them from wanting to know as to position themselves for a currency collapse would seriously upturn their life.
Our geographical isolation probably also makes people think we are economically isolated too.

dave2004 said...

Unfortunately I haven't really convinced anyone besides my mother and my sister (well, my sister 'delegates' the financial to my mother, although she is more than old enough). My mother was easy, she was born in Germany during WW2, still remembers how worthless paper can be. I haven't tried explaining freegold, because I have only a very small understanding and could not explain it. Being afraid of a devaluation is sufficiently motivating.

A friend of mine who actually talked about gold before 2000, finally preferred to invest in stocks and I can't convince him to buy any gold.
Another friend piles up cash on savings accounts and doesn't want to bother to open a safety box at a bank, so she doesn't have a safe place to put it, and it's too expensive anyways, so just forget it...

I have the impression there are 3 groups of people: the ones that just put the head in the sand and hope or even believe it's going to be all well, the ones that complain about the situation but can't actually act on their conclusion and finally the third that analyses, concludes which personal steps they can take to mitigate/protect their wealth and actually take those steps. The third group being the smallest IMHO.

@mortymer001 said...

Lets recap:

"(Reuters) - The world's largest economies should consider gold as an indicator to help set foreign exchange rates, the head of the World Bank said on Monday in a proposal that threw open the acrimonious currency debate days before a summit of G20 nations.

Writing in the Financial Times, World Bank President Robert Zoellick called for a new monetary system to replace the floating rates adopted in 1971 known as Bretton Woods II.

In typical Zoellick style, the proposal before the G20 leaders' summit in Seoul is aimed at fuelling a broader debate on currencies that goes beyond competitive devaluation wars.

The price of gold powered to an all-time high above $1,400 (867 pounds) an ounce on Monday, despite a bounce in the U.S. dollar, on concern about a weakening trend in the dollar, after the U.S. Federal Reserve last week resumed buying Treasury bonds to inflate its money supply.

The former U.S. trade representative, who served in several Republican administrations including Treasury, said the new system "is likely to need to involve the dollar, the euro, the yen, the pound and (a Chinese yuan) that moves towards internationalisation and then an open capital account".

"The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values," he added.

Zoellick did not spell out in detail how this system might work, but said it would help to rebuild the confidence of financial markets and the general public in the global monetary system after the financial crisis.

However, policymakers appeared cool to the idea, while many analysts said they doubted it would be implemented given practical difficulties.

European Central Bank President Jean-Claude Trichet said central bankers from around the world did not discuss returning to a gold standard at a meeting of the Bank for International Settlements in Switzerland on Monday..."

J said...


"Swiss Central Bank Returned to Profit in 2011

Jan. 13 (Bloomberg) -- Switzerland's central bank returned to profit last year as the valuation of gold holdings and foreign currency reserves helped bolster earnings."

AdvocatusDiaboli said...

Actually I dont know, why I should have interest on convincing "weak hands" to buy gold to make a (quick?) profit. I explained gold to a strong hand, immediately the next week he bought 4kg physically. I asked him a month later, if he is still okay with the decision, although prices dropped, he answered "Yes, actually I havent even looked what the price is doing, that's not what I bought it for".

IMHO weak hands, who dont understand gold only buying for paper profit, have great potential to screw up "freegold" just before it might become reality from the natural outcome.
As long as gold is not "going into hiding", there will not be freegold.

I made a present of one ounce Krügerrand to somebody I consider from the weak hands camp, just to give him the subconscious feeling for physical gold, with one obligation: Never ever sell it, only to spend it for something else which is as good as gold.
IMHO: This can only be farmland in a free non-socialist country (which does not exist today, so we have also to wait for that also ;).
Or does somebody have better ideas to spend gold for (assuming you are a superproducer having already all you need/want)?

Michael H said...


"silver (because it is so used in industry) may be the only safe haven which the Elites may hesitate to harshly tax."

This seems completely backwards to me.

Large gold holders are the big sharks. They make the rules. Individual investors with small gold holdings are those little fish that hang around the big sharks, eating the scraps that fall to them. They are relatively safe.

Silver holders are the little fish swimming by themselves. There's another name for them: lunch.

In other words, the large gold holders will run the country. They won't make rules that hinder themselves. Whereas, they'll be more than happy to tax silver into oblivion -- exactly *because* it is necessary for industry.

DP said...


Great video and loved the passage you highlighted ;-)

Also loved this part at 15:42+, regarding the importance of "will" in the sphere of political economy.


JR said...

Hi Winters,

Well said, your comment echos the comments form others and touches on a key theme from FOFOA's post. You wrote:

"It was a big thing for me to buy my first few oz's. I am risk adverse and it felt very rash.
The accepted thinking is you 'put your money to work' in one of three areas

1) real estate
2) high interest account like ING Direct
3) stock market


My mother is very sceptical. She read about Warren Buffett in who "likes to invest in productive businesses!"
Not to mention she has no clue about 'investing' money and would not have the first idea how to put her savings in a productive business!"


FOFOA touched on this idea of distinctions between "saving" and "investing" or "trading/ speculating."

"And now that I'm thinking about it, does anyone even save anymore? If you've got a hundred grand sitting in a bank CD or savings account someone will likely tell you that you should invest it or else you're wasting money. So you invest it in what, mutual funds and bonds? In that case there will be people that will say you should be actively trading, because you're still leaving potentially rich profits on the table.

Have you noticed how many people think they are traders and investors these days? And with all the options to invest in and trade out there, who can blame them? But in reality they are not traders or investors. They are doctors, lawyers, businessmen… and savers. What we call investing today is more like speculating. So why do we "save" the way we do today, by speculating on things we know so little about?


A saver is different from an investor or a trader/speculator. A saver is one who earns his capital doing whatever it is he does, and then aims to preserve that purchasing power until he needs it later. Investors and traders aim to earn more capital by putting their already-earned capital at risk in one way or another. This takes a certain amount of specialization and focus. But this difference is a big topic for another post."

Edwardo said...

Costata and VTC,

Some number of years ago, about three or four if memory serves, Eric Janzsen wrote a piece dealing with the question you two (and I presume quite a few others) are trying to answer, namely what are the precise pre-conditions for a full on currency collapse/hyper-inflationary episode. I've tried to locate the epistle, but I have been unsuccessful as yet.

Michael H said...


Was the article referred to in this Mauldin piece one of your three?

"Professor Peter Bernholz, from the University of Basel, has written Monetary Regimes and Inflation, which provides an overview of every inflationary episode that has ever happened, and he explains the origins and characteristics of hyperinflation."

"Bernholz examined 12 of the 29 hyperinflationary episodes where significant data exist. Every hyperinflation looked the same. “Hyperinflations are always caused by public budget deficits which are largely financed by money creation.” But even more interestingly, Bernholz identified the level at which hyperinflations can start. He concluded that “the figures demonstrate clearly that deficits amounting to 40 percent or more of expenditures cannot be maintained. They lead to high inflation and hyperinflations. . . .” Interestingly, even lower levels of government deficits can cause inflation. For example, 20 percent deficits were behind all but four cases of hyperinflation."

"Stay with us here, because this is an important point. Most analysts quote government deficits as a percentage of GDP. They’ll say, “The United States has a government deficit of 10 percent of GDP.” While this measure makes some sense, it doesn’t tell you how big the deficit is relative to expenditures. The deficit may be 10 percent of the size of the U.S. economy; currently the U.S. deficit is over 30 percent of all government spending. That is a big difference."

MH: I am not sure if "deficits amounting to 40 percent or more of expenditures" means 'deficits financed by money creation' or 'any deficits, whether financed by debt or money creation'.

dave2004 said...

As good as gold, and it floats:

There nothing as good as gold if you want to save/store your wealth, anything else is either for fun or investment (i.e. potential return associated to potential risk).

Impressive: talking to a strong hand, who then runs to buy 4kg. Why did he not do it before?

Piazzi said...

"My mother is very sceptical. She read about Warren Buffett in who "likes to invest in productive businesses!"
Not to mention she has no clue about 'investing' money and would not have the first idea how to put her savings in a productive business!""

Remember Gresham's principle of good money

In bad times, good money goes into hiding

Debt is a precursor to bad times

Question is where does money (or capital) go to hide? Answer that and you will know where to park excess that you want saved

I have an addition to Gresham's. I say that in good times, good money (or capital) goes to work. When the world is purged from excess debt, money will come out of hiding and go to work like businesses, the DOW would be a barometer of that and not just increase in an index for inflationary reasons but for both inflationary and productivity reasons.

Until then, if you believe we have a problem with debt that is now morphed from private books into national balance sheets, then remember Gresham and the fact that good money goes into hiding -- the n decide for yourself where you want to hide it

Piazzi said...

Buffett was made Buffett through a few bets that he placed at bargain basement prices and also through help of less mentioned Munger

Now, say I have some money and I want to do what Buffett did, I need to first locate that bargain-basment-priced business that is gonna come out of burning ashes healthy and sound

I don't think S&P as a whole is bargain-basement-priced.

If you know of a spewcific company that would mean that criteria and would stand alive and provide cash flow and cash distribution through revaluation, then sure, think about it, but without that, how can one do what Buffett did, which is the point seldom mentioned in media when they use Buffett as a model for buy and hold

Jaqship said...

Michael H and Edwardo:

"the large gold holders will run the country. They won't make rules that hinder themselves."

I fear they will indeed make such rules, but they'll arrange that the rules are only enforced against shrimps; just as they have been doing for the last 10+ years, e.g. against small brokerage houses (most of whom have had to fold).
(This collapse of the US system's rep for fair treatment has much to do with gold's recent rise, according to folks like Janszen.)

"... they'll be more than happy to tax silver into oblivion -- exactly *because* it is necessary for industry."

Only if they'll be OK risking the utter collapse of an already dying economy. I must admit that they may be just fine with that, but they may flinch at that extreme; they may be OK with what their handiwork will already have done to enserf the middle class.

"... mining company profits are likely to be windfall taxed, but not sales of physical itself since that would be entirely counter-productive to functioning of a freegold system."

I rather doubt that the smooth functioning of a freegold system will matter much to US Elites. Their priority seems to be the enserfment of the middle class.

Michael H said...


"I rather doubt that the smooth functioning of a freegold system will matter much to US Elites. Their priority seems to be the enserfment of the middle class."

I don't get it. What good are serfs, if there is no economy within which for them to produce goods and services that the elites can enjoy?

Jaqship said...

Michael H,

"What good are serfs, if there is no economy within which for them to produce goods and services that the elites can enjoy?"

Good question.
ONE possible answer was just posted at (Caps mine):

"That got me thinking, what is the next most important resource next to food? Clearly it's oil. Since oil is a non-renewable resource and our own reserves peaked in the 70's, it's vitally important to reduce consumption of our own oil and USE AS MUCH FOREIGN oil as possible. Using foreign oil is doubly useful because it allows us to continue thriving while SAVING OUR OWN OIL and reducing fuel for the economic growth of foreign competitors. This is basic national security.

Hence, environmentalism is a useful cover to curb our domestic oil production while our foreign military activity and dollar policy have allowed us to use up the rest of the world's oil.... Out-sourcing further causes foreign countries to use finite resources (internally produced inputs to production are cheaper) while also raising their populations' standard of living CAUSING THEM TO CONSUME YET MORE.

The geopolitical activities of America since the 70's seem pretty close to optimal when thought of this way. Of course, that doesn't mean the American middle class will indefinitely prosper from these policies. People are ultimately just a USEFUL TOOL FOR THOSE IN POWER."

There would be an economy all right, but one in which the serfs produce as much as the Elites desire, only when they desire it!

But there probably are other worthy theories.

Edwardo said...

Please note, Texan, as per Mortymer's post above, that Mr. Zoellick has publicly inserted RPG into the discussion again.

Edwardo said...

"That got me thinking, what is the next most important resource next to food? Clearly it's oil."

Clearly it's not. No water means no crops and no livestock. And if we set that aside, try surviving without water for a few days as opposed to getting by without oil for the same length of time.

Michael H said...


One could argue that, within our current systems, oil is actually more important than either food or water.

No oil means
- no farm equipment
- no water pumps
- no transportation

Regarding mortymer's RPG quote, note that the date is November 2010.

Edwardo said...

In absolute terms, water, potable water, and crop friendly hydration is more important than oil. Think about this. If a population were deprived of sufficient fresh water, in a very short period of time, said population would perish without question. Oil, strictly speaking, is vital to maintaining civilization at a certain level of activity, but there are other, by no means equal, energy inputs that would allow mankind to maintain a semblance of the civilization we have come to know during the age of oil. Don't misunderstand me, were all grades of crude to cease to exist tomorrow, it would, in short order, be an unprecedented catastrophe. Now let's substitute the word water for the phrase (all grades of crude) and the end of the previous sentence would end with the word extinction.

Michael H said...


I suppose what I was getting at is not that oil is more important than food or water on an individual survival level, but that oil is the most important of the things that can be controlled from afar. In other words, oil can be used to control our access to food and water.

In other words, yes, I agree that if all fresh water was to be poisoned tomorrow we would all die. But I don't think that is very likely.

Robert LeRoy Parker said...

Valentin Dmitrovich Zukovsky,

More on negative lease rates:

Goldman on metal pawning

Goldman attributes negative rates to deflation and calls the dollar king, for the time being.

Gary Morgan said...

I started thinking of Exter's pyramid as I listened to this. It's already all over, bar the shouting and fighting. Next step, that money literally goes under the mattress, and then rushes out to try to secure real things.

Still reading the archives and learning more day by day, and it is quite a strange feeling to watch clips like this, and see other events, and imagine you are perched up on a mountain-top with Another, FOA and FOFOA, watching the river flow toward the sea.

Texan said...

Edwardo, are you talking about the quote from November, 2010 that Mortumer referenced above? I think thats the quote that set off "RPG" posts.

Is there a more recent quote he posted? I didn't see it, let me know which one.

One Bad Adder said...

Nice to see you dipping your toes in the water FOFOA -
Gold at it's current $-level is indeed a hard "sell" and given the level of my understanding, I'm not altogether confident in adding to the reasoning.

The Goldman link posted by Robert (above) alludes to the clear and present deflationary impact of a Fractional Reserve System in it's death throes.
The various "backwardations" in metals generally are due (imho) entirely to the situation with Treasuries ...especially at the short end - which are themselves now flirting with backwardation on a daily basis.
This is the REAL DEflation - as ultimately the world moves to $Cash ...and abandons all faith in the "future".
P-Gold (in possession)...given the simple fact that it's properties are (to all intents) eternal, represents the only viable alternative as a here-and-now asset, however "manys the slip twix cup and lip" as they say...and it will take a strong commitment to hold same through the coming conflagration.

costata said...

Michael H,

I wasn't referring to the Bernholz research that Mauldin mentioned. I will take a close look at that. Perhaps it should be number four in this group as it appears to look at HI from a different angle.

Thanks for that contribution.

I will go looking for the other piece of research shortly.



I recall reading that Janszen piece but I cannot recall the details.

Exactly - precise (as possible) set of conditions.

I think A/FOA handed us the big picture argument - the long tail/fat tail risk - that is emerging. FOFOA has, IMO, provided clarity on the distinction between HI and inflation and the thinking of the quantity of money theorists.

I'm thinking of advancing another perspective on this as well which is outside the range of topics that we generally discuss here. An RE based perspective.

Harking back to AdvocatusDiaboli's comment. Perhaps the extension of the reach we can attain is to speak to the strong hand paperbugs. FWIW I think that size of wealth is not the only indicator of strength or weakness. I think you could interpret weak hand as weak mind or weak nerve.

If we can make the case (more comprehensively) that HI is a high probability, near term risk then the insurance argument is strengthened. I realize the matters we discuss here go well beyond insurance but it seems to me that we need to find a fallback position for those who cannot absorb, or will not review, the material collected here.

Many of these folks are all-in without even realizing it. They may think their investments are diversified but they are not in at least one important way. Many of them are all-in on a single currency bet.

Anonymous said...

Perhaps someone here can teach me the history lesson that I never got at school.

My question concerns the HI in Germany 1922-23. Several authors write that inflation had been high (more than 10% per year) for several years, and Germany had huge deficits because they had to pay reparations to the allies in gold. When France occupied the Ruhr area, the German workers went on strike, but the German government continued to pay them (with essentially printed money) in order to sustain that strike action against the French occupation. Then these authors write that, suddenly, in summer 1922, the mark collapsed by half within two weeks.

Is it true that this coincided with the assassination of their foreign minister Rathenau by some right wing extremists? The reasoning would be that Rathenau was moderate and could successfully negotiate the reparation payments. With his death, however, there was no hope to resolve this.

If this view is correct, then it was a political event that pushed the mark over the edge.


costata said...

Sovereign Debt Ceilings

VTC et al,

This is the third paper I was referring to earlier. The authors of this paper discuss sovereign debt “ceilings” in terms of the available "fiscal space". The paper includes a very interesting table comparing a broad cross section of developed countries. One of their key points is that as debt mounts and takes you closer to the "ceiling" loss of market access is sudden.

As public debt rises or views about fiscal risks – or the reliability of fiscal data – change, our results imply that markets may give little or no warning about imminent spikes in borrowing costs or curtailed access to debt markets. With the inevitable uncertainty around where precisely debt limits lie, and the potential for market perceptions to change in the bat of an eye, there is a need for caution – a few successful auctions are not grounds for complacency.

More in depth results of the author's research here. In the full results a table is shown on Page 17 assessing the probability of additional fiscal space being available. The tipping point can occur suddenly once you cross a certain threshold. (My emphasis)

Third, though not evident in the reported estimates of fiscal space, simulations to calculate the fiscal space under the model endogenous interest rate suggest that the increase from the risk-free to the risky interest rate tends to happen quite abruptly as debt reaches its limit.

As an example, if the largest shock to the annual primary balance is 5 percent of GDP, then at 5 percent of GDP below the debt limit, the government should be able to borrow at the risk-free rate; but as debt rises by a mere 5 percent of GDP more, the government loses market access and the marginal interest rate effectively becomes infinite. Although the analysis is more complicated with multiperiod debt, these orders of magnitude imply that market signals of rising interest rates will likely come very late (that is, just on the eve of a loss of market access).

The last two properties resonate with the experience of some southern European countries in the past few months and underscore the importance of maintaining sufficient fiscal space by undertaking timely adjustment. Finally, while the analysis underscores the risks of suddenly…

Perhaps somewhat akin to the Waterfall effect that FOFOA and Martin Armstrong have discussed.

Aiionwatha's Nation said...

@costata, thanks for the additional story on the JPM item. Probably puts things in a decent perspective. Whatever they get on principal is just gravy on top of years of interest payments at those rates.

Anybody else think we are in the hyperinflationary collapse now and have been since 2008? From a USA perspective if you look at money growth, derivatives outstanding, govt debt trends, real purchasing power of nominal incomes, estimated gold price at number of paper and unallocatedd claims per ounce(guessing here of course), but they are all going exponential. Nobody back in 1999 would have believed any of this possible.

I'm probably generalizing some on the items above but a key factor is mindbending propaganda and a highly motivated sales force you compete against when discussing gold. Think back to What was the tipping point there? I think you can apply similar logic. So simple to see in hindsight, but some of the brightest of the bunch were all aboard until the bitter end. What causes that? Market confirmation bias?

M said...

I think real estate investors are the hardest to convince because they have the physical part right. And they have done well, especially in Canada and Australia

Nickelsaver said...

As long as gold is not "going into hiding", there will not be freegold.

One thing I find troubling is that not only is gold not going into hiding, it is coming out of the closet.

If I has a nickel for every radio, tv, email ad I see everyday promoting gold and silver.

Makes me wonder if the pm brokers know something about supply that we dont know. Or are they just paperbugs optimizing fear.

Either way, there are no gold shortages from my vantage point.

costata said...


I don't think there is any debate that there is no shortage of gold. The market is well supplied at present. Rather than "coming out of the closet" demand is being met by the flow. As Bron Suchecki points out the Perth Mint refinery alone is wholesaling roughly 5 m/t per week.

Shortages of metal are a silverbug tale for the most part. Some dealers may be attempting to spin the same yarn about gold but that is par for the course with some of the dealers.

This idea of gold "going into hiding" springs from A/FOA's discussion (10 years ago) of the impact of the sudden failure of the paper gold market. Resulting in a period when price cannot be discovered and gold holders simply sit on their stash until price can be discovered again through a purely physical gold market.

I don't think anyone here is suggesting that is happening at present or likely to happen tomorrow. But I would suggest that many here would argue that timing is extremely difficult to predict.

costata said...

Hyper-inflation – John Mauldin Citing Professor Peter Bernholz

Michael H,

Part 1/2

After reading that March 2011 post from John Mauldin you linked and the quotes from Professor Bernholz it seems quite clear to me that he is referring to financing deficits with base money issuance as opposed to selling bonds to fund deficits. A few quotes from Bernholz that JM included in his post support this interpretation.

“Hyperinflations are always caused by public budget deficits which are largely financed by money creation.”

Mauldin writes:
Bernholz identified the level at which hyperinflations can start. He concluded that “the figures demonstrate clearly that deficits amounting to 40 percent or more of expenditures cannot be maintained. They lead to high inflation and hyperinflations. . . .” Interestingly, even lower levels of government deficits can cause inflation. For example, 20 percent deficits were behind all but four cases of hyperinflation.

“The United States has a government deficit of 10 percent of GDP.” While this measure makes some sense, it doesn’t tell you how big the deficit is relative to expenditures. The deficit may be 10 percent of the size of the U.S. economy; currently the U.S. deficit is over 30 percent of all government spending. That is a big difference.

Bernholz on the USA:
Though it is true that budget deficits with government expenditures covered by 40 percent or more through credits have historically led to hyperinflation, it has been stressed in Monetary Regimes and Inflation that it is not only the size of these credits but also their composition that is important. This is noted in the book, thus:

“‘It will be demonstrated by looking at 12 hyperinflations that they have all been caused by the financing of huge budget deficits through money creation” [emphasis added]. This expresses the fact that only credit extended directly or indirectly by the monetary authorities to the government leads to the creation of money, that is, an increase of the monetary base. This is not true for borrowings taken up in the capital markets if they are not resold to the Fed. Looking from this perspective at the U.S. deficit, by far not all of the credits borrowed by the government were financed by the Fed.


costata said...


Part 2/2

Bernholz concludes:
‘According to preliminary and rough estimates, not 40 percent but “only” about 13 percent of U.S. expenditures are presently financed this way. Moreover, in discussing this problem it has to be taken into account that about two-thirds of dollar bills are estimated to circulate abroad.

Inflation may rise more or less strongly during the next years, but there is presently no danger of a hyperinflation in the United States.’”

Incidentally Mauldin cites the “Tanzi effect” as an argument that inflation is no solution in the USA:

“If inflation is the cure for too much debt, as we suggested earlier in our tongue-in-cheek example of Brazil, why is it that high inflation and eventually hyperinflation made things worse? Governments have to spend money all year round, but typically they collect tax revenues at the end of the year. So the value of the government’s revenue in real terms is constantly diminished until the money is spent. Indeed, plugging a hole with inflation merely makes the hole bigger. Digging yourself deeper in an inflationary situation is what economists call the Tanzi effect, after the economist who discovered it.”

Mauldin also comments on the amount of USG expenses that are indexed or tied in some fashion to inflation:

“Many governments around the world have tied pensions and salaries to inflation measures, so increases in government spending would rise with inflation. Nearly half of federal outlays are linked to inflation, so higher inflation means higher deficits. … Any increase in inflation will erode the value of existing debt, but it will make deficits much larger going forward and even possibly increase the real burden of debt as a percentage of GDP.”

Me again:
I think we can add Professor Bernholz’s indicator to the mix as well. After we get some feedback from the contributors on how robust they think these four indicators are I would like to see if we can draw some conclusions about where the USA is positioned in relation to each indicator.

I also think that we need to look at a couple of other issues. Can the US economy grow its way out of the debt problem? And can the USA borrow its way back to growth (that exceeds the cost of borrowing)? I would also like to take another look at a statistic that, in my opinion, is entirely misleading – GDP.

Nickelsaver said...

Thanks Costata,

Do you see price discovery being made by government fiat upon the collapse of the market?

Edwardo said...

Well, Texan, I thought Mr. Zoellick had issued up a new salvo on behalf of RPG. Apparently not.

Edwardo said...

There's an old saying says one should "never ascribe to malice that which is adequately explained by incompetence."

The story at the link could be an instance of this.

Well, Texan, I thought Mr. Zoellick had issued up a new salvo on behalf of RPG. Apparently not.

costata said...


Do you see price discovery being made by government fiat upon the collapse of the market?

I don't think that government will set prices if that's what you mean.

I think that currency issuers will be the ultimate market makers and liquidity providers in the physical gold market but free market forces will dictate the price. IMO any pricing errors will be eroded by arbitrage between gold and currencies.

Edwardo said...


As in so many phenomena, there is a confluence of events that sets things fully in motion. Rathenau's assassination was likely a pivotal event, but, then, so was the following one, especially given the timing.

From Wikipedia:

"During the first half of 1922, the Mark stabilized at about 320 Marks per Dollar. This was accompanied by international reparations conferences, including one in June 1922 organized by U.S. investment banker J. P. Morgan, Jr.[17] When these meetings produced no workable solution, the inflation changed to hyperinflation and the Mark fell to 8000 Marks per Dollar by December 1922. The cost of living index was 41 in June 1922 and 685 in December, an increase of more than 16 times."

So, we have an assassination and a series of failed high level finance meetings which, coincidentally, occurred at precisely the same time.

Nickelsaver said...


I think that currency issuers will be the ultimate market makers...

The USG is the biggest currency issuer of them all. So in the absence of market price discovery, couldn't they wipe out all debt by pegging to gold at an outrageously high price.

This plays into the concept that they sacrifice the currency and not the system right?

costata said...


A free float in physical gold will price the currency issued and indirectly the debt. The roles of ultimate market maker and liquidity provider are inseparable IMO. Very little of their gold reserves would ever need to move. Think of this as a smoothing of spikes and sudden dips in supply and demand rather than a price setting role.

IMO the preservation of the system over the currency factors into this in a different way. If they issue base money to cover the debt (the front lawn dump) then more currency will be issued. More currency = higher gold price to recapitalize the currency system.

So the direct relationships are:

1. Currency covers debt and;
2. Gold prices currency.

I will try to find the thread where we had a lengthy discussion of how this would operate in practice. We also discussed how the ECB could kickstart a market where gold was in "hiding".

Jim Rickards has been talking about pegs but as yet has offered no explanation (that I am aware of) as to why this is even necessary let alone desirable.

His prescription sounds like a gold exchange standard. That has failed in the past and there is no reason I can see to have any confidence that it would succeed this time around.

Perhaps someone should ask him why the USG needs to control the price of gold under his model?

costata said...


I can't recall the thread where that discussion took place but here's an extract from a comment I posted giving a scenario on how, say, the ECB could kickstart the physical gold market. There's also a few remarks how this initiative would in turn price all currencies in gold.

From comment titled:
Market Makers

"If, say, the ECB wants to unfreeze the market they would have to step in and become the market maker. They don’t know what the market price should be so they would have to test the market. Here’s one way to do that. They hold a tender for a large, but not unlimited, amount of gold. Let’s assume they offer 100 m/t. They could set a limit on individual offers of, say, 100 kg per bid. Tenders could be restricted to Mints, BBs, Dealers and so on.

If they want to sound out a broader cross section of the market it could be opened to all pre-registered bidders with minimum offers for, say, 1 kg to make it manageable. Perhaps the ECB gives an indicative price as well. After the tender closes the highest bids are filled first and the price cascades down until the supply runs out. After the tender closes they publish the prices accepted.

Now we have a reference price for private transactions. But let’s assume that the physical gold market is still patchy and somewhat illiquid. So the ECB then places a buy and sell quote in the market through the 17 Eurosystem Central Banks with a daily limit on transactions, say 100 m/t, and they “fix” a price every afternoon.

If the demand for that 100 m/t is high and there are no private sellers emerging then the sell quote is too low. So they increase the sell quote for the following day until no one wants to buy from them because they can obtain gold at better prices in the open market. This is the crucial point to understand. This is what they would be aiming to do.

Once the market is liquid again the ECB could also widen the gap between their buy and sell quotes until no one wants to sell to them either. Bear in mind these CBs aren’t coin dealers who have to turn over their stock in order to collect premiums. They would simply be attempting to find the price that will allow the private market to become liquid and to clear again.

How much gold are they risking? Let’s assume they offered to sell at Euro 5,000 and buy at 4,998 on the first day and that 100 m/t simply flies out the door. So far they are down 200 m/t in total. Day two the quote is Euro 10,000 and 9,998. How many days would it take to find the price at which the market clears? Bear in mind too that every participant in this market will be striving to help the ECB restart the private market – no turnover – no profits.

Now that the private physical gold market is functioning again if the Eurosystem CBs continue to be the market maker they would most likely try to ensure that their buy and sell quote was always slightly outside the range in the open market. Aiming to discourage people from buying from them instead of the open market.

Bear in mind too that they would not necessarily need to use gold to manage the amount of Euro on issue. The Euro gold price would simply be a reference point, an indicator of whether there was enough Euro in circulation or too little and whether the currency was being managed competently.

Once we have a market price for gold in Euro we would also have a reference point for the market price in every currency that can be exchanged for Euro. Arbitrage between various currencies would very rapidly iron out localized anomalies in the gold price."

Nickelsaver said...

I read Currency Wars.

Perhaps someone should ask him why the USG needs to control the price of gold under his model?

I would think the answer would be obvious, to maintain the dollar as the reserve currency.

Do you really believe the US is going to just lay down and let the EU call the ball?

I understand what Rickards is saying. He is saying that the major gold holder WILL be the one. And on paper (ECB balance sheet) that is the EU, but in physical possession (foreign gold in US vaults), it may still be the USA. I do not know, but that is his argument.

From where I sit, as an American, that would not be a bad deal for me.

That being said, I don't know that it will happen.

I actually think the front runner in a paradigm shift is a major WAR. Israel/Iran could be the first domino.

Nickelsaver said...

Possible senario:

President uses the combination of a financial crisis and a military crisis to invoke executive privilege, dictates bank holiday and confiscates all gold in all US vaults.

Opens the gold window at 100,000 per ounce. Pays all US debt off with less than half the gold.

The US is very good at spending other peoples money.

costata said...


You wrote:
Do you really believe the US is going to just lay down and let the EU call the ball?

I wrote:
"I posted giving a scenario on how, say, the ECB could kickstart the physical gold market.."

I deliberately used the phrasing "say" as in "for example". The US could do the same thing. In fact I think it is a higher probability that the US will do this at some point rather than the ECB Eurosystem.

It would be helpful too if you would explain how you "maintain the dollar as the reserve currency" IF increasing numbers of countries don't want to use it in trade or hold any more of it in their reserves. Did the currency swaps that are occuring escape your attention?

I understand what Rickards is saying. He is saying that the major gold holder WILL be the one.

ORLY - that news should thrill the House of Saud, the UAE and Quatar. Or perhaps India should be cheering that news. By some estimates the Indians are holding around 20,000 m/t of gold - so I guess with the logic you ascribe to Rickards the Rupee is the front runner for the new global reserve currency.

When Bretton Woods II was agreed the USA had cornered the gold market (around 80,000 m/t by some estimates) and large swathes of the rest of the world was in ruins while the USA's huge industrial base and infrastructure was intact.

costata said...


In that last comment I should have written Bretton Woods as opposed to Bretton Woods II.

Texan said...

Constata, this is absolutely the right direction to explore! GDP is just a measure of turnovers, and it includes government spending. By my very, very rough calculations, total US public spending + 2nd order spending (ie the cafe across the street from city hall or boeing) is probably approaching 50% of total GDP. Let that sink in for a minute.

And a good third of that (federal and state) is deficit financed. Under the 4 years of Obama (and by no means a political comment, both parties are equally culpable), debt will have gone from just under $10 trillion to just over $16 trillion. As KDenninger likes to write, it's the "law of exponents". The next 4 years may see
some reduction in the deficit as the Bush tax cuts, but I doubt it will be much as higher taxes will slow the economy.

So we could easily be up another 50% of debt, or 24 trillion by 2016. What is CAGR for GDP going to be? 3% per annum at best, more likely 2% or less. So call it 10% over same period. Or GDp of 16-17 trillion. so we will have debt/GDP in 2016 of over 140%, which will be completely nuts but some might say is still "livable".

But now do 2016-2020. 36 trillion in debt by 2020. 19 trillion GDP. Ie, Japan. I have no idea how much the gvt wiould consume at that point.

So yeah, it's very very grim on the fiscal side of the equation.

Now debt to GDP is currently

Texan said...

As Bush tax cuts expire

sean said...

Two superb articles by documentary film-maker David Malone that were mentioned recently on Turd's blog:
Plan B – How to loot nations and their banks legally, and
A new Reserve currency to challenge the dollar – What’s really going on in The Straits of Hormuz
His looks like a blog worth reading.

Gary Morgan said...

Of currency wars (and literal wars)...fascinating stuff....

Nickelsaver said...


I did say that I don't know that it will happen. I certainly have not spent as much time as you and others here thinking about all of the scenarios. I was just giving my impression of what I think Rickards was saying. And also my impression as an American that the US will TRY to keep this thing going.

In truth, I believe the dollar is on its death bed. But that doesn't mean it won't fight to survive, even if by hopeless means.

On China or India being the major gold holders, that is an excellent counter to who will call the ball. Are you counting private gold ownership in that?

As for industrial dominance, it is very much a different world today. There is no question that the US is no longer a net producer. We are still a nation of innovators though (my opinion).

Do you remember our discussion about a single global currency? I'd like to revisit that.

Dr. Octagon said...

I have been able to convince others to purchase physical gold as a part of their long-term savings. In the case of some family members, these are people who are not willing to put much if anything into the stock market, believing in CD's for personal savings and stable value funds (US bonds) for retirement savings.

I believe the best approach is not to advocate for gold, but instead to show that these forms of paper savings are not nearly as safe as they think they are. Once the illusion of safety is gone, then they can be guided to gold as an imperfect but relatively good form in which to store savings.

Nickelsaver said...

Doc Oc,

I don't believe you will create strong hands unless you show that gold is perfect.

It is perfect because it holds its value no matter what direction we take going forward.

You cannot say the same thing about any other 'store of value'.

If we convince others to hold gold, and then its price discovery in the current system collapses, weak hands that see gold as one of many options will let go.

milamber said...

@ Nickelsaver wrote, "It is perfect because it holds its value no matter what direction we take going forward."

Two questions:

why did Gold drop off a cliff (as measured in dollars) back in 1980?

And what is to stop it from dropping of a cliff again? (and I don't mean when freegold finally hits and gold goes not hiding. It didn't go into hiding in 1980, but the price got crushed.

I have read discussions here (and elsewhere) discussing the difference between value & price, and maybe that is where I am getting lost, because to this shrimps eyes, price goes a long way in determining something's value to me.

In January of 2012, Because I value tacos at a certain price, i Am willing to exchange $1.00 for a taco. If I go to TacoBell tomorrow and the price is $1000, Then the taco will no longer have value for me. Or at least, it won't have enough value for me to part w/ $1000 for it.


Motley Fool said...


Value is circumstantial.

What is the value of 1 litre of water to you now?

What if you were in a desert? ;)

When all current savings is seen to be in a flawed medium(systemically), then only gold will quench your thirst. :P


Ps. Seems I was a bit subtle earlier. My meaning was that I think people should have skin in the game. So I only try and get people to buy one ounce.

Motley Fool said...

Oh sorry.

To answer your first. Again the function of gold underwent a shift in the international monetary system.

Gold's functionality was seen to be useless and this translated in a drop in price.

In the short term view ( say 1970-2000), this was a perfectly good view. In the longer term this system is not sustainable.


Nickelsaver said...


why did Gold drop off a cliff (as measured in dollars) back in 1980?

And what is to stop it from dropping of a cliff again? (and I don't mean when freegold finally hits and gold goes not hiding. It didn't go into hiding in 1980, but the price got crushed.

If we are talking in the context of the 'backless dollar system' coming to an end. It is irrelevant.

If you are saying that the current system will persist, I personally believe that gold will not lose nominal value within the current paradigm. The moment it does, it will signal a change in the paradigm. And as such, there will be only a short window where price discovery is in question. IMO

Aquilus said...


1. Why did Gold drop off a cliff (as measured in dollars) back in 1980?

Answer: Real rates of return turned positive in a big way.

In 1980 Volker had to raise interest rates up to an all time high of 21.50% (Prime Rate) on December 19, 1980. That is the only thing that made the dollar more attractive than gold in that era.

The United States could afford to do that because its debts (on and off balance sheet) were relatively small and it could afford to pay the 21.5% interest for a short period of time on a small debt (as compared to GDP).

Basically, once real rates of return are positive, it is more advantageous to keep the money in dollars as the purchasing power of your savings grows at that time. (not to mention convenience of electronic/paper money over metal if that is the case).

Also, by the end of 1980, it was pretty clear that the US dollar was not going to collapse, so the risk of holding dollars was low.

2. And what is to stop it from dropping of a cliff again? (and I don't mean when freegold finally hits and gold goes not hiding. It didn't go into hiding in 1980, but the price got crushed.

Today we have the exact opposite. The real interest rates are way negative, and the United States would bankrupt itself paying interest if rates got even a few percent higher.

The only alternative for raising rates without that penalty is for the Fed to own most of the debt and return the profits (interest paid by the Treasury) back to the Treasury.

The scale of that kind of monetization can only happen in late stages of the loss of confidence in the currency
Without the possibility of returning to positive real interest rates unless they let deflation take complete hold and bring on the Mother of all Depressions (you see deflation rear its ugly head every time money injections slow), the US has no choice than to keep devaluing its currency and steal the purchasing power of all the bank savings.

In this environment, gold thrives, even though "gold price" is today mostly the price of the paper contract known as gold. Even that has to appreciate over time, because otherwise market forces will take delivery and clean up the physical stock in the real metal if the gold price is considered to be under fair value.

Texan said...

Thank you Aquilus. That is exactly what happened.

In fact, the US can probably never raise rates again. The USG ex-social security takes in just over $1 trillion in income taxes. Assuming tax rates go up, let's call it generously $1.5 trillion. From my earlier post, the USG has $16 trillion of debt and growing fast, about $100/bn a month.

That's easy math, right? A 10% rate on the debt would consume ALL the income tax. Before spending a dime on anything else.

So maybe the Fed will someday allow short rates to "climb" back to 2-4% (I doubt it, but it's possible), but the 10-20% rates of the Volker era through the early 90s are pretty much gone forever.

Which means there is no "debt break". Every single deficit dollar and every dollar of NET private credit creation is adding to the money supply . The only reason we aren't experiencing massive, visible inflation is that the previous credit boom is slowly defaulting, so there is very minimal net credit creation (though the deficit more than makes up for that).

So prices are going to expand pretty quickly at some point, the trick is when. At that point, basically the only tool the Fed will have to slow prices will be to shrinkits balance sheet and try and suck up base money by selling Treasuries. Long rates may pop up when they do that. But this is a temporary tool, and given the deficit, I am nt really sure how they would sell Treasuries at the same time the USG is selling them also.

costata said...

Are furriners losing their taste for US guvvermint debt?

Foreigners Sell Record $85 Billion In Treasurys In 6 Consecutive Weeks - Time To Get Concerned?

Nope, the time to get concerned was 10 years ago. It might be time to escalate concerned to uneasy or something a little stronger than that, perhaps, somewhat agitated.

Interesting graph:

Crack said...

Jeff said...

1. Why did Gold drop off a cliff (as measured in dollars) back in 1980?


The last small gold war ended in the early 1980s, as the choice was to use the US$ or go to a gold based economy. No other reserve currency existed, and gold lost the war as all continued to buy dollar reserves.

But by 1980, Europe was working with the BIS to implement a new "reserve currency".

The European plan was to support the $IMFS at least until a new fiat "reserve" currency could be established, one large enough to absorb the shock of a failing reserve currency, to avoid being forced back 100 years into a physical gold-based economy which would have been very traumatic. This effort took 20 years from 1980.

FOFOA: "The dollar system should have collapsed between 1971 and 1980, but it didn't. It received an assist from Europe, the Middle East, and later from the Far East. The purpose of this assist was to buy the time necessary to build another currency large enough to lubricate international trade in the event of the disappearance of the dollar. That ended in 1999 with the launch of the euro. What kept the dollar afloat since then is anyone's guess. I have a few theories. But they all seem to be expiring in 2010.

Edwardo said...

Hmm. If one is concerned they harbor, as yet, unrealized fears about some matter. Well, it seems to me that on the emotional state of being Richter Scale we are now into the fearful zone as that implies that there is an awareness that certain concerns are now coming to pass. Downright scared is next followed by absolutely terrified. Finally, we have full scale panic, which my wife informs me is when one feels terror to the point of totally losing the plot.

And on that note, there seems to be quite the buzz in certain quarters- take a wild guess which quarters those are- that the S&P report is amounts to a harbinger of EU doom.

Dr. Octagon said...

Nickelsaver - My goal is for family members who I care about, to take at least a small portion of their long-term savings and convert it from fiat/bonds to physical gold. If I attempt to argue that gold is a perfect store of value, then they will see me as a crackpot, and will stop listening to me. All I need to show is that fiat is less perfect than gold, which is an easier argument to make, especially when talking to someone who does not pay attention to such things. Once I have done this, and provide some help with the sources for, and procedure of the actual purchase of gold coins, I've reached my goal. I am confident that they will not be sold until their value is needed, because the funds were for long-term plans in the first place.

costata said...

The Impact Of Financialization

Karl Denninger and Antal Fekete have both discussed the theories about debt saturation such as the "marginal productivity of debt" at length. Basically the finding is that at a certain debt level each dollar of new debt produces less than a dollar of GDP or even a reduction in GDP.

Research into this area also appears to correlate with Steve Keen's work on the impact of credit growth acceleration or deceleration on GDP. Long time readers would know that I disagree with Keen's conclusions about where this is ultimately heading. Although it has been encouraging to see Keen talking specifically about asset deflation in some of his recent writing about his debt deflation theories.

So perhaps we may yet see some clear delineation in Steve Keen’s models of goods/assets that are generally debt financed and other goods which aren’t generally debt financed in the conventional sense in which the word “debt” is used.

This paper presents the results of the authors’ research into the effect of excessive private sector debt and asks:

Too Much Finance?

We conclude that:
....the marginal effect of financial development on output growth becomes negative when credit to the private sector surpasses 110% of GDP. This result is surprisingly consistent across different types of estimators (simple regressions and semi-parametric estimations) and data (country-level and industry-level).

The threshold at which we find that financial development starts having a negative effect on growth is similar to the threshold at which Easterly et al. 2000 find that financial development starts increasing volatility.

This finding is consistent with the literature on the relationship between volatility and growth (Ramey and Ramey 1995) and that on the persistence of negative output shocks (Cerra and Saxena 2008).

Overall I think this body of research makes it quite clear that there is no realistic possibility of the UK, Japan and the USA achieving sufficient organic growth, or borrowing to engender growth, in order to pay off the debt loads they are carrying. So that leaves but two options – default or default. And thus we return to two of our favourite themes at this blog – When? and How?

But before we revisit those four debt crisis indicators we canvassed recently in search of answers to these questions I think we need to explore some of GDP's weaknesses as an economic indicator.

Wendy said...


I'm reviewing Martenson's crash course to decide if I want to bring it to the attention of family.

Anyways you might want to have a relook at chapter 16, it might help you with the bogus GDP figures.

costata said...

Thanks Wendy

costata said...

Hi Texan,

Thanks for the input and encouragement.

I would like to have a comment in the archives here that highlights some specific issues with GDP. I have some material from a couple of the Austrian economists that suggests huge error factors beyond the inbuilt distortions like government expenditure.

And I agree that's truly scary. A while back I posted a comment where I suggested that government employees shouldn't pay taxes to their employers. They should just pay them net of tax and skip the sham transaction.

That might sound nasty but I think it could also send an honest message to public servants.

Robert LeRoy Parker said...

Valerie Ramey has some interesting work debunking Keynesian money multiplier ideas.

Ramey Papers

Mr. Mandelbrot said...

I just went back to the FOA's Gold Trail introduction and just realized that I must have missed it in the first time reading that he asserted he was a "born and raised" American. The fact that I never registered that "fact" struck me kind of hard, so I got to thinking that there ought to be a Wikipedia page that presents such facts. I did some quick searches, and didn't find any. I'm not the one to do this, but for weaker minds such as mine, a factual database on A/FOA/FOFOA on Wiki might be helpful (kind of a Cliffs Notes for the Lazy) :)

@mortymer001 said...'s President Arnold Greenspatz interviews Fed Chairman Alan Greenspan
March 25, 1999

@mortymer001 said...

costata, I remember few years back there was once on iTulip an excellent detailed article about marginal utility of debt - in archives, I can not locate it now since it is in "only paid subscicers". I will check thought if it was posted somewhere... :o(

Michael dV said...

Imagine you find an old safe. All you know is that the content of this safe contains one year of income of an average person. As you wait for the locksmith to open you think: I wonder how he saved his money.
Ask yourself how you wish he had saved it. Can you imagine any time in history that cash would have been a better savings instrument than gold? Can you imagine any instrument whether stocks or bonds or jewels that would have yeilded more than gold?
There probably are but they are few.

Michael dV said...

After I had purchased a fair amount of gold I faced the situation of having to decide what to do with other cash that I held and investments that I wanted out of. I decided that I would hold that amount as physical gold. The long term stuff I don't worry about. The other that I am simply holding until a better investment comes along I don;t worry about either because I held enough cash to cover expenses. Unless this economy can limp along for years I should be fine. Even if it does, unless gold goes way down I am fine.

Anonymous said...

Great post FOFOA.Great song to finish.Never thought anyone could attach any meaning to those lyrics, but you seem to have managed it.

I was chuckling to myself reading the comments.I ve had the same fustrations trying to persuade friends or family (FOF) to buy gold.I seem to recall FOFOA mentioning having the same problem with his FOF as well.So if even FOFOA is having trouble, it shows how brainwashed the genral public are.Normalcy bias is a very powerfull force.
After about two years i finaly had some success with my target FOF; the only one with much money to spare.I had told myself it would be the last gold orientated discussion(GOD) i would have after so many failed attempts(it probably wouldnt have been though),and as luck would have it my FOF suddenly became a lot more enthusiastic about the subject and the decision to buy was made there and then.My GOD was no better than all my other GODs; i think time was the thing that made the difference.Real world events over time started to ring true with what i de been saying and it must have finally clicked in my FOFs head.
So would say to people like Max, dont give up, your next GOD could be the one that breaks through.
Dont look at it as a battle of wills between you and your FOF,look at it as a battle with the shitty MSM.
Hope this helps .

A Leg

@mortymer001 said...

Eurosystem, ESCB by ECB:

KJ said...

He may have done so in earlier writings, but Martin Armstrong's latest:

"No government debt will be safe! Nobody will ever pay off anything. It is merely a question of time. That appears to be coming next year – 2013. By 2017, we may end up with a new World Monetary System."

Aaron said...

Hi Everyone-

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If you find value in this blog perhaps you might also consider making a small regular donation. Remember, FOFOA doesn’t have a day job. This is it folks. This is where he spends all of his energy; teaching the rest of us what Another and FOA were trying to tell us over a decade ago.

OK! Scroll on up and click that donate button. I just did!


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