Thursday, February 23, 2012

Today's (quote-unquote) "Gold"

There were a few great discussions going on in the last thread and so I thought I'd rejuvenate it with a fresh count!

Early on in the thread Hawks5999 quoted me and OG from Yo Warren B, you are so OG! and then asked a question:

FOFOA: "Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now."

Buffet: "This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further."

Hawks5999: "Can you break down the nuance between these two statements? Because they sound like they are both saying the same thing to me. Sorry for being dense if it's really obvious."

Here was my reply:

Hello Hawks,

Great replies from Max, JR and others, by the way!

It's not really obvious, but I'll try to break it down even further for you. As JR pointed out, price and value are different things. Price is determined at the margin. Think stock to flow ratios with the ratio acting as a governor on the price in both directions.

Warren's stocks have relatively objective valuations through common metrics like earnings, operating cash flow and the sum value of their component parts. This is kind of like the NAV for GLD and PHYS. If the price falls too far below that valuation (it is undervalued), the stock to flow ratio will rise constricting the amount of flow (supply) at the margin where price is discovered. If the price is higher than the valuation (it is overvalued), the ratio will collapse flooding the market with shares.

Now compare that with gold which has no similar objective valuation. Of all the possible "unproductive assets" out there, gold has the highest stock to flow ratio because of its unique, singular properties. To think about it simply, price is determined at the margin—the flow—while value resides primarily with the stock(holders). Does this make any sense? If gold is as undervalued as I say it is, then we should expect the s/f ratio to explode, constricting the flow (supply) at the margin.

Can you see how viewing price and value from this angle puts the onus on the stock holders at least as much as on the pool of new buyers?

"Correlation does not imply causation"

In light of this new perspective, we can see that price can converge with value through the actions of either the current stock holders or the pool of new buyers. And when valuation is of the relatively objective variety, as it is with OG's stocks, it is usually a combination of both.

But in the case of gold, where value is entirely subjective, this is not necessarily the case. In fact, I would even propose to you that, subjectively, those who already possess the physical gold value it higher than those who don't yet hold it. Ergo, the explosion of price to the level of value is more likely to be brought about by the existing stock holders exploding the stock to flow ratio toward infinity for a period of time than by a stampede of panicked savers driving the price higher and higher.



ANOTHER: "People wondered how the physical gold market could be "cornered" when its currency price wasn't rising and no shortages were showing up? The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold **flowing** during a time that trading would have locked up.

(Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up [to cease flowing] as the price rises.) Westerners should not be too upset with the CBs actions, they are buying you time!"

Me: "Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now."

"Gold the wealth reserve" means A) only physical gold, and B) in its widest distribution… "which requires a much higher valuation than it has right now." "Correlation does not imply causation." Gold in its most valuable role correlates with it being in wide distribution, but it is not necessarily caused by that. Are you starting to see yet? Perhaps gold's functional change will cause its widest distribution, not the other way around.

Today's "gold" encompasses many other things. Ask any investor what percentage they have in gold and whatever they tell you will likely include mining shares, GLD, silver, maybe some platinum, and possibly not even ANY discrete, unambiguous pieces of physical gold. This is an important concept to grasp, that "gold" today is a bastardized term and the $PoG does not have anything to do with "gold the wealth reserve—which means physical gold only."

People see the "paper gold market" working today and so they think that it can work all the way up. Like we'll go from $2,000 to $3,000 to $4,000 and so on all the way up to $55K. They think that as the pool of new buyers flood into today's "gold" the shorts (or the bullion banks) will simply have to cover their exposure and bid for any physical they need until the price gets high enough for them to get it.

In many ways today's "gold" does need an expanding pool of buyers. But here's the main difference between OG's stocks and physical gold. From my 2010 backwardation post:

Dollars bidding on MSFT stock set the value of that stock. If dollars are frantically bidding on MSFT (high velocity), the stock skyrockets. If dollars stop bidding for MSFT all at once (low velocity), the price falls to zero. This is true for everything in the world **except gold**.

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

And from yet another angle we can put the onus on the existing stock holders rather than a pool of new buyers.



In the post above you just heard OG talk about three major categories of investments which are, basically, stocks, bonds and "unproductive assets". Through the singular properties of gold (durability, fungibility, divisibility, lack of industrial uses, CBs have it, etc…) along with the focal point principle, we can go along with Warren and focus on only gold as the third major "competitor".

Now in just three weeks I've written posts about both the King of Bonds and the King of Stocks dissing bonds. That should tell you something about bonds, no? So let's say it's mainly between stocks and gold at this point. As I have pointed out, stocks are for investors and gold is for savers. Savers outnumber investors by a longshot, and previously it was bonds that did it for the savers.

So now we've got all these homeless savers that will need to choose between stocks and gold (or else sit tight in bonds waiting to be sheared like either the Greek debt holders or Zimbabwe pensioners). This bunch is NEVER going to choose today's "gold" (the $PoG) en masse. They will likely end up splitting the difference and going 50/50 in stocks and bonds (or cash) while a few put 5% in GLD.

So what I don't foresee is a stampede by those homeless savers into today's "gold". There may well be another mini-stampede like we had in August, but it will display many characteristics of a bubble, including the volatility and the downside, which savers don't like. Savers aren't looking for the next XX-bagger and they don't like beta, so they are a hard sell for both OG and the $PoG. Savers simply want a nonfluctuating asset… preferably in real terms.

So Freegold, newly stabilized at a plateau stasis of ~$55K in constant dollars, will be very appealing to them. Funny to think that they'll buy gold en mass at $55K but not while it's only $1700, but hey, c'est la vie. As KindofBlue wrote: "Early adopters [of the next reference point for purchasing power] are being handsomely rewarded."

But once you realize that gold's highest value and widest distribution are correlated but not necessarily causally related in the obvious direction, the question then becomes how we get from here to there.

As I said (because ANOTHER taught me), "Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero." So you see, there doesn't need to be a stampede into today's "gold" for real, physical gold to become "priceless". ANOTHER wrote, "Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies"."

So now I'm looking only at physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold (i.e., not for paper profits). And I'm wondering when physical gold will stop moving through paper currencies, at least at parity with today's "gold", the $PoG. And I think that will probably happen when the $PoG goes too low. OBA has a neat theory about that.

Look at Buffet's piece above. He's shunning bonds but keeping his cash in bills. That's what the savers are doing while they decide where to deploy that cash. All the financial advisors across the land are advising savers to hold some cash, because they just know there will be some deals soon. And for the really big money, that means T-bills, just like the $20B Berkshire is holding. And when a trade gets that crowded it chases the yield right away, which is why the T-bills are heading to sub-zero yields.



This is the rush out of future-dated debt into Here&Now cash (T-bills for the really big $$$). It's the bank run shoebox under-mattress effect en masse. This makes the dollar look (temporarily) strong and today's "gold" (the $PoG) look weak by comparison, gold bug protestations notwithstanding. So just imagine another quick run-up like July/Aug. to, say, $2,333 correlating with a big spike in the USDX/$IRX (price) and then a crash in the $PoG down to ~$1,000 or lower. How hated would today's "gold" be by the homeless savers then? That's some serious beta!

So that's why I said in the post, "ALL TRADERS dump ALL gold, paper, physical, whatever, in my scenario. It has nothing to do with insiders. It has to do with traders and weak hands." And at the same time… because the return is surprisingly shitty all of a sudden… "physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold" … "stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero."

This is when the stock to flow ratio explodes to infinity and physical gold goes into hiding, when the price (the $PoG aka today's "gold") gets too low to support parity between it and "gold the wealth reserve, which means physical gold only."

FOA predicted something like this as well:

FOA (06/12/00; 19:48:25MT - msg#26)
Put your cards on the table!

The current paper gold world will die (burn) as its value to users erodes, not increases!

…Again, most everyone in the Western Gold bug game is running with the ball in the wrong direction.

…So who is in danger of being hurt as this unfolds?

That's right, the Western paper gold long! I'm not talking about just the US market! This is about the entire world gold market as we know it today. The real play will be for the ones that get out in front of the move by owning physical…

It seems every Gold bug sees only half the trade and has great faith that contract law will favor a short squeeze. Yet, none of them see where it is the long that will be dumping and forcing the discount!

The point is, there is no price discovery market for "gold the wealth reserve" that could even require an expanding pool of buyers. There's only the stock to flow ratio of physical gold (gold the wealth reserve) as a tiny component part of the wide $PoG basket, today's (bastardized) "gold", a ratio which is already very high and struggling to keep from going infinite (parabolic). [Any stock with "zero" flow has an "infinite" s/f ratio because in the function r=s/f, as f approaches zero, r approaches infinity.] A rising $PoG "stretches" the existing flow making it "larger" in currency terms and keeping it from falling to zero. But what if the $PoG suddenly dips below even the cost of mining gold? What is that cost today?

Once the flow of "gold the wealth reserve" (physical gold only) is credibly reestablished at the revalued Freegold price, the savers will eat it up like hotcakes! Ergo, "its widest distribution possible."

"Correlation does not imply causation."

Hope this helps!


Then victorthecleaner wrote:

FOFOA, fantastic! Why don't you make this an official posting?

No problem, Vic, here you go.

We also had a newcomer show up with a repost from the Gold Standard Institute website which kicked off a nice discussion about various hard money proposals and prescriptions versus emergent Freegold.

The next day, Victor wrote another outstanding piece on his own blog called Currency Wars: Why The United States Cannot Return To A Gold Standard. In it he addresses one of the main proposals in Jim Rickards' book, Currency Wars.

Victor starts off by asking if Rickards' proposal is even possible, and then answers his own question with this: "The answer is No. But why not? ...The answer is that the existence of the Euro prevents the United States from returning to a gold standard."

Here are a few highlights, but please go read Victor's post in its entirety:

Rickards advertises the return to the gold standard in particular with the claim that the first country that makes this step, would gain a considerable international advantage through the gain in confidence in its currency.

The problem with this statement is that the advantage of the first adopter is no longer available. The first step was made as early as 1999, and it was done by somebody else: by the Euro (€). It was accomplished in a fashion slightly more sophisticated than just a plain old-fashioned backing of the currency with gold at a fixed exchange rate: The Eurosystem of Central Banks, i.e. the European Central Bank (ECB) together with the National Central Banks of the member countries of the Euro zone, account for their gold reserve at the current market price of gold in €.


From these balance sheets, we can see that there is no advantage of early adoption that could be captured by the United States. The Euro zone has already anticipated this step, and the Euro enjoys an even more robust gold backing. In fact, all else being equal, the comparative advantage of the € over the US$ increases with an increasing price of gold.


■ In the United States, according to Rickards’ proposal, the government or the Federal Reserve guarantees that one US$ can always be redeemed for 1/7000 of an ounce of gold. The key to this guarantee is that the government pays out the gold even if there is no private participant in the market who is willing to sell her or his gold for this price. Even if the free market values gold higher than US$ 7000 per ounce at some point in the future, the United States Government is still required to redeem one US$ for 1/7000 ounces of gold (this is the point of having a gold standard after all). How clever is that?


■ Since the ECB has never claimed that the Euro were as good as gold, they need not redeem any Euros for gold. If somebody purchases gold with their Euros, these Euros continue to circulate. The Euro is explicitly advertised as a transactional currency, but not as a store of value. Gold is the store of value. This is Free Gold, the separation of the store of value from the medium of exchange, i.e. from the credit money that forms the transactional currency (also see Section 7 of The Many Values of Gold and FOFOA’s The Long Road to Freegold).

Let us finally remark that the price of US$ 7000 per ounce as proposed by Rickards merely serves as an example and that none of our arguments depends on this precise figure.

The material presented in this section was inspired by Rickards’ book and by contrasting it with FOFOA’s point of view. See, for example, Euro Gold, Party Like It’s MTM Time, Reference Point Gold Update 1 and Reference Point Revolution.


In order to illustrate this effect, let us assume that the official US gold price and the free market price in Euros diverge considerably. We estimate that the US$ and the € presently have purchasing power parity at an exchange rate of US$ 1.20 per € 1.00. As a very rough simplification, let us say that one hour of labour costs € 30.00 in the Euro zone and, at parity, it costs the same amount in the United States: US$ 36.00. Also at parity, the official US gold price of US$ 7000 per ounce corresponds to € 5833 per ounce. Let us further assume the free market price of gold in the Euro zone differs substantially: € 8750 per ounce.

Firstly, there is the obvious arbitrage: The smart money in the Euro zone can simply take € 5833, exchange them for US$ 7000 in the foreign exchange market, go straight to the Federal Reserve and redeem this sum for one ounce of gold which is immediately shipped back to Europe. There is therefore a continuous flow of gold from the United States to Europe unless the currency exchange rate adjusts to $US 0.80 per € 1.00. This is the exchange rate at which the official US price of gold of US$ 7000 per ounce agrees with the European free market price of € 8750 per ounce.

Although this adjustment of the exchange rate indeed eliminates the arbitrage opportunity, it does not stop the outflow of gold from the United States to Europe. The problem is that the currency exchange rate now deviates from the purchasing power parity of US$ 1.20 per € 1.00. At the no-gold-arbitrage exchange rate of US$ 0.80 per € 1.00, one hour of European labour can be offered in the United States for US$ 24.00 whereas American labour still costs US$ 36.00 per hour. The United States therefore run an increasing trade deficit compared with the Euro zone. Under the proposed gold standard, the Europeans who initially receive US$ for their exports, can immediately cash in and redeem their US$ for gold.

The flow of gold from the United States to Europe therefore persists regardless of the currency exchange rate. If it is not a consequence of direct price arbitrage, then it follows from an imbalance of the trade accounts. In either case, physical gold reserves are drained from the United States...


We see that the arrangement that is now proposed by Rickards, basically used to exist during the Bretton Woods period. In the late 1950s, the credit volume in US dollars was already growing so quickly that the official US gold price and the free market price of gold outside the United States started to diverge. Although the Western European allies helped to stabilize the gold standard, it inevitably failed because of the arbitrage and the trade imbalances sketched above. If a gold standard of this type is established again while a major trade block openly advertises a free market price of gold, it would probably collapse even sooner than it did in the 1960s.

In 1971, the United States chose to terminate the gold convertibility of the US dollar rather than to revalue gold in US dollars. We refer to FOFOA’s It’s the Flow, Stupid for the reasoning that lead to this decision. Finally, please see his Once Upon A Time for more details on the London Gold Pool.

Side Note:

In fairness to Jim, Rickards/FOFOA reader Aquilus asked Jim at a book signing event about a fixed versus floating gold price. Because Aquilus knows that I, too, appreciate Jim's work, he emailed me the following report:

"The more interesting part is that I had been trying to get him to give me a straight answer on the notion (from his book) that once gold is revalued to "the right price" the Fed would then step in and defend that price (in a narrow range). He had been avoiding a straight answer for months, but I finally got one yesterday while he was signing the book - in a short one on one conversation.

When I asked him how he could seriously believe that a fixed price could be defended when dollars continue to be issued and credit created, and how that would be different from the old London Gold Pool, he smiled and said, "no, no, you see, the defended price would indeed have to change every year or else it would not work."

So, basically, he's still somewhere in the "we can semi-control" the price with this Fed-defense of an adjustable price, as far as I can tell."

UPDATE: Also see Blondie's comments right under the post. Thanks for sharing, Blondie.

…The ECB, however, which does not guarantee a redemption of the Euro for a fixed weight of gold, can engage in various types of Gold Open Market Operations.

Firstly, in absence of a liquid market for physical gold in Euros, the ECB can act as a market maker and, say, bid for a fixed weight of gold at € 8745 per ounce and offer to sell a fixed weight at € 8755. If they bid for and offer more than 10 tonnes each at any time, they are able to make a liquid market for physical gold in Euros, a market in which other central banks can trade the quantities that typically arise in the settlement of international trade balances. As soon as it turns out that there is more weight of gold sold than it is bought (or vice versa), the ECB adjusts the bid and offer prices accordingly. This amounts to assisting the price discovery for large quantities of physical gold while the reserve of the Eurosystem remains essentially unchanged.

Let us stress that as of February 2012, there exists no liquid private market for physical gold in € in which bid and offer would be quoted for tranches of 10 tonnes or more at any time. In fact, this is apparently not even possible in the London market in which gold is traded in US$:

James G. Rickards, Currency Wars, page 26:
In ordinary gold trading, a large bloc trade of as little as ten tons would have to be arranged in utmost secrecy in order not to send the market price through the roof [...]

Secondly, the ECB can manage a dirty float of the gold price in order to smooth fluctuations in the currency exchange rates, in order to influence the domestic price level, or even in order to affect the competitiveness of goods and services from the Euro zone in the international market. If they expand the monetary base and purchase gold in the private market, they lower the exchange rate of the Euro relative to gold, creating domestic consumer price inflation and rendering exports more competitive and imports more expensive. Conversely, if they sell a part of their gold reserve and cancel the base money they receive, they raise the exchange rate of the Euro relative to gold, reducing consumer price inflation and rendering exports less competitive and imports cheaper.

In particular, if things ever turned hostile, for example because not only a book author but also some government officials started talking about ‘confiscating’ the gold owned by foreign countries, the dirty float could be used in order to terminate Rickards’ experiment with the new gold standard in the United States at any time, simply by expanding the monetary base in € and purchasing physical gold in the open market. This operation is always possible because it relies only on the ability to expand the € money supply, but does not require any existing official gold reserve. In fact, any major currency area or trade block who exports enough goods and services for which there exists a global demand, can make this move. So far, none of them has.


It should be clear from Sections 2 and 3 above that it is the high price of gold in terms of US$ or € that inspires confidence in these currencies rather than the question of whether the currency unit is redeemable for a fixed weight of gold. (There is one caveat though: as long as the US gold reserve is owned by the highly indebted government rather than by the Federal Reserve, it will never inspire the full possible confidence.)


Let us summarize what is the key point of Rickards’ proposal to return to a gold standard at a substantially higher price of gold in US dollars. It is not the idea of the gold standard that the currency unit would be backed by a fixed weight of gold. This would not be sustainable in the long run, and it would eventually fail for the same reasons for which the London Gold Pool failed. It is rather the revaluation of gold in US dollar terms that inspires confidence and that addresses many of the present issues such as recapitalizing the banking system.

We finally refer to FOFOA’s How is that Different From Freegold for another response to a very similar question.

Nice work once again, Victor! As Ari would say, it's good to have help carrying this water. B^D



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Alien said...


if istory is a guide for present have a look at ths outstanding piece.
A small teaser remarkable alike to our times:

In Italy itself, these bankers loaned aggressively to farmers and to merchants and other owners of land, often with the ultimate purpose of owning that land. This led by the 1330’s to the wildfire spread of the infamous practice of “perpetual rents,” whereby farmers calculated the lifetime rent-value of their land and sold that value to a bank for cash for expenses, virtually guaranteeing that they would lose the land to that bank. As the historian Raymond de Roover demonstrated, the practices by which the Fourteenth-century banks avoided the open crime of usury, were worse than usury.

In the Italian city-states themselves, the early years of the Fourteenth century saw the assignment of more and more of the revenues of the primary taxes (gabelle, or sales and excise taxes) to the bankers and other Guelph Party bondholders. From about 1315, the Guelph abolished the income taxes (estimi) in the city, but increased them on the surrounding rural areas, into which they had expanded their authority. Thus, the bankers, merchants, and wealthy Guelph aristocrats did not pay taxes—instead, they made loans (prestanze) to the city and commune governments. In Florence, for example, the effective interest rate on this Monte (“mound” of debt) had reached 15 percent by 1342; the city debt was 1,800,000 gold florins, and no clerical complaints against this usury were being raised. The gabelle taxes were pledged for six years in advance to the bondholders. At that point, Duke Walter of Brienne, who had briefly become dictator of Florence, cancelled all revenue assignments to the bankers (i.e., defaulted, exactly like Edward III).

costata said...

The Coming Struggle Over Mediterranean Oil

By William Engdahl

RJPadavona said...

Hello Friends,

Just something for us to think about:

As most of us know, August 13th, 1971 was the day that high ranking Treasury officials met at Camp David to sever the dollar's remaining link to gold.

Lo and behold, what was in the news today? The G-8 Summit which was supposed to be held in Chicago with Obama's homies has suddenly had a change of venue. That's right, the G-8 are now meeting at Camp David on May 18-19:

This is probably a long shot and just a coincidence. But with all the crazy action in the gold markets lately, one can't help but wonder if they're finally starting to lose control of the current system and are meeting at Camp David to get their stories straight before the Big Reset.

Truth be known, it's probably just a ploy by President Smooth Operator to get the Eurotrash politicians all warm and cozy at Camp Shangri-La. You know, get 'em all lubed up, so he can beg them to allow the $IMFS to continue for just a few more years.

I expect Obama's pitch to look something like this:

Or it's possible he's not the Smooth Operator I think he is and could sound even more gay than Morrisey as he's begging for mercy:



Nickelsaver said...


FWIW, I live and work in Chicago. Word is that Obama's buddy, the new Chicago Mayor "Rahm Emanuel" warned him that security would be a major problem. Chicago seems to have a bit of a reputation for certain types of violence. Not that I have witnessed any ;-) Go figure

Anonymous said...


I'd say this is nothing remarkable. Camp David is a popular venue for all things diplomatic:


Anonymous said...

I was getting a bit impatient with the ECB because they pumped so much liquidity into the banking system (LTRO), and you can plainly see from the bond yields that the banks did purchase government debt with that money. (although they might still deliver the Greek default I am waiting for)

But now Zero-Hedge writes

that they require a cash margin form their borrowers. Perhaps they do have some teeth. While everyone is enthusiastic about the ECB eventually printing a substantial amount of money, they might just start draining the very same money through the back door.


Nickelsaver said...

A lot of discussion on what might be the final nail in the $IMFS coffin - perhaps that nail comes from beyond this world.

1 in 8 chance of solar megastorm by 2014

JR said...

"Okay, so she’s not a slut."

Nickelsaver said...


Did a little research, found a way to search comments very easily.

Came across this gem on 8/12/11

Hey, Rube!

It must suck to have such a limited reading comprehension. I do admire your courage and dedication in forging ahead despite your significant disability!

Got to admire your consistency!

I do however acknowledge your superior grasp of all things FOFOA.

And as such, I would work to one day be considered a protégé.


Your Nephew

Alien said...

VTC& Costata

Default AND no ESM, margin calls from ECB, what do you think about this constellation?

Woland said...

I have been rereading some old print out's from the
archives, recently, and was reminded of a minor
favorite of mine by FOA. In light of the currently
incomplete 3rd COMEX smack down, since the $1913 top last year, it is worth revisiting.

FOA: "It is easy to become addicted to technical analysis, a useful and powerful market tool. Our
"addiction" makes it (TA) a useful and powerful
tool for strategic planners, whose purpose is not
make money, but rather to execute strategic
plans. Me: A small, easily movable market, like
Comex gold, can be pushed or pulled to create
strategically significant technical patterns, or
reach tecnically "significant" levels, where the
technical traders do the bidding of the "strategic
planners". Kind of financial Jiu Jitsu.

In light of this, as one looks at the past 6 or 9
month chart, I think you can see a larger story
being written for our consumption. Whether it
is the last story before bed time I do not know,
but it looks to be trying to tell of a head and
shoulders top, with lower highs and lower lows,
as it attempts to break the 200 day moving
average. I hope it does, as I need to complete
my full commitment, and they still sell real
gold at these unreal prices. I just wish I could
read the handwriting.

Edwardo said...

For RLP, at least I think it should be for RLP.

JR said...

Costata's the uncle.

I'm a prickly juvenile at best.


"Hey, Rube!" is a slang phrase most commonly used in the United States by circus and travelling carnival workers ("carnies"), with origins in the middle 19th century. It is a rallying call, or a cry for help, used by carnies in a fight with outsiders.


When a carnie was attacked or in trouble, he would yell "Hey, Rube!" and all carnies in earshot would rush to his aid. Circus pioneer and legendary clown Dan Rice called it "a terrible cry, [meaning] as no other expression in the language does, that a fierce deadly fight is on, that men who are far away from home [travelling circus workers] must band together in a struggle that means life or death to them."[1],_Rube!

See how it makes sense to consistently (if not always with the comma) use it when people are getting adrift of message?

P.S. - plus one of my favorite authors wrote a longstanding column under that title, and his conception of it as in part representing a rallying cry for like-minded individuals is not lost on me.


"Okay, so she’s not a slut."

Is in response to the ZH article VtC posted. It is a quote from Rush Limbaugh's recent bombastic brouhaha of backtracking to make a funny about how ZH is (perhaps for a fleeting moment) also backtracking in its rhetoric and assessment of the ECB and its separation from the nation state. Maybe the ECB is not the "monetary slut" for the "socialist PIIGS" and the "greedy bankers" etc. that ZH would have us believe. Maybe :)

Bjorn said...


Regarding the technicals, my opinion is that the "gold" price is VERY well behaved technically, which to my mind indicates that it is indeed managed as that FOA-quote and a lot of other evidence of later date points to.

I think you will find over the next couple of months that it will complete a reverse head and shoulders, very much like in 2008-2009 only faster, setting it up for a lunge to $2000 later in the summer or perhaps fall, where it will bounce a bit before going on to.... who knows maybe even 2333?

I´ve had a lot of fun and actually more success than failiure predicting PoG moves in the medium term, over the last couple of years, and at the moment I´m looking for a bottom around, or slightly below 1600 in march or april at the latest.

Not that I have the guts to wait for any bottoms when I have fiat to save... This is strictly for entertainment purposes. :-) And besides, even if I do get the dollar chart right most of the time, im usually completely off base trying to predict the SEK-gold movements (which is what matters to me).

Nickelsaver said...


Nice Zappa reference.

Memories of junior high rushing to the forefront. What a whacked out meritocracy that was. [Shudders at the thought]

ampmfix said...

Hey Nickel,

Oh yes Zappa! loved it 30 years ago and love it now, no more intelligent vanguard jazz/rock like that anymore, in fact here's a piece that might have to do with the paper gold trail we don't want to follow (yellow snow trail ;0)...).

Edwardo said...

This came to me attention recently. So here it is for your consideration. I'm not a client.

Aquilus said...

From the Financial Times via ZH - the glacial pace of confidence deflation in the dollar continues unabated:

China Moves To Further Marginalize Dollar - Offers CNY-Denominated BRIC Loans

Motley Fool said...


Well since China is insistent on being pegged to the dollar (for good reason), it makes sense that they want to diversify their avenues for getting rid of yuan. A international holding of yuan would help curb their imported inflation somewhat, similarly to what the dollar reserves do for the US.


Aquilus said...


Here's the picture I have:
For every item exported to the US that a Chinese company produces, they receive $ converted to the corresponding number of Yuan.

The US exports inflation when they flood the Chinese market with $ in return for physical items, and a flood of new yuan appears in the Chinese economy.

Now if I understand the FT article, if China gives out yuan loans, and use the yuan directly for trading, it makes sense to me that those yuan will be used to buy Chinese goods by companies that take the loans out - so the yuan come back to China.

Maybe some Chinese companies can buy raw materials directly in yuan, but I don't see them using the US model of exporting inflation by importing goods based on cheap foreign labor. That's because they mostly import raw material, and labor price is part of the world commodity price.

If the hot money (in yuan) looking for a place to be invested could be invested abroad instead of say the local property or stock market, that would reduce inflationary pressures, but I don't think that's the case here.

Am I making sense, or did I veer off on some crazy tangent?

Motley Fool said...


You are not wrong, but there is a time lag involved, which already helps...and the obvious hope for future revolving bonds in yuan held as reserves...which would take up some of that imported inflation.


Aquilus said...


Ok, let me paint this picture then:

To tame inflation inside China, they need to find a home for the new yuan created by China's exports.

Currently there are a few avenues for folks inside China: invest in a business, buy property, buy stocks inside China, hoard industrial commodities, and buy precious metals.

For some lucky ones, they can re-convert the yuan into $,EUR, etc. and buy assets outside of China (that relieves inflation).

Now, as I see it, if you can create a credible bond market in yuan INSIDE China, where you convince your people to park their extra savings in, then OK, you reduce inflation.

What I cannot really see is this:
Say Brazil, turns their yuan into Chinese bonds as reserves, and therefore hands China the yuan for that paper. Ok, so China uses "credit" yuan to cover their deficit with Brazil, but how does this help their internal inflation (cause by $yuan from exports). At least, paying for Brazil's commodities in dollars, reduced the number of yuan needed to be issued internally, but if they create more yuan to lend out to Brazil, and they come back as part of bond purchases, does that not increase the problem?

Now if China could buy gold directly with their yuan, ok I see the advantage - but how realistic is that?

Somewhere I miss your point...

JR said...

One way to view the old gold window is that it sterilized dollars - people gave dollars to the G for gold. Thus dollars were thus taken out of circulation. In the 1970s the US left the gold standard for this reason - to allow the $ price of oil to rise by removing the USG as a sink to absorb all those dollar looking for gold. The dollars would now bid on gold on the open market and stay in circulation.

China selling bonds in return for dollars is do something similar - tkaing yuan out of circulation.

From Moneyness, think about the idea of base money. When a G deficit spends base money increases (towards Zimbabwe), when it taxes or sells debt base money decreases (away from Zimbabwe)

So the volume of the base is expanded when the government spends, and it is likewise contracted when the government taxes and/or sells Treasuries to the private sector (including our trade partners like China). But when the government spends in excess of those two operations (taxing and debt selling), the base volume is simply expanded.


When the private sector (plus our foreign free stuff suppliers) buy bonds, the USG is essentially spending credit money rather than expanding the base because "the credit to the reserve account of their banks" that Randall Wray mentioned above is deleted when the private/foreign sector buys a Treasury bond. Spending credit money does not dilute the base and debase the reference unit. But when the people (or banks) that bought those bonds swap them with the Fed for cash, the base is diluted and the reference unit is debased.


Here's the thing, the act of government deficit spending without either counterbalancing taxes or Treasury sales to the private/foreign sector, and the act of Fed quantitative easing, both change the nature of the money supply in a way that all other "normal" activities do not. They debase "our money" by expanding "their money" in volume to ease their discomfort.


Government money, which is the monetary base the economy uses as its reference unit, is expanded when the USG spends, and only contracts when you either 1. pay taxes, or 2. buy Treasuries.


As MMT explains, the base is expanded when the government deficit spends, and it is likewise contracted when the Treasury sells debt to anyone other than the Fed.

Good comments from Michael H too starting around here.

JR said...

So when a government sells debt they takes their currency out of circulation (whether the currency comes from their people or their foreign trading partners buying debt), yes?

JR said...


China selling bonds in return for dollars is do something similar - tkaing yuan out of circulation.

should be

China selling bonds in return for yuan is do something similar - taking yuan out of circulation.

Edwardo said...


Nickelsaver said...

Perhaps someone here can help me.

Looking for suggested reading material on currency, banking, and modern monetary operations, as in college 101. I want to understand what the __ you guys are talking about.

Thanks in advance

FOFOA said...

Hey Nick,

I must admit I haven't read it yet, but it's sitting on my nightstand thanks to a gracious reader who recently sent me a paperback copy after I mentioned it in an email… Economics in One Lesson. Not that I think I need the information in it, but I heard it's really good. Maybe someone who has read it (JR?) can give us a freegoldish review. ;)


FOFOA said...

Here's another one I recommend. I did read this one (sent to me by the same reader). While Hazlitt's book (1946) is about economic fallacies, Pick's book (1985) is about currencies and gold. The Triumph of Gold


Motley Fool said...


I have read economics in one lessen a few times, though not lately. It is a excellent book, but would not address Nick's questions.

It is also of little relevance to FreeGold, I'd say, except to note that it also does not take political will into account.

Still, a excellent book, and I would highly recommend it to anyone who wants a broad overview of commonsense economics.


FOFOA said...

Thanks MF! I assume Nick is asking for someone who is not reading my blog. If he's asking for himself, then the book he seeks likely does not exist. What do you think? ;)

Motley Fool said...


Well perhaps one does, who can say. I however do not know of one, sorry Nick. What little I know I picked up from reading and thinking about economics for years.

While on the topic, you should take the time to read that book by Hazlitt. I am certain you will enjoy it immensely as his thought process is similar to your own. It is also only about 80 pages, so not more than a hour's read, and broken up nicely into chapters for easy piecemeal digestion. :P


Nickelsaver said...


Thank you for the suggestions

and yes, it is for me.

FOFOA said...

Here's another good author. But don't expect to find Freegold in the books. ;) Titles:

Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System

Global Imbalances and the Lessons of Bretton Woods

Capital Flows and Crises

China, Asia, and the New World Economy

Gold Standard In Theory & History

Emerging Giants: China and India in the World Economy

The World Economy after the Global Crisis : A New Economic Order for the 21st Century (World Scientific Studies in International Economics)

Amazon link

If you're looking for Freegold in books, you might want to try Jacques Rueff!


Nickelsaver said...

Actually what I'm looking for is just a working knowledge of how the markets, CB's, BB's, etc., function.

I get very lost in the conversations here.

Nickelsaver said...


i got a good list, going to make my way to the library


FOFOA said...

"Actually what I'm looking for is just a working knowledge of how the markets, CB's, BB's, etc., function."

Welcome to the party!

Bjorn said...

One more book tip:

You can also order it quite cheaply in hardback from for more comfortable reading...

Some of the other lectures are a bit rambling at times I thought, but Prices and Production is a must read, as well as "The paradox of saving" imho.

More as a foundation for general economics understanding than specifically CB-BB operation of course but it´s helped my own thinking a lot.

Bjorn said...

Oh, but do read Economics in one lesson (Hazlitt) first. Its a lot easier to digest, and then you can move up a level so to speak. :-)

And when you have read all that you will probably STILL feel stupid sometimes when VTC, Costata, JR and the rest of them goes rampaging on the forum. I know I still do after 5 years of trying to educate myself.

dragonfly said...


I'd be reluctant to post a link to anything written by Bill Engdahl. Everything he writes has the NWO spin he learned from two decades with the LaRouche organization. He may have renounced their anti-semitism, but not their crypto-plagiarism, as a thorough read of his reference links will verify. He cherry-picks with a deft hand, to further his version of connect-the-dots fear mongering. His last reference, number 17, is a much better read than his own article. Do an Amazon search of the books he's written to confirm the NWO assertion.

Some say he was only with LaRouche for 20 years - see - but this article on the BIS from 1999 suggests that psychologically he hadn't made the break, even after leaving for a solo career.

The madness incurred from dancing to LaRouche's tune in the 70's, 80's and 90's is still there, if one cares to look for it. He's found a new home over at - which might tell you all you need to know about his present state of mind. Just sayin' - Cheers

dragonfly said...


The same caution as referenced in my post to costata applies to your link to the Shiller Institute, another front organization of Lyndon LaRouche. Paul Gallagher, the author of that article, was sentenced to 34 years in jail for fraud in 1989 (Virginia).

While far from complete, the following Wiki link should get your attention.


Alien said...

John Fry

I don`t give a F..K about justice courts these days and I plenty spit on the term "antisemitism".

I use my judgement to understand things and don`t enroll right or left. If you are American you should understand that.

Alien said...

... and btw I also don`t consult Wikiliesshit but only if I am constraint.
Well, maybe when in hurry and need to look up on monuments, museums.

Alien said...

John Fry

read some data about prison industry in USSA. Corzine is free und unpunished and you tell me about justice. LOL!!!

I regard it as highly interesting when such a gubernmint credulous person as you look like gets involved with the subject of this blog and I hate it when people try to impose thinking in patterns.

costata said...

John Fry,

I hear you in regard to the idealogical and political orientation. That said, I think the Engdahl piece on the energy politics and machinations in the Med accurately dscribes the situation.


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

Please, sir, may I have some more (base money).

People of a certain bent, love Jim Grant, and while there are absolutely things to admire in his perspective, he is, still, a hard money advocate as near as I can tell.

In the meantime, I'm going to go out on a limb with the notion that the bounce over the last two days (in
risk on assets like shares and paper gold) is primarily down to The Fed's latest gambit.

dragonfly said...

It's not that I don't love a good conspiracy theory, especially one involving the "gubernmint" as you say, but what I'm trying to point out is that the LaRouche material is beyond conspiratorial, it is downright psychotic. It might take a person 30 years of reading to actually understand that assessment, but so be it. They have flipped from left to right and back again so many times it's like watching a high-stakes ping-pong game. The easy conclusion is that their research and political agitation simply go to the highest bidder - slanderous wrecking-balls for hire.

I do think there are many conspiracies afoot, but the one we see generalized as The NWO is a fear-based, delusional caricature that pathetically attempts to simplify a very complex world.

I feel your angst about Corzine, and the lack of effective justice here in the states. But that doesn't exonerate Gallagher in the least. LaRouche and his bunch have muddied the political waters to an extreme degree for decades, and destroyed more lives than you can count. That is a plain fact, evident to anyone with a lick of sense. To propagate their world-view is a destructive tendency for anyone seeking actual solutions to the world's woes.


Nickelsaver said...

Edwardo, John Fry, Alien,

People of a certain bent, love Jim Grant, and while there are absolutely things to admire in his perspective, he is, still, a hard money advocate as near as I can tell.

I would assume that most world views are from either a "hard" or "easy" money perspective. Until I found this blog (4 months ago), I had no idea there was a 3rd alternative.

As far as LaRouche, I've had a pretty good understanding of his whacked out agenda going back to the days when he used to run for president. (Is he still trying to do that?)

What was that quote again...It is the mark of an educated mind to be able to entertain a thought without accepting it. - Aristotle

I suppose that I should consider myself fortunate, in that I have not read a lot on this subject before finding this blog. It gives me the advantage of understanding various "thoughts" more clearly as I "consider" them.

Which begs the question, Is it better to approach with a bias or not? I say it cannot be helped. The only thing that one can do is to attempt to understand their own bias.

DP said...

IMO the biggest problem for people who have "read a lot on this subject before" (whatever the subject) is they believe they know everything already and are the expert that is educating you, not the other way around. So they don't bother to consider alternative viewpoints on the subject. When you send people links directly, check the stats on it -- I bet you 9 times out of 10 they haven't even clicked it by the time they next respond.


DP said...

I ain't wise,
I'm just a blagger.
I just just hide,
Behind jokes'n'swagger.
But can't you see,
That we're skipping down.
The garden path.

Nickelsaver said...


How right you are. In fact, I think there is something more at play in that phenomenon.

The contrast between wanting to be respected or thought well of -vs- wanting to learn.

Pride can be an obstacle. Growth necessitates a certain level of humility and self awareness.

But reality is, we are all bipolar in that regard, IMO.

DP said...


This is why it works so well with FO/FO/A being anonymous. There is no problem of anyone taking their opinions seriously/not based on what they think they know already about them. If people don't know who you are, they can't prejudge what you say.

DP said...

Speaking of "the contrast between wanting to be respected or thought well of -vs- wanting to learn"... we haven't heard anything from Ash since he implied he might agree us after all.

Alien said...

John Fry

Engdahl might make a quick buck being some kind of a populist. NWO is so stupid a word I cannot even hear it but depending on the terminology you use there cannot be denied that "conspiracies" are and were everywhere.
Concerning LaRouche. I don`t care to get implicated in this subject as it is not my sphere of interest and I have no solution for the world save Ron Paul for a start. He is not perfect but there are worse proposals.

Have you been to Toscany and Venice?
I have an idea that the historical data in that piece are quite accurate.

Nickelsaver said...

Another resource that I would love to see similar to this Glossary of FOFOA Acronyms would be a full blown glossary of terms.

Robert LeRoy Parker said...

If people don't know who you are, they can't prejudge what you say.

I strongly disagree with that statement.

DP said...

RLP, no show in UK :(

Jeff said...

What if 'dollarized' small economies find the dollar to be not a harder currency after all?

costata said...


Interesting anecdote. Thank you.

Robert LeRoy Parker said...

Well that sucks.

Maybe some boat music to forget about it.

JR said...

+1 for Yacht rock love!

JR said...

Yacht rock rocks, lol.

RJPadavona said...

Hello Nickelsaver,

Followers of this blog have arrived at this destination via many different routes: Austrian, Monetarist, Keynesian, or MMT to name a few.

The two extremes are the hard money camp (Austrian) and the easy money camp (MMT). I've found that the truth lies somewhere in the middle of the extremes. It is only because of A/FOA/FOFOA that I was able to take off the rose colored glasses and see a light as bright as the one seen by Paul (not Ron).

Given what you already know, it should be easy for you to filter through the bullshit and find usefulness in what you can learn from the two extremes.

Economics in One Lesson by Hazlitt is a great book and I would suggest reading it, but I don't think it's exactly what you're looking for. It mostly covers the basics like the broken window fallacy, etc.

I think reading Rothbard's "What Has Gov't Done To Our Money" and "The Mystery of Banking" is more what you're looking for. I would also recommend reading "Gold Wars" by Ferdinand Lips.

On the MMT reading list, I would just suggest going to and going through some of the articles. They do a pretty good job of explaining how debt, credit, and money actually function in the modern world. FOFOA covered a lot of this in "Moneyness".

I still have a lot to learn and I learn more every time I visit this site, whether it be in the articles or the comments. I'm sure others will have even better recommend reading for you. I hope I've been of some help.


Try not to confuse DP with this yacht music stuff. I think this is his idea of yacht music :-)


Anonymous said...

I don't know how final the figures are, but it seems I will not get my default this time. So let's move on to the next target.

People have been shorting the Yen for decades and have kept losing money. But this does not look very good.

Is it just because of the strong Yen?


Robert LeRoy Parker said...
This comment has been removed by the author.
Zebedee said...
This comment has been removed by the author.
Edwardo said...


I believe, for quite some time, Kyle Bass (and I imagine Hugh Hendry) have had their gimlet eyes on Japan, in particular, as the place that will cause, what I call, The Global Grand Wobble, to intensify. The quake and Fukushima catastrophe that ensued may have accelerated that process

JR said...

So you're like where is vtc?

Killing it abroad is what this guy is up to. Don't miss it! Here's a random quick sample:


JR said...


I was hoping since that one is from his island, but I see. Oh well, to err is to be me. Do you think he knows Norway? :)

Motley Fool said...


Personally I do not have the time and energy to walk into that minefield of confusion.

Restecpa. :P


Anonymous said...


How many dead, what do you think?


Motley Fool said...

VtC would be nice if FreeGold could be explained in a few sentences...which it can; the problem is that justification takes (p)ages.

Perhaps you have given the open-minded enough to think for themselves and read some more.

One can hope.


Yannick said...


Ahah you did a killing!

Read what you wrote in TF, your writing style is very good, directly to the point, and more accessible for newbies than the writings here (does not have high prerequisites).
You should try to submit to TF a small guest post on the critical point of the paper-physical divergence (that you have basically already done). It should hopefully ring a bell to the more open minded persons.

Nickelsaver said...

From JR's Victor(y) list

#3 KWN and all these cheerleaders
Submitted by victorthecleaner on March 6, 2012 - 8:15pm.

...The problem is that unless someone decides to unwind this market by printing US$ and using them to buy up physical gold and silver in the market and thereby increase the reserve ratio of the banks, the short squeeze will never happen.

What is way more likely to happen is that one day, there is a run on the (bullion) bank, and they run out of physical reserves. The problem is that you will not get a short squeeze in this case. Rather, all trading will stop. Markets will remain closed, banks may remain closed for a while, and this will be the end of the US$ based financial system as we know it.

In other words. The FED ain't gonna commit hari-kari, they are going to be murdered.

Anonymous said...

I think it is enough. Everyone who cares should have more than enough information to find their way here.

Also, MF is right, it is very tiring and takes too much time. What I found somewhat instructive though is the reactions I got.

I think I have leant that the transition will be induced by the giants, not by the shrimps.


Aaron said...

Good god, Victor. You are a very patient man. Some of my favorite comments from those you've been chatting with.

Submitted by Hayman on March 8, 2012 - 5:15pm
"We currently can save in gold and spend in dollars. That is nearly freegold (don't let your baggage get in the way now)"

Bzzzz - wrong.

Submitted by worldend666 on March 8, 2012 - 5:31pm.
I don't understand why you think there would be hyperinflation? If you print crazy amounts of money you get hyperinflation. If you don't do that, then you don't get hyperinflation.

Bzzz - wrong.

Submitted by cpnscarlet on March 8, 2012 - 5:44pm.
I'll go further to say that a man who is trusted in his own community can theoretically make his own notes and not need a gov't.

Good luck purchasing anything not manufactured within your local community of trusted friends!

Submitted by tmosley on March 8, 2012 - 6:00pm.
And I didn't say hyperinflation causes wars, I said central banks cause wars. That is, they allow governments to fund military campaigns without having to tax their citizens directly to cover costs.

I would argue it is a nation's savers saving in the wrong store of value that enable those wars.


raptor said...

Did he said that they will enforce max 10% of year production on silver shorts ??

DP said...

Sorry, I just don't like to think about boats since that episode with the scaly man fish...

Jeff said...


A noble effort, but taking freegold to the masses is like Jesus teaching the pharisees, and you would be crucified if you stayed too long. You left a trail of crumbs for those that are inclined to learn but the majority of militant silverbugs and conspiracy theorists will just rage on. Isn't that why FOFOA doesn't broadcast his message beyond this blog?

DP said...

RT @darenpa72 #ISDAofficial Whoomp! Here she is:

JR said...

A brave effort Victor!

JR said...


DP said...

Ahem. I managed to munge the link I posted earlier (by stupidly not including the http:// prefix) to the ISDA announcement. Ooops. :-)

Sure you all found it for yourselves by now anyway.

Aquilus said...

ISDA auction rules and games for the curious:

1. Federal Reserve Bank of New York Staff Reports - Credit Default Swap Auctions

2. ZH 2009 - The ISDA CDS Settlement Auction is A Hidden Goldmine for Cash-Rich Accounts

Relevant extract:

The auction process has two stages (we provide a detailed numerical example in Box 1
based on the Lehman bankruptcy).

In stage one, dealers post bid and offer prices for the underlying debt for a pre-defined amount and a pre-defined spread (the amount may vary by auction) resulting in an initial recovery rate (inside market mid-point). The initial rate is used to constrain the final (second stage) auction price. In addition, participants who wish to
physically settle make requests to buy or sell debt at the final (second-stage) price. Then, the
open interest (the net of buy and sell requests) is calculated.

The first stage process is typically completed in 15 minutes. Within 30 minutes of the end of the first period, Markit (a major vendor of CDS data) publishes on a number of metrics from the first stage auction, of which the key ones are:
-The inside market mid-point (average of the highest offers and the lowest bids)
-The size and direction of open interest

Following publication of the initial results, dealers have two to three hours to decide whether to submit limit orders (i.e. orders to buy or sell an amount at a firm price) for the second part of the auction, and at what terms. If the open interest is zero, then there are no limit orders and the final recovery price is equal to the initial market mid-point. If the open interest is to sell (buy), then dealers place new limit orders to buy (sell). In addition, the open interest in the first stage is carried over into the second stage of the auction as limit orders.

At the second stage Dutch auction, the open interest is matched to the limit orders to establish a price that eliminates the excess demand for or supply of bonds. If the open interest is to buy, the lowest ‘sell’ limit order submitted is matched to the amount of open interest equal to the size of the limit order. For example, if the limit order is to sell $10m of bonds, then this is matched against $10m of open interest to buy. If the open interest is to sell, then the highest ‘buy’ limit orders are used. The next step is to take the second lowest sell order (in the case of buy open interest) or the second highest buy order (when the open interest is to sell) and match these. The process continues until all the open interest is matched, or the limit orders are exhausted. In the former case, the last limit order used to match against the open interest is the final price. If the limit orders are exhausted, then the final price is the par when the open interest is to buy and zero when open interest is to sell. The second stage auction price is the final recovery price.

Aquilus said...


From hundreds of comments ago, on China inflation, if I have time, I'll follow up.

Your quotes about sale of debt reducing base money/inflation possibility were on point as usual - 100% agreed. I just have some further possibilities I'd like to put out.

We'll see how much time I get, and thanks for yours.

Anonymous said...

Concerning the CDS payout because of Greece, it is difficult to guess how big this issue will be. As far as I remember, many (all?) of them are marked-to-market, i.e. they are dangerous if their market price changes quickly and the issuer suddenly needs to post more collateral. When they are finally closed or paid out, the cash is already there, it is just that that is the time when the profit is booked. At least with Lehman, this was the case. The final CDS auction was a non-event.

Zero-Hedge has some nice quotes from the German foreign and finance secretaries:

There are new centers of power in the world.

wanted an amendment to incorporate tighter regional oversight of government spending and allow the European Court of Justice to strike down a member's laws if they violated fiscal discipline.


Wendy said...

Has anyone read Jim Sinclair's comments about Greece's "credit event"?

"Clearly, the amount of CDS’s outstanding is infinitely more than the $3.5 billion that is being quoted.”

Jim Sinclair continues:

“The BIS confirms, in the area of CDS’s the total outstanding is approximately $37 trillion. So I believe the reports being given about this just being a small and modest market event is false. As a market observer and having more than 50 years in the business, the real number is at least 50% or more of the existing $37 trillion that is related to Greece."

Is this it?!?

Anonymous said...


as I said, I don't think so. I am not sure Jim Sinclair has all the details about the CDS. As far as I know (although I am not an expert on this either), many of these are marked-to-market. So whenever their market price changes, one party has to transfer cash to the other.

When the CDS finally settle, this just makes the profit/loss official, but the cash has already been transferred when their prices went up during the second half of 2011.

Same as with Lehman.


Wendy said...

Thanks Victor,

I remember your previous comment regarding marked to market. I understand the theory of marked to market vs marked to fantasy.

This alphabet soup of derivatives is confusing. I do understand that one can buy a greek bond, and then buy a cds to insure against the failure of the bond to perform. I don't understand why these bonds might be marked to market when most are not, and the practical applications of this.

As someone else mentioned, I too am a technician with no backgroud in economics, however we are great problem solvers and very teachable :D

Anonymous said...


it is the CDS that is marked to market. This means when the market price of the CDS goes up (because people think the default becomes more likely), the issuer of the CDS already transfers cash to the holder.

So the CDS is dangerous when the market prices change rapidly because the CDS issuers suddenly need to come up with the cash.

When the CDS are finally closed, the official profit/loss will be booked. In the case of Lehman, the CDS settlement was a few weeks after the bankruptcy and was entirely boring.

I should say that this is how I understand the CDS work - I have never been involved in trading any.

To all,

I have a question concerning a GATA article about some journalists and apparently a parliamentary committee complaining about lack of an audit of the German gold in NY:

Can one of the German speakers (AD?) tell us exactly was was said, what was claimed and how the German CB responded, i.e. try a word-for-word translation of what they said? (there are a few things that don't make sense to me)



Wendy said...


I will be deleting Panama as a possible "go to retire spot" thanks for the info ;)

Aiionwatha's Nation said...

Big day

Aiionwatha's Nation said...

Also of note, the CDS weren't written against Lehman, LEH was an issuer and conduit.

What JS was saying is that, like a gargantuan fed backstop, if the contracts are called to perform you have hard cash standing in the place of an entity that can no longer deliver real production at the level which flows to the bondholders. Donuts.

Anonymous said...


I was referring to the CDS written on Lehman bonds. They were eventually settled quietly without any problems.

Lehman itself went bankrupt because they had kept the 'super-seniour' part of their mortgage CDOs on their own balance sheet - that's a different story.

IMHO, JS misses the point with the CDS on Greek government bonds. There is no further cash backstop by the Fed (or whomever else) required because all the action happened last year. My guess is that the CDS auction will be rather unremarkable and the eventual payments be minor.

In terms of profit/loss, it may effectively result in some $5bn of losses for U.S. institutions, but this money has already been transferred.

In some sense I got half of my default because Greece forced all holders of bonds subject to Greek law, to participate in the haircut. I still don't fully understand what happens to the bonds under UK law - they might get away. That's a pity.


Anonymous said...

DTCC says gross exposure on CDS on Greek gov bonds is $69bn, net $3.2bn (theoretically, there could be more out there, but if the majority of CDS on Greece were written after 2008, they will know).

Don't know what JS is trying to tell us.


Anonymous said...

Russel Napier, one of the kings of deflation, at Financial Sense


AdvocatusDiaboli said...

Jack Gutt zu BILD: „Es gibt Listen mit allen Barren. Jeder Barren hat eine Nummer, einen Stempel für den Reinheitsgrad des Goldes und ein Siegel.“ Die deutschen Goldbestände können also nach Recht und Gesetz gezählt werden. Im Bundestag wächst der Druck:

Jack Gutt (FED) to BILD: "there do exist lists of all bullion bars. Each bar has a number, a mark of purity and a seal." The german gold holdings can therefore be accounted according to legal messures."
In the german parlament the pressure is rising.

Mißfelder zu BILD: „Es kann nicht sein, dass beim Gold-Vermögen der Deutschen offenbar gegen geltendes Bilanzrecht verstoßen wird. Das ist ein Fall für das Parlament. Ich fordere eine klare Bestandsaufnahme.“

Missfelder (CDU, memember of the german parlament): "It is not exceptable that concerning the gold ownings of the germans, accounting rules and laws are violated. This is a case for the parlament. I demand a clear accounting"
Is this interesting info? NO, except that it appears that serial number lists do exist. The regular BS we get in Germany over the last 40yrs. If you are interested in details, there are better onces on GATA about Lars Schall contacting the FED.
What is really new is that the BILD newspaper gets involved. Because this is the proletarian sensation seeking newspaper number one, everybody reads it.
Greets, AD

AdvocatusDiaboli said...

having said that: Forget about the german gold. It is gone and will never ever go back to germany. The german government is just a big fat joke, having no balls at all.

What might be much more interesting are the swiss people:
If I have a little bit of confidence into democracy and the will of the people left, it is with the swiss, since they can launch referendums (see above) and really enforce them, no matter what the political class thinks.
Greets, AD

Edwardo said...

...This means when the market price of the CDS goes up (because people think the default becomes more likely), the issuer of the CDS already transfers cash to the holder.

AKA "margin call."

Anonymous said...


was there a statement by the German CB? Do you have its precise wording? I thought there was something, but now cannot find its anymore (they must have put the article into google translate, so may just be confused)


Anonymous said...


AKA "margin call."

Yes, this is what killed AIG in 2008 - once they lost their AAA, the had to post collateral. Suddenly, this was a lot.

For CDS on Greek government debt, this must have happened around Aug/Sep/Oct 2011. You might see the funding stress in LIBOR (was perhaps too fudged to see).


Edwardo said...

Has anyone (not here necessarily) bothered to point out that the mere fact that entities feel the need to resort to purchasing CDS "protection" is prima facie evidence that debt, including, of course, sovereign debt, is a piss poor place to preserve one's hard earned (or inherited) boodle.

And now the entire CDS paradigm, if one can even describe these fearsome and opaque financial instruments using such an exalted term, has been, in effect, sundered, as a result of all the contortions made in response to the ongoing Greek saga.

Wendy said...


thanks for the "margin call" comment. That makes sense to me.

I also agree that if you have to buy insurance on your neighbors house in order to not lose yours, something is seriously wacked!

JR said...

Hi Edwardo,

Gold: The Ultimate Hedge Fund

Today, the big money is all hedged. Almost no one with a sizable account holds only long position bets. The market isn't balanced by 50% betting on one side and 50% betting on the other. It is balanced within each portfolio through leveraged hedges. And it is the evolution of these hedging instruments that has both extended the life of the dollar like a steroid injection and at the same time, sealed its fate.

During Bretton Woods, foreigners held "good as gold" dollars, "the hard currency", as a hedge against their local currency risks. But once those paper gold derivatives we like to call FRNs grew too numerous, all bets were canceled, conversion denied, and those who still held the paper lost out in the immediate devaluation. The same thing happened 38 years earlier... and the same thing is happening 38 years later!

In the 1970's the liberated physical gold market proved to be an excellent hedge against both currency and default risk. Then in the 1980's we were treated to an amazing growth spurt in electronic exchange traded futures and new global exchanges trading these derivative hedges, ultimately netting more than 90 different futures and futures options exchanges worldwide.

In the early 90's, the dollar saw its match as the Euro was taking shape. To counter this threat it promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar system beyond its ability to serve as a real fiat money system. The whole dollar landscape become just a trading asset arena, evolving away from any meaningful currency use to trade for real goods. It can head in no other direction now because our local economy, the US economic base, cannot possibly service even a tiny fraction of the purchasing power currently held in dollars worldwide.

We are now at the "end time run" in fiat dollar production that will soon crush all hedging vehicles. One item alone, physical gold, because it is the main wealth asset behind the next currency system (see: Central Banks), will outrun everything by a wide margin. No matter the derivative's hold on it! Just like gold to the pre-'71 dollar, paper and physical will soon blast off in opposite directions.

Paper Promise Hedges

The purpose of modern paper hedging instruments is no longer to simply balance a portfolio with opposing bets, but it has instead evolved into a risk dispersion game. Like an insurance company, the writers of these instruments issue highly leveraged promises of protection from the risks inherent (and inevitable) in an unstable and unsustainable system.


JR said...


The two main risks that are hedged today are default and currency risk. The primary instruments for hedging these risks are credit default swaps (CDS) for the former and interest rate swaps (IRS) for the latter. But the sheer number of promises that have been issued (for a fee) has become so large that it has now become the market driving force.

Think about this. The hedges are now guiding the markets. What do you think will happen when they all of a sudden fail to function? The financial world today turns on dollar assets that are all hedged, not just pure bare holdings! Block the hedge markets from performing and the dollar itself is unseated.

Today's Fed policy of saving Wall Street at all costs is in direct opposition to the risk transferring dynamic of derivatives that has kept the dollar alive. Contradictory forces! Of course the alternative would have been almost as devastating, but that's the problem with Catch-22's.

The dollar's structural support system, its very skeleton, its integrated hedging operation has failed. It is no longer a matter of time, it is only a matter of recognition.

Today's dollar is so brittle that it requires a hedging mega-structure so leveraged, so large, and so unstable that it must... MUST collapse under its own weight. Some of it will be replaced with titanium implants (monetized) in an effort to save the banks, much like AIG was "rescued". Other parts will be dumped into a market that wants nothing to do with them in an effort to extract pennies on the dollar. Net effect -- dollar disintegration.

A fiat system cannot exist without a functioning counterweight, and today's mountain of derivatives is failing at this task.

So where does gold fit into all of this?

Well, the gold market is part of this massive derivative complex that is currently counterbalancing and supporting the dollar.


FOA: What doesn't seem to be obvious is the "why for" the paper market grew so large. It grew to dominate because world wide dollar expansion reached its "non hedged" peak. In other words, the dollar's timeline was ending as its ability to produce non price inflationary economic gains came into sight.

In order to push dollar holdings further, international players needed and purchased "paper financial hedges" to balance their risk. Within their total mix of derivative hedges were found "paper gold price hedges"; modern gold derivatives. The important thing to remember is that these positions are not and never will be used to demand physical gold. They are held to buffer financial and currency risk associated with holding any form of dollar based asset. To work, these items don't need to really perform "dollar price movements" in the holders favor as much as they need to be present in the portfolio to act as insurance stickers. In that truth, these paper gold positions act like FDIC insurance at our banks.

While so many of our gold bulls salivate at the prospects of some player calling for delivery and driving the gold derivatives market to the moon; it ain't gonna happen! Our world of dollar based gold derivatives has grown so large and become so integrated into supporting (hedging) international dollar assets, the central banks will band together to crush any delivery drive.


How many postulated, even just a few years ago, that with the fed expanding the money supply by a year to date "one trillion"; that paper gold could not reflect this inflation? This only further confirms that this form of market "hedge" is failing to function for its owners.

Paper gold derivatives became a major force in allowing this last, end time demand for dollars and subsequent surge in its value. This is why Another said it would run way up, even while being inflated, before the end would come.


JR said...


FOA: It's no accident of nature that our world monetary structure embraced derivative expansion as it has over the last ten or twelve years. I think we can say that this modern creation of risk management began around 1988 or so. (It's funny, but I remember living in San Diego and reading a paper about a gold company called Barrick that just started only a few years earlier?)

The record of derivative evolution meshes seamlessly with the recent need for supportive dollar currency measures; a strategy of maintaining a failing system that was ending earlier than expected. Truly, in 1990 no one was going to carry the dollar any further, waiting on the endless delays of Euro creation, without some way to hedge risk. We had hit the end of the dollar's timeline too early; we had missed the mark.

The US could not physically save the dollar then, neither with gold backing nor the production and sale of real goods. The only answer was to let the dollar kill itself while you create an illusion of risk dispersion in the form of derivative protection; a form of backing if you will. With this "illusion of risk dispersion" in hand, called a derivative hedge, the world currency system and its denominated assets, continued on. This "just in time risk management" was and is adopted into every present day currency that carried the dollar as reserve backing.

It's no wonder that Alan Greenspan has commented so often on the need to control derivatives yet has no workable plan to counter their function. Truly this dynamic was created to counter his function and few can understand this! In effect, the dollar was placed on a one way street that required it to be inflated into infinity. All as a means of protecting dollar originators; the US banking system. Dollar leverage, that is actually US liabilities, is now built up endlessly. This all points to a nonstop, end time need for an uncontrollable inflationary expansion by our fed.

In our first real test of "just in time risk management" our Fed is and will provide buying power to gobble up any and all risk, "just in time" and without end. It seems that when our "free market" created assets are threatened to be exposed as an illusion of value, Americans embrace any and every form of government socialistic bailout known to man. Perhaps, our much exampled form of a "free market driven economy" was little more than "free as long as derivative risk is covered with social money"... "just in time".

Now, we will follow this trend in an accelerated fashion, until all derivative process is exposed as nonfunctional outside a massive hyperinflationary policy. Our wealth is and was nothing but an illusion of safety and created in our own minds. Within this mix is contained all the various gold derivatives we have come to love so well. The future failure of a gold contract does not mean that the long holder gets his price or his underlying good; it means his derivative fails to shelter his exposure by matching his other loses. In terms closer to a gold bug's heart; paper gold in any form will not match up anywhere near the price of free traded physical gold.

We are on the road to high priced gold and under priced derivatives. The same thrust will be apparent in all financial derivatives. Further, we are on the road to a fully "cash settled" contract market for gold; here in the US and abroad. In the time ahead, just before serious real price inflation rears its head, look for most all dollar based contract commodities markets to be restructured into pure "undeliverable" cash settlement markets. Markets that, also, many gold producers will be forced to use. The day of big premiums on gold coins and bullion is coming and coming fast.

Edwardo said...

Thanks, JR. That was both thoughtful and helpful.

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