Wednesday, November 28, 2012

Regular Forum Archives 1998-2001

Two years ago, Martijn went through roughly 1,200 days-worth of the regular USAGOLD discussion forum and compiled (most of *) the intermittent comments by ANOTHER and FOA, along with a few others, into a 436 page pdf. That pdf is available for download on Scribd here.

But lately, the discussion forum archive on the USAGOLD website appears to be MIA. ANOTHER (THOUGHTS!) and The Gold Trail are still there, but not the regular forum. All we have at the moment is Martijn's pdf which is not covered when JR searches for applicable quotes on Google.

So I put those 436 pages of comments into two (search engine-friendly) pages linked in the side bar right under FOA. Blogger couldn't handle 436 pages in one post, but it was fine with 218 (my new post length limit ;). That's why I had to split it into A/FOA Discussion Forums 1 and 2.

There are some great posts in these archives. For example, my 2010 post FOA on Hyperinflation came entirely from the discussion forum, as did FOA to Martin Armstrong. Here's another good teaser for what you'll find in these archives. It's a post I happened across just the other day when Michael H posted it somewhere else (thx Michael H!):

FOA (10/14/99; 9:20:06MDT - Msg ID:16318)

Strad Master (10/12/99; 23:48:43MDT - Msg ID:16216)

---- My first question, though, is this: If gold should rise to, say, $30,000 per oz as FOA predicts, how, at that time could one's gold holdings be unwound? For what? $30,000 in paper money? Or would the actual gold bullion become the only negotiable currency? If so, what good would a one oz. bullion coin be? It can't be cut apart into small pieces with a pair of garden shears. Beyond that, Goldbugs are notorious for holding onto their physical holdings long past the time of maximum return. ----

(((NOTE: Strand: I find it interesting that goldbugs have become "notorious" for bad moves when their present universe has only existed some 20 years? and the lady has not sang the song yet?)))

You continue:

---In fact, I'm sure that some older people who post at this forum have held gold through several (albeit relatively minor by comparison) upmoves in gold only to kick themselves for not having sold at or near the top.----
(((Note: I know people that have been buying through this entire span of time! True, they have timed their buying on a cost averaging basis, but that concept has made them almost even today. In the believe it or not department. Ask MK about "cost averaging" using a fixed dollar amount. Then I suggest you see the show "Rollover" with Jane Fonda. You would not believe how true it is!)))

Hello Strad,
I'm going to ramble on a bit, so I hope this helps your perspective.

Back in the early oil days I was very close to some of the largest oil men in the country. When in Texas we would visit at the country club and shared a lot of our perceptions. Usually over a poker table. Looking back, I find their (and mine) viewpoints had much in common with the gold outlook today.

When oil went from around $3.00 to $5.00 everyone that had local reserves thought they had made a fortune. You wouldn't believe how many sold off not only their storage barrels but their best (lowest cost production) reserves for cash. The feeling was that oil had just zoomed in price and would quickly go back down. The percentage gain on those leveraged assets was simply huge.

Then oil went up to around $8.00! Good god, we were so stupid to have sold. What a bunch of buying fools out there. Those idiots buying $8 are going to get killed. Everybody knows the major producers can pump for $1.00. Oh well, it just a political thing.

When oil hit $15, some of them knew they had missed out on a train to $20. But they still thought oil would one day return to around $5.00. So as not to miss out completely many of the early sellers jumped on the Natural Gas wagon, using everything they had gained from their first sale. At first this new move made money, big time. Then something funny happened, oil soared and later returned to a more normal $18 to $25 range, but gas plunged from the higher supplies. The "oil boys" turned "gas boys" lost it all. Even into today, gas has never returned.

Truly, they used the silver vs gold concept, thinking the more leveraged natural gas would out run oil and regain their fortunes. It made sense as gas (like silver) was more industrially useful and "CHEAPER". You might even say it was the "poor man's oil" (smile)! Also: Just like silver, gas proved to exist in much larger amounts that the "statistics" demonstrated. As its price "coat tailed" oil, it brought out the massive increase in production that wasn't needed as long as oil was available. Incredibly, this was the exact same story for silver. All the stories about people buying silver as gold went up saw them sell the silver and keep the gold because people just didn't need both of them. The same will happen when gold runs this time. People will keep the high unit cost gold in their vaults, use the digital currencies for trade and sell the silver as it floods out of the woodwork.


You see, oil in the early 70s is like seeing the prevalent gold concept today. The perception was that oil could never go up from the $1.00 production range into the $20s (just an unimaginable increase to those in the business) because such a price would flood the world with production. It was thought that there was so much unfound oil in the world that every home owner would have an oil drilling rig in their back yard at $20+. Just as $10,000 gold will have people taking gold from sea water.

Here is where reality gets in the way of concept based on perceived conditions. Yes, the $20 and $30 oil did bring out the rigs and production soared. But, even at the higher prices, the world found uses for this great new gusher of oil. The same human traits that dictate that "you can never have enough money in the bank" also said "we can never use too much oil"! If all the oil reserves in the world could produce at $2.00 then the price would return to $2 plus a profit. But, we want and use all oil produced from fields that pump from $2 cost on up to $30. Gold and oil are not like any other commodity, because under the right circumstances, people find both of their qualities useful and can never get enough of them at any price. It seems we accumulate assets until we die?!

The "paper boys" try and paint a picture of gold like "old oil men" looked at values "back then". They were wrong and so are the "paper boys" today. The Smiths and Arnolds of the world try to convince us that the supply of gold is never used up and creates a glut as it grows. They say that unlike oil that is consumed, gold holdings have become a stockpile that refining cannot use up. I bet these guys would have also sold their oil reserves in the mid 70s also.

Where they miss the boat is in their assumption that people will get enough gold. Not if it's money, they won't! People do consume money just like oil, rather it's just in the form of "savings consumption". Gold, just like money has an "unlimited demand". Again, have you ever seen anyone that said "I have too much money and have no more use for it". "No, don't give me any more of that cash, I've got a glut of it now, go away"! Yea, right!

Often, we read where people say, "oh what am I to do with all this gold if it hits, $30,000?".
Funny how Bill Gates never says "what am I to do with all these MS shares". Well, you too will act like anyone with too much cash or assets, just stash it away until you need to spend it. The old "what will I do with all this high priced gold I can't get change for" logic just doesn't compute when dealing in reality? Ever see someone in a flea market rolling around a cart full of $100 bills,,,and frantically trying to unload it because it buys so much and they can't get change? Help me out here, am I not seeing something?

I'm afraid that even the very poorest of people have a better grasp of spending and saving value than some of the "big time investors" present about gold. (I'm talking about the brokers, Strand)


Anyway: The amounts of gold in vaults today is nowhere near enough to represent the only circulating world money. It would have to be priced at $++++++ to do that. So, if mine production can continue, the world will take any and all they can produce. Be it 3,000 ton a year or 10,000 a year because the demand for money (even a parallel supplement money) is unlimited. Personally, I would take all of it (smile) and let the rest of you keep the paper.

The reality of this is that people hold cash in banks as it is lent out and earns interest. If no one lent their cash and just saved it (like gold) to spend in later years, it would take an enormous amount of paper money. This is why the US goes to great lengths to identify gold to the public as a commodity, not money. They want you to know that it must be sold as soon as it goes up. Trade it, don't save it. Most Western investors have bought into this and are going to pay dearly because of it. Again money demand is "unlimited". The same will be true for gold. As people begin to buy gold as a currency supplement, to be spent "as needed", the price could reach enormous levels.....and be seen just like oil......a useful asset you just can't get enough of.

On the road... ...FOA

Enjoy the archive!


* I will note that I think Martijn missed a few comments. One that stands out is FOA's Brown's Bottom comment which I inserted into my copy. So I don't know how many others might be missing. Hopefully USAGOLD will put the full archive back online soon…


A/FOA Discussion Forum 1
A/FOA Discussion Forum 2


1 – 200 of 220   Newer›   Newest»
Wendy said...

WOW ..... first

Hello Tyrone ;)

Indenture said...


Robert Mix said...

Oh how excellent, FOFOA!

Nice post quoting FOA. You really oughta try and track him down and see if he would grace the world with his views. FOA's remarks are still so timely... Indeed, it's almost impossible to NOT want more money or more gold.

If I can get a BLOCK of time during my upcoming trip to Peru, I will wade into the .pdf. Otherwise, I'll just post some (bearing? odd vehicle?) pictures at my blog, LOL!

Robert Mix said...

A "PS" to my comment: only 35 minutes or so until they draw the $550 million Powerball. That would work out to some $360 million (present value of the income stream paid up front, before Income Tax). Then I could buy enough gold to become a Giant! WHEEEE!!!

costata said...

Still catching up with the comments on the previous thread. I just wanted to say to DP you are a crack up. LOL

Michael dV said...

Am I correct in assuming that it is in pursuit of (the implications of) Gibson's paradox the those in charge of the value of the US dollar would seek to keep the price of gold down?
The simple answer we hear about the dollar and gold is that a high gold price 'looks bad' and makes the dollar 'look weak' by comparison. Is it the understanding of those here that the aim of backers of the dollar is more specifically driven by the work of Summers?
I was just thinking of this today after the 8:10 AM drop in the POG (realizing that there could be other reasons of course).

costata said...


It's very lucky for us that Martijn went to so much trouble in putting that archive together.

Two things jumped off the screen in that post from FOA:

The amounts of gold in vaults today is nowhere near enough to represent the only circulating world money. It would have to be priced at $++++++ to do that.

Again money demand is "unlimited". The same will be true for gold. As people begin to buy gold as a currency supplement, to be spent "as needed", the price could reach enormous levels.....and be seen just like oil......a useful asset you just can't get enough of.

Michael H, DP,

Michael H thanks for the links but I can't access them from this zone. So DP is pointing to the printing press and you nominate arbitrage in maintaining parity/fungibility between the base money and bank demand deposits. (The reason I'm pursuing this topic is that I think it may help to counter one of the key arguments of the debt deflationists about base money i.e. it will get harder.)

Having reflected on this issue today I'm going to nominate regression theory as the tool to provide the reason for parity. Over time people were conditioned to equate an entry in a bank account "book" to the currency in their wallet, later cheque accounts and so on right through to a plastic card and Net banking.

However, as the queues outside Northern Rock a few years back demonstrated people still think their money is "in the bank" and when they are nervous they want cash. As a wise man once said to me "never underestimate tactility". At certain times people want the cash in their hands rather than what they see as a promise.

Picking up on DP's response, sure they can print but I think the strategy that is not available to the Fed today is the option to shrink the base money supply in order to strengthen the currency.

The traditional way of doing this was to issue government bonds and/or buy currency with gold. The Fed can do neither in a sovereign debt crisis but I suspect that Bernanke genuinely believes that he can strengthen the currency in "15 minutes" as he claimed. His economics and training tells him (and his colleagues) that interest rates are a magic bullet.

Meanwhile more and more here-n-now money demand is trying to get as close to the end of the printing press as possible whether people consciously realize it or not. Their actions betray their liquidity preference and uneasiness about tying up their money.

Essentially the argument boils down to this. The Fed can't shut off the supply even if they wanted to do so. The USG can demand as much money into existence as they want courtesy of that executive order from the President last year FOFOA did a post on and Congressional powers (BS "debt ceilings" notwithstanding).

The banks can constrict the supply with deposit limits. Unfortunately that is precisely the kind of response that could break the parity between the currency and bank demand deposit ledger entries.

JR said...

Yay, GIMF!

JR said...

Friend of Another (10/14/98; 10:13:46MDT - Msg ID:567) Items.


Mr. Dallas Guns Msg #560:
You write: " Why is this the only place were this theory is being discussed? Wouldn't many more know the same as you and another?"

Dallas, in the 1970s few thought that gold would go to $800+ US and it was discussed openly by how many? Even less saw oil at $40+US or a Dow of 8,000+. The history of world major events are filled with actions that were impossible to foresee, yet some record was always found of people that did not discuss the event but did anticipate and prepare for it. Today we see the birth of a new currency that was thought to be dead (and openly discussed as finished) yet somewhere, somehow a very large group of people were working diligently to create it. Don't assume that your media and elected officials will always keep the public informed of
impending events. Especially if those events could undermine their power.

You write: "If you are as sure as you say, why not bet the farm"?

I have learned a great deal about conservative living. And I learned it from some world class wealthy people. It was put to me this way:

"If you have a nature to bet the farm and you win, the winning will not change your basic
negative character of farm betting. In time, you will bet all of it again! Conversely, if you do very well with an appropriate investment decision (with your family in mind), the winning will reinforce a positive character of prudent wealth building. This you will carry for all your days."

Dallas, trading some of your currency (yen? mark? dollars?) for another currency (gold)is not investing! It is the prudent use of playing the history of gold against the history of paper money. It has worked for others for thousands of years and will work for you. Thanks for the consideration. May we will continue this as time allows? FOA

costata said...


Who asked this question?

If you are as sure as you say, why not bet the farm?

Nickelsaver said...


JR's quote indicates that it was asked by Dallas Guns.

Anonymous said...

Oil and Gas as a description of Gold and Silver. Brilliant analogy.

Ore em' said...


Great quote from FOA. It made me think about the difference between Jesse Livermore and say, a Rothschild.

costata said...


Thanks. I thought it might have come from a recent thread.

Woland said...

Fofoa and Michael H;

A nugget worthy of the Smithsonian. Wow. Makes ME feel like
a "heap leacher".

Motley Fool said...


"Blogger couldn't handle 436 pages in one post, but it was fine with 218 (my new post length limit ;)"

Surely you mean post length goal. :P


Michael H said...


Try here and here?

burningfiat said...

If gold should rise to, say, $30,000 per oz as FOA predicts, how, at that time could one's gold holdings be unwound?

I love it. We are really still discussing many of the same things now, as they did back then...

Top-catchers must still have this same uneasy feeling in their stomach Strad displayed, when they now contemplate their alternatives of what they will be "getting out" into.

We catch this top together, yes?

Motley Fool said...

I would like to request some anecdotal evidence from readers.

I was wondering about the trend of recycled gold in terms of weight.

My dealer which covers most of Cape Town, and has the best prices, tells me that supply is drying up, and if he isn't getting much then nobody else there is either.

He says that essentially the lower and middle classes have sold all they have, and lately some rich have sold what they have to stay afloat during this recession.

You guys certainly all have what's the word on the street, and please state your street (city and country at least).



Woland said...

Good morning Fofoa;

If I might have you undivided attention for a moment, I have
a question. Your link to FOA's "Brown's Bottom" comment
directly above has supplied a near answer to a question which
has troubled me for some time. I have said elsewhere in the
comments that there are only 4 pages, out the 435 referenced
in the Scribd transcript, that matter deeply to me personally.
One is the "Texas story" and the other is FOA 3/14/99, 11:17
14 MDT Msg ID 3351. It is the only passage known to me in
which FOA poses a "riddle" to the reader. In reference to the
title, "ON THE FRINGE OF REALITY", FOA asks, "Will anyone
recognize from where the title came?"

Now you have supplied a partial answer with the following;
"Only a short time ago, most analysts completely wrote off
such "thinking" as being absolutely "on the fringe of reality",
as FOA refers to the gold price management revealed in the
Brown's Bottom comment. Sooo, the question is, what well
known commentator is responsible for consigning this
"theory" to the intellectual dust bin of lunatic, conspiracy
minded thinking? I would love to know! Greetz!

Edwardo said...

Well, Motley, my Capetown comrade, here in The Hub of The Universe, aka Boston, MA, there have been a number of interesting developments. The only worthwhile retail bullion dealer in town shuttered his doors last year. I was told by his nephew, who has carried on in a more modest capacity, that it was a case of burnout, but I wonder if there wasn't more to it along the lines of the erstwhile proprietor realizing that the jig was about up.

I was one the phone yesterday to the nephew, and he didn't have any low premium stock on offer, but that was apparently due to folks swooping in following the market's swoon and buying it up. All the dealer had by the time I made my call-I was pretty busy yesterday otherwise I would have been calling early too- was a smattering of the usual overpriced Eagles, Buffalos and Krugs.

DP said...


I think the strategy that is not available to the Fed today is the option to shrink the base money supply in order to strengthen the currency.


The traditional way of doing this was to issue government bonds and/or buy currency with gold. The Fed can do neither in a sovereign debt crisis but I suspect that Bernanke genuinely believes that he can strengthen the currency in "15 minutes" as he claimed.

Yes. The Fed doesn't have control of the US' public gold, the Treasury does.

All the assets on the Fed's balance sheet, which they can mobilize in draining currency from the market in 15 minutes to defend it's exchange value, are dollar-denominated debt instruments. If people are shunning the dollar, they are pretty unlikely to want to trade them in for something which ... promises a nominal amount of dollars in the distant future. In fact, what we're seeing is the opposite; they're trading-in promises of dollars in the distant future, for dollars today (or 13 weeks, which is as close to "today" as you're going to get if you aren't a US bank, if you're talking about >$100K and you want 100% nominal security).

The ECB is quite a different beast, however. They don't have to sell euro-denominated debt assets from their balance sheet, in order to support the value of their euro in the market. Because they can mobilise Eurozone publicly-held gold for exactly this purpose. :-)

Woland said...

AEP, over at the Telegraph has a quite interesting article,
entitled, "Germany displaces China as U.S. Treasury's
currency villain". (Seems UST is disturbed by Eurozone
"internal" imbalances), while its external position is, as
we know, about neutral. Fofoans should enjoy this, methinks.

DP said...

Yes, Woland.

Treasury officials told Congress that internal balances within the eurozone are disrupting the global trade structure, with almost nothing being done by north Europeans states to curb their huge surpluses.

Very funny indeed! XD

Peter said...


Nothing at all to do with USG's insatiable hunger.

It's all you dirty Asians and Europeans' fault, demanding more and more of our lovely dollars!

Michael H said...


The banks can constrict the supply with deposit limits. Unfortunately that is precisely the kind of response that could break the parity between the currency and bank demand deposit ledger entries.

Sounds like the Argentine 'corralito'.

An acquaintance recently went traveling in Argentina and said the people there were all very nice, helpful, and polite with a single notable exception: at the end of his stay he went to the bank to exchange pesos back to his local currency, and was rudely told 'no' by the bank teller, who promptly looked to the next person in line and called 'next!'.

Woland said...

Soup Nazi; "No soup for you!!" Next!!

Michael H said...

From the corralito Wikipedia page:

Operations using credit cards, debit cards, cheques and other means of payment could be conducted normally, but the lack of cash availability caused numerous problems for the general public and for businesses.


At the time, the average Argentine did not employ the banking system for daily uses; many did not have a personal bank account, and dealt only with cash. Debit cards were not popular and many businesses did not have the equipment to accept them. Thus the cash restrictions only exacerbated the recession and angered the public.

Robert Mix said...

@ Motley Fool

I am not positive of Miami, as I have not bought here in the past few weeks, but in Orlando (Florida), two gold coin dealers told me that the local companies are low in stock (Gold Eagles), partly because gold is so expensive and they did not want to run "inventory risk" (having customers swoop in and buy on a price drop). One of the two had a lady come in before I did, and cleaned him out of his last four Canadian Gold Maple Leafs.

@ costata and Michael H

Having 2 - 4 months of FIAT$ as well as lots of gold seems like a good idea to me. costata, I liked your friend's comment on the power of "tactility", I feel the same! Whatever each of us can keep in our own hands and OUT of the banks reduces the pain we would suffer in any version of a "corralito".

@ All

YES! FOA's comments on NatGas vs. crude oil being a rough equivalent of silver vs. gold were spot on. And who talks about eventually converting their GOLD into SILVER?

Michael dV said...

re: available gold for purchase
Tulving always seems to have plenty of gold for sale. Oddly they are out of some silver items. I am not sure how deep their stock is but I once ran them out of one item. Similarly Apmex and Kitco 'seem' well stocked. I would look to those high volume guys...when they are is likely all gone.

Anonymous said...


The ECB is quite a different beast, however. They don't have to sell euro-denominated debt assets from their balance sheet, in order to support the value of their euro in the market. Because they can mobilise Eurozone publicly-held gold for exactly this purpose. :-)

Yes, theoretically, they can sell gold in order to buy up unwanted Euros. What's more likely in an acute crisis though IMO is that they will print Euros to buy gold.

Now you think long and hard about this one ;-)

(They will sell gold and buy stray Euros only much later once the dust has settled)

Anonymous said...

When I sold some gold last week, I, too, asked the dealer how their business was doing. She said on average their customers were buying gold and selling silver. They had basically every product in stock though.


Nickelsaver said...

Motley Fool,

My preferred coin shop is always top heavy in numismatics, but always has small selection of bullion items available. Since bullion isn't his main throw, I would guess that he isn't seeing a shortage.

As for the "we buy gold" shops, I see more of them around now than ever before. So I suppose there are still plenty of Americans out there with gold to sell.

As for my street, I can't seem to remember it. But here is my phone number:


P.S. If jenny answers, just leave a message ;-P

DP said...

What's more likely in an acute crisis though IMO is that they will print Euros to buy gold.

I suspect the market will be busy doing the heavy lifting you're talking about for them?

Nickelsaver said...

I suspect the market will be busy doing the heavy lifting you're talking about for them?

In other words, they print to maintain 2% inflation. Which would drop with a rising price of gold. And use existing dollars to buy gold if the PoG drops enough to see inflation rise above 2%.

Motley Fool said...

Edwardo, Robert, Michael, VtC, NS... and others

Thanks for the replies. To be honest I am less interested in investment grade gold, ie. coins and bars at present. I am more interested in scrap gold, so old jewelry and the like being sold to cash4gold stores.

Though I am not discounting the sale of the above, it is in general held bu those who view gold as an investment. I want a pulse on those who don't and how much gold they have left to feed re-refineries.



OneGoldenRing said...

Hello All,
Any thoughts on storing Perth Certificates in a Roth IRA?
Perth Certificates are physical gold backed certificates that are audited twice per year, insured by Lloyd's of London, guaranteed by the government of Perth Australia and have no storage fee.
Any better ideas for storing gold in a Roth IRA?
Thank you,

Edwardo said...

VTC wrote:

"When I sold some gold last week"

When you SOLD some gold last week?

Motley Fool said...


Perhaps this is of help to you. Bron Suchecki from the Perth mint is a regular commenter here. In the comments here something of that nature is discussed.

Treasure chest 2 - Game Changer


burningfiat said...

Hello OneGoldenRing,

I'm no US pension system expert, but coincidentally I've just read:

Maybe it is not Perth Mint you should worry about? Maybe it is the banking system or your local government you should worry about?
Can I recommend holding at least some of your savings as physical gold, outside the official system?

Unambiguous Wealth - Get you some!

Anonymous said...

@ OneGoldenRing

I'm in the process of trying to get my head around Perth Certificates and their Depository account. If you have the right amount to invest the Depository unallocated seems the best bet as there are no charges whereas the certificates have to be purchased through an agent with cost incurred.

The "certificates" have a lower investment threshold though.

I could be wrong maybe Bron can enlighten us.

Unknown said...


Please would you let me know who exactly your dealer is in Cape Town. Do they have a JHB branch?

I like buying with cash from the coin dealer in Sandton City. Best prices.

PS where did you sell your silver?


Unknown said...


The coin and stamp dealer I meant...tucked away...

Michael dV said...

my approach was to move gold into a Roth and then out to me in physical.
I put it into a Roth but then I realized that it had to be in a Roth for 5 years before the growth became tax free. So I just said screw it I'd rather have it to cuddle with. Since I do not see 5 good years left in the system I am paying the taxes now and I guess if gold appreciates in the future and the system does survive I'll pay taxes on gains in the future. At least what I have is mine and it is not easily grabbed by my rapacious countrymen and their goons.

Motley Fool said...

Lemuel Habbakuk

I know he flies to Jhb often for business, but he doesn't have time to open branches down there afaik.

I traded my silver in to him for gold, he gave me spot both ways. :P

If you like, ask again if you happen to be in the mother city. :)


Unknown said...

Motley Fool


I might go to CT in December or Jan, I usually go once a year. Perhaps you could give me his number? or email me at my name at gmail dot com?

PS I bought way too much silver (but I bought at $15 so I'm not too upset) and I plan to exchange a lot of it into gold. A friend imports eagles and maples and sells them, as well as kilo bars for some on-the-side income, and he says buying of silver has dried up somewhat. I do expect that will change somewhat if price starts ramping up anytime soon, people were buying like mad when it went above $45. Buy-high psychology never fails.

Thanks a lot!

Edgar said...

South Africa following Zimbabwe into oblivion as gold mining output zero?

Motley Fool said...

Well that is one way to keep it in ground till post $IMFS collapse.

I wouldn't mind if between strikes and taxes they kill off our gold mining sector.

costata said...

DP, Woland, Robert et al,

..almost nothing being done by north Europeans states to curb their huge surpluses..

Tick another box if this is representative of the thinking in Congress. It's the same thinking that led the USA to force Japan down the path that exacerbated the crisis which developed in the late 1980s. Perhaps we now progress from a currency war to a trade war.

DP, there is a third strategy to soak up currency that the Fed could (in theory) use. Raise the interest rate on reserves. I forgot about that one. This is probably one of the reasons Bernanke is confident that he can control the situation through interest rates.

Michael H,

Thanks, those links worked. Yes, corralito. To save the banks and lock in the devaluation of the currency without causing a total Zim-style collapse in its purchasing power.

costata said...


If people are shunning the dollar, they are pretty unlikely to want to trade them in for something which ... promises a nominal amount of dollars in the distant future.

Agreed. FOFOA has done an excellent job of explaining how the currency issuer can only control supply - not demand. From one perspective HI is a loss of demand. But to get inside the minds of some of the economic actors in this melodrama it's useful to adopt the perspective that there is never a lack of demand for money.

From the perspective of a CB like Gideon Gono's Zim CB all those people being paid 2 or 3 times a day were demanding currency. If we can show that the Fed has a bias to perceive demand only and that it will supply it relentlessly then it neuters one of the deflationists most trusted arguments. The assumption that physical currency will be a safe haven.

Rejection of the currency will look like high demand to an economist with Ben Bernanke's training. In my opinion he will meet that demand for the reasons we have been discussing here. Others may encourage him, or his successor, for reasons of their own but we won't need to resort to any conspiracy theories to explain the response (and I know you don't do that).

Edwardo said...

A bit of breaking news.

"Within the next 18 months, the EU should set up a banking union and establish a "convergence and competitiveness instrument"

Okay, so the over under is 18 months. I'll go with the over.

costata said...

h/t JSMineset (My emphasis)

Adding to policymakers’ worries, after three successive quarters of decline, gold demand surged 9% to 223.1 tonnes in the three months through September, defying an 11% drop globally. In value terms, Indian demand shot up by an impressive 27% to Rs 65,373 crore in the September quarter from a year before, thanks to a more than 20% depreciation of the rupee.

Going broke in style. (sarc/on)

Gold imports worth $50 billion helped push up the CAD to a record 4.2% of the GDP in the financial year through March. The CAD rose to 3.9% of the GDP in the first quarter of 2012-13, compared with 3.8% a year earlier.

Indenture said...

Edwardo said...

Delusional Investing said...

The ... ratio tells you how much real crap ... the government has to pay you every year for borrowing your $1000.

... this ratio hits zero in mid-2014

h/t VtC

Edgar said...

"Unser Ziel sollte es sein, den Euro zu stärken, glaubwürdiger zu machen und den Dollar als Weltwährung zu attackieren."


byiamBYoung said...


Google translation:

"Our goal should be to strengthen the euro, more credible and to attack the dollar as the global currency."

Wow, indeed.

Motley Fool said...

Bron has a new post up for those who are interested. :)

ETF Price suppression mechanics


DP said...


Rejection of the currency will look like high demand to an economist with Ben Bernanke's training.

I suppose it depends on ones perspective viz "demand"?

If you're a Central Bank, whose M.O. is consumer price stability and when you look at consumer prices you find they're rising, this implies there is insufficient demand to hold money; heightened velocity. So your reaction should clearly be to withdraw liquidity from the system - shrink M to rebalance the elevated V, restoring P to the level you would prefer it to be.

If instead you look at liquidation of assets (or just no longer choosing to rollover at muturity in the case of bonds) for cash at bank — or, even worse, withdrawals of cash from ATMs! :-O — then, yes, these could be interpreted as high demand for cash that you may decide needs to be satisfied; falling velocity. A lack of confidence in the future.

So it really comes down to whether ones perspective is the most important thing in life to ones currency users is: stability of their ability to purchase and consume staples; stability of their investments in the future. And whether you might have systemically encouraged people to focus on the wrong one for quite a long time (while you were running a little workshop on the other side of the stage to help make ends meet), creating something of a dilemma for everyone concerned now.

there is a third strategy to soak up currency that the Fed could (in theory) use. Raise the interest rate on reserves. I forgot about that one. This is probably one of the reasons Bernanke is confident that he can control the situation through interest rates.

As long as everyone doesn't start getting too nervous about the future and stresses the grid connections into those ATMs, yes he may well be able to work with the banks to dry up credit and shrink MV while still allowing them to turn a profit and keep the lights on at their employees' homes.

Guess we'll have to wait and see — I don't know about you, but I'm on the edge of my seat - cheers!

Woland said...

Hullo DP;

You might also enjoy "Teller Talks; The art of Misdirection" by
the silent half of the duo, Penn and Teller. I quite enjoyed it.

DP said...

Yes, I love a good laugh!

We're all gonna laugh about this $IMFS for, like, ever!

Woland said...

Don't I vaguely remember something to the effect of, "The
politics - it is a side show." I'm sure some of the sharper
knives in the cutlery drawer have it at their fingertips.

Michael H said...

"The politics - it is a shit-show." might be more appropriate these days.


Mr. Kosares, Your friend thinks much of this gold owned by the USA. It could be used to back the dollar up to 25%, no? Many come to this thinking and hold a secure thought, that as last resort, this gold will save the day! I think, many persons never gained the understanding that the American gold is kept by the "Treasury", not the maker of your money, "The Federal Reserve". It is there for good reason, as the present world currency system is not a function of American law! If the US were to place gold in the hands of the US/CB as reserves for the dollar, the BIS could claim it! It is, as a point of contention and of no real use. I think not a war would come of this claim, if it should happen! As the world currencies are now, a "new dollar" would be needed if gold were used as reserves! The present dollar would then, truly be as "paper for the wall"!

The urgent drive to create a new "reserve currency" began in the early 80s, after the last small "gold war". The road to making this new Euro did never include gold in large amounts, until the last few years! Even one year ago, the news would say, 5% or less. Today, we speak of a much greater amount! This is interesting, yes? The BIS did "hatch" this deal in a very late fashion! The future of the Euro was found to be "weak", as the Middle East oil imports onto the continent would continue in dollars! This was so from the dollar being made strong in gold. Gold priced in dollars at near production cost, offered a "no switch currency" position, for oil. This position has been unstable for the last year, and the alternative of a switch to gold was in progress! You have read my "Thoughts" before. Now the BIS does offer to "change the rules of engagement", a real reserve currency is offered!

Few do grasp what is happening and why! They think the holding of gold reserves by the Euro is of a little point, as to what good are gold reserves? One cannot use gold as Marks or Yen to intervene in currency market to support the Euro. My friend, the BIS has played the, as you say, "big poker hand"! The holding of large reserves by the ECB and the withholding of sales from the market will not only bring the end of the London paper gold market, it will, thru a high USD gold price, "make the dollar weak in gold"! From this position, the dollar will lose the "oil backing" from the Middle East! At first, all oil for Europe will be in Euro's, then all producers want "strong currency"!

There is more: Many say, how to defend Euro without much currency reserves? If gold go to many thousands US, what will be used to bid for Euro as defense? I say, these persons will find a problem on their computer screens! You see, the Euro will start as "nothing", no holdings of size, anywhere! The dollar is held as reserves as "the stars in heaven"! It is to say, "the dollar will bid for the Euro", not "the Euro will bid for the dollar"! All currencies will "flow into the Euro for trade". But, if the Euro becomes so strong, how to compete in world trade? It will be the price of oil that will make the "trading field" level! The soaring US$ price of gold will make even a 10% Euro reserve be as 100% today, in USD! Oil will become, very, very cheap in Euros and allow that economy to do well! Many other countries will see this and also want to join the new "world reserve currency" that has become"the new world oil currency"!

The politics of the ECB? It is as a "side show"? We watch this new market, yes? Sir, my words take time. I did receive two E-mail's from you.

Thank you

Michael H said...

I've been reading the freebanking work recommended by Bron, and I found an interesting passage referring to monetary equilibrium vs. price stability:

George A. Selgin, The Theory of Free Banking: Money Supply under Competitive Note Issue [1988]

Most of these authors explicitly distinguish the goal of accommodating changes in the demand for money through changes in nominal supply from that of stabilizing an index of prices. The two goals differ because general price movements may be caused by changes in productive efficiency, and not just by changes in the demand for money balances relative to nominal income. Offsetting price changes due to changes in productive efficiency would not preserve monetary equilibrium.


Many past and present American monetarists would probably agree with the theoretical views of the European writers discussed above. Their preference for other policies—for price-level stabilization or a fixed money growth rate rule—stems, not from any theoretical disagreement, but from their view that these policies provide the best achievable approximation to the ideal of a truly demand-elastic money supply.

Also a passage on Say's law:

The view of monetary equilibrium presented here should not be controversial, and has been upheld by many economists. ... . Most of these writers link the concept of monetary equilibrium to that of “neutral” money. According to Koopmans (1933, 257), who has developed this approach most thoroughly, monetary policy should have the goal of “compensating for any deflation, due to hoarding, by creating a corresponding amount of new money, or of compensating for any inflation, due to dishoarding, by destroying money in like measure.” When this goal is achieved “the money outlay stream should remain constant.” In other words, money is neutral as long as Say’s Law remains valid (that is, as long as excess demand for money is zero). Conversely, monetary disequilibrium occurs and money is non-neutral whenever Say’s Law is violated:

Hoarding and money destruction cause a leakage in the circular flow of income; dishoarding and money creation make, so to speak, new purchasing power spring from nowhere. In the first case, that of pure supply [of non-money goods], the situation is deflationary, in the second, where pure demand occurs, it is inflationary; in neither case does Say’s Law apply. If net pure demand is nil, monetary equilibrium prevails . . . the monetary equilibrium situation corresponds to Say’s Law [De Jong 1973, 24].
(end quote)

Machlup has the same view in mind when he writes (1940, 291 and 184-89) that “credit inflation is ‘healthy’ if it compensates for deflation through current net hoarding, or for an increase in the number of cash balances or in the number of ‘stopping stations’ in the money flow” and that credit contraction is healthy if it compensates for dishoarding (“a decrease in idle balances”).

Michael H said...


Does the fact that bank liabilities are accepted as 'legal tender' for debt settlement and tax payment help to keep parity between physical currency and book-entry money?

As far as parity between different currency denominations, as long as the different denominations have a higher monetary value vs. intrinsic value, then it is a no-brainer that they trade in relation to their monetary and not their intrisic values.

But it is interesting to note that currency can continue to trade for its monetary value even when its intrinsic value is higher. Witness the US penny, which hasn't been made of copper since 1980. Today a copper penny is worth around $0.025, yet many still circulate at a monetary value of $0.01.

The US nickel's intrinsic value is currently just over $0.05, yet it is not disappearing from circulation.

And once in a great while you can still find a silver quarter circulating at par, now worth over $6.

Regarding the 'corralito': note that electronic payments were not suspended, and continued as normal. Only physical currency was limited. Since most people in the US barely keep enough currency on them to split a bar tab, the effect of such a measure inn the US would be different from its effect in Argentina.

Joe Yasinski said...

Anonymous said...

@Michael H,
I prefer Neal Stephenson's description of politics as an "infinite clown show." (Anathem, which is a good book, btw)

Biju said...

dieuwer : Wow indeed about Dutch Prime minister's open threat against US Dollar. Reading the quote, one would think it was Iranian president calling for US Dollar demise.

"For the single currency, it was "vital that all euro countries keep to the promises they have given, when it created the currency. Only way the euro is credible. Our goal should be to strengthen the euro, credible to make and to attack the dollar as the world currency. "

Tony said...

@ The Engineer,

Something's awry in your ebay searches. My search for "Gold 1 oz" nets over 11,000 active listings.

costata said...

Michael H,

Does the fact that bank liabilities are accepted as 'legal tender' for debt settlement and tax payment help to keep parity between physical currency and book-entry money?

IMO the answer is yes. The key word is "liabilities". For other readers the actual transactions involved in a transfer of funds is different to the way it appears to, for example, the taxpayer. Taxpayer lends deposit to bank. Bank provides an undertaking to supply cash on demand to taxpayer/depositor.

Taxpayer/depositor transfers "funds" to government. Government now holds undertaking from bank to supply funds on demand to government. Banks and CB net the transactions for a given period and settle in base money reserves or using one of the CBs other conventional tools.

So I would say that the strength of the bank's warranty/covenant is what maintains parity not the demand from the government.

..then it is a no-brainer that they trade in relation to their monetary and not their intrisic values..

Agreed. In that example I wrote addressing SMRI's thread at Screwtape Files I threw in melt value just to reinforce the point that "money" can have multiple "values" at the same time.

I'm going to have to mull this over:

Regarding the 'corralito': note that electronic payments were not suspended, and continued as normal. Only physical currency was limited. Since most people in the US barely keep enough currency on them to split a bar tab, the effect of such a measure inn the US would be different from its effect in Argentina.

There hasn't been a digital HI to date. It's always been a physical currency event. I have read exchanges on other blogs where people argued that a digital HI is possible. I think the key is the inter-bank market. As with the GFC it leads. The bank run that kicked off the GFC was digital.

Why did governments everywhere step in with deposit guarrantees? Presumably because the banks' couldn't guarrantee that they could perform on the digital transfers and settlements. In effect governments took over those deposit liabilities.


mr pinnion said...

Might be of interest to some here.!


costata said...

Another kick in the cojones for gold mining stocks.

Fitch Ratings on Thursday warned that cost inflation would have a more “visible” negative impact on mining companies in 2013, than has been the case in recent years.

Edwardo said...

Beware of funnymentals, cos. FWIW, the technical picture in, for example, GDXJ, the junior mining index, has, by my runes, a bullish tint to it what with the weekly stochastics bottoming even as the index has done a nice, clean .50 retrace of the most recent move up from the July lows.

So while there would seem to be a lot of fun da men tal headwinds for the mining sector, as has been observed many times, the stock market is all about liquidity flows.

burningfiat said...

mr pinnion,

Thx for the link!

IMHO Zbigniew is a political dinosaur of past American global hegemony (about to be extinct) and I look forward to seeing the look on his face after Freegold emerges...


costata said...


Point taken. TA rules!

burningfiat said...


I think a lot of Americans fail to appreciate how much admiration the world had for your Constitutional Republic and Bill of Rights.

And we root for you guys every time you succeed in taking back/upholding some of your rights (for instance to go to a Freegold-meeting in Vegas without getting groped):

Motley Fool said...


I always look for new dates on the calender to keep an eye on. At present 21 Dec 2012 is on my mind, just for fun.

However, a new one just popped up.

Leave "fairy world" behind, Draghi tells euro zone

I will quote the sentence I found most interesting.

"We have not yet emerged from the crisis," Draghi told Europe 1 radio. "The recovery for most of the euro zone will certainly begin in the second half of 2013."

Combined with STF latest offering by Warren, it gives another fun date to keep in mind. ;)


Beer Holiday said...

eBay searchers:

You may have searched on ebay "your country" not US. Also eBay is sticky with catagories and search criteria - you need to remind it that you no longer want to look for gold in the "silver coin" section

If bullion stopped transacting on eBay, you'd know about looong before then.

PS please stop buying bullion on !@#$#$ eBay lol.

PPS You may have just successfully trolled me? :-)

Kind regards

byiamBYoung said...

Beer day,

Actually, for us micro shrimp buying our gold sometimes by the gram, Ebay is about the lowest total transaction cost source I've found. Lots of sellers offer free shipping. So the auction price is the total price.

If anyone can offer a better source for teeny portions, I'd be most grateful.


Beer Holiday said...

Sorry byiamBYoung, no offence was meant.

Maybe were you are eBay works, that's good. I do have trouble believing you can't do better.

Gold also isn't meant to have counter-party risk. That starts with trust and faith in the initial transaction IMVHO . eBay is great for selling however.

In Australia, postage makes bullion a joke on eBay, and we have a mint who sells to the public generously. Sometimes I wonder why they do it (then I remember freegold).

To be honest, I'd go out and pan for the stuff if I was after a gram or two, and our gov would pay ~ 300 AUD in benefits to do it. Our taxes at work.

I'm a shrimp too FWIW, and I was born and bred in country recently founded by criminals, drunks, and outcasts. Consequently, I have trouble attaining the high standards of politeness and self control that Costata and others here seem to have manage easily :-)

byiamBYoung said...


No offense taken! As for Ebay's counterparty risk, I admit to being an eternal optimist (well, except for our entire financial future), but I see sellers who deal only in small portion bullion with thousands of transactions and 100% positive feedback, and I think of how few fraud assertions it might take to shut their business down. Based on that, I tend to believe that they are legit, and I have always been satisfied.

I sold a few of the tiny wafers I bought on Ebay once when my finances went tits up, and they passed the merchant's exacting gold vetting exam swimmingly. So, I'm comfortable with the few dealers I have bought from.

Sorry about the postage over in Oz. Location changes all factors in these matters, yes?


FoNoah said...

Aaaah! The week-end, the only chance I get ”to FOFOA.”

Re the FG week-end in Vegas I would love to cash in all my Platinum Freq Flyer points and make the long haul from Aus. But alas, (Qantas) FF points are much like paper-gold. They can be redeemed for real seats to anywhere in the world until of course you actually try to redeem them. Then you discover the reality that you can only go somewhere else in a year’s time – or else take a digital bathroom scale and an exercise bike instead.

Having said all that, still put me down as a “Geez . . . why not . . . hmmm . . . OK . . . Yes”. But before I book and finalise any tickets someone needs to confirm if it’s definitely going ahead.

Funny thing about this Luxor. In May 2010 I was in the US and decided to take the opportunity to attend a Doug Casey conference (at the Four Seasons/Mandalay) in Vegas. I was late to register and the program was sold out, (they put me on a waiting list), but I decided to go anyway – and I landed up at the Luxor. It took me a very long time to figure out how you can catch an elevator from any corner of the pyramid right to the top, but when you stand outside the building, you can’t see any lift shafts! It’s all smoke and mirrors in Vegas. Anyway – they would’nt let me attend the Casey conference, so I landed up going to see Gerry Seinfeld instead.

@Michael dV – I’ll have to give the shooting a miss. Last time I tried was in Kirkuk – Iraq (2004), where they let us try our skills on the practice range, with M16s and Glocks. I managed one absolutely perfect bulls-eye (first shot, which of course attracted much attention), then failed to hit the target even once after that. How embarrassing – but it’s harder than it looks. Anyway they told me to just wave the gun around “and look threatening” – it might help to scare the bad-guys away.

Cheers - FoNoah

costata said...

Beer Holiday,

I have trouble attaining the high standards of politeness and self control that Costata and others here seem to have manage easily..

If only ... but thanks anyway.

To be honest, I'd go out and pan for the stuff if I was after a gram or two, and our gov would pay ~ 300 AUD in benefits to do it. Our taxes at work.

Had to smile at this thought.

FoNoah said...

Hello ChrisF

Please could you ask your son what your wife and you should put in a secure safe deposit box for him now that he can only open in 25 years.
His answer would be very interesting.

The kids came over a for a birthday bash last week. My son just turned 28 and his wife will turn 30 next week. I gave them both a list of 10 investment options, each to the value of AUD $1.0M today, but only to be available in 25 year’s time. The list included all the usual suspects on any Global market, Stocks, Bonds, CDs/Currencies, Physical Gold Bullion of course, Fine Art Collectibles, Real Estate etc. I asked them to choose their top 3 in order of preference.

Dan chose:-
1. Buy-back of shares from the VC in their own business (prior to hopefully an IPO) then in the Publically Listed company
2. Gold
3. Sovereign Chinese Bonds

Elise Chose:-
1. Residential RE in inner Sydney
2. Gold
3. Light Industrial RE in Singapore

Item 2 in both cases was probably only in deference to me, because I tend to preach/nag from time to time about the virtues of PG Holdings. (As a result they have both promised to save (at least) 5% of their net worth in PG – thanks FOFOA!).

Cheers - FoNoah

FOFOA said...

Hello FoNoah,

Yes, it looks like we'll be meeting in Las Vegas. I think Aquilus and Poopyjim have confirmed that they are going, and I know of a few others who are likely to confirm. But don't expect a Doug Casey-style conference. More like an AA meeting of evil hoarder cult members and their fearless cult leader. ;D

Pain d'Or, who owns a pin company, had some "Freegold lapel pins" made up for their Dutch Freegold meeting in October, and he sent me a bag of them to pass out at our meeting. They just arrived the other day from the Netherlands. He used one of the icons that Freegoldtube featured in a video. Here's how the pins look.

So if you send me an email, FoNoah, I'll keep you in the loop as things develop.


PS. You might not be the only one traveling all the way from Australia!

FOFOA said...

Speaking of the Mandalay Bay, FoNoah, back in 2008, about a month before I discovered A/FOA, I attended a Money Show there. I had only begun buying gold a couple months earlier, and I had just started getting interested in the greater leverage of physical silver! So I went to see David Morgan speak in one of the rooms at the show about the fantastic opportunities in silver and especially the mining shares. After the talk, I waited in a long line to have him autograph my copy of his book Get the Skinny on Silver Investing! :D

Wendy said...

costata is coming FOFOA??

We'll have so much fun. Mr and mrs costata and myself will occupy Ross's (dress for less) and then entertain the discount outlet malls.

Uncle costata can carry the load of course ;)

Wendy said...

Vegas tip #1

Unless you've won big do not get a mani/pedicure at a vegas hotel. RIP OFF

ChrisF said...

Hi FoNoah,

Thanks for your interesting reply. It occurs to me that the 'FOFOA' ingredient that your son and daughter-in-law may be missing is the potential 'great reset' of the real value of physical gold by 30x the current value versus everything!... as so well outlined in this blog.
If one factors in this 'reset' within (say) 5-10 years into the equation my guess is that everyone from your son to politicians, fund managers, bankers, venture capitalists and even taxi drivers would choose physical gold as number 1.
It is a massive 'free call option' IMHO which seems not to be understood except by the true believers here.
After the 'reset' your son's and daughter-in-law's choices seem sensible.

Thus, amongst all the very interesting discussions here about banking and currencies etc. we are actually all here biding our time for the coming 'great reset'. Afterwards, things will probably not be so exciting ... my point is that it is this 'reset' that is the main attraction of this blog and its thesis.

Motley Fool said...

Absolutely excellent explanation of all parts of the gold trade market found in this hour long podcast with Jeff Christian : Podcast

For those of you who do not understand all the inner workings but are interested. :)


Woland said...

Hi Michael H;

Sometimes, you get more than you asked for. Your citation
in response to my request re: "The politics (of the ECB), it is
a sideshow", is a case in point, and boy am I glad you gave
us the whole thing! When you read that passage carefully, a
lot of detail about what is likely to occur, as the current dollar
reaches its "sell by" date, comes into view, at least as I see it.

Let me lay out what I think is expressed. There has been a
lot of discussion in the past here about what the rest of the
world could or could not do, regarding the 1971 default on
gold convertibility for foreign CB's. Another makes clear that,
at the inter-CB level, (BIS) American law does not apply. Thus,
were gold linked to the "present" US dollar, those CB's could,
via the protocols established via the BIS, claim gold at the pre-
default rate of $42.50 per oz. That is why, as we now know,
the U.S. gold is held by the treasury, rather than the Fed.

I think it is also evident that, whatever the precipitating event
which causes the "current dollar" to lose its reserve status, the
dollar will continue in use, and the US Federal Reserve will not
become a willing satellite of the ECB. This will require the
mobilization of the US gold stock. How will this be done? If I
am interpreting Another correctly, a "new" dollar will have to be
created, and the "old dollar" scrapped. This will cause a great
tension between those dollars held OUTSIDE the US and those
held within. The resolution to this dilemma will be found in a
very different exchange rate offered (lower) to non citizens,
(dollars or deposits held outside the US) than to US residents.

In order to minimize the difficulties and expected reactions
of those non citizens with large foreign dollar holdings,
(Another is silent on this topic), a brand new set of the largest
circulating FRN's (100's) would be printed which were clearly
distinguishable from the old notes. There would have to be
reporting controls on foreign cash transfers from outside the
US as well, to avoid the hyper inflationary effect of those
dollars looking for some tangible expression of value within
US borders. That inflationary pressure would be separate
from and independent of a "front lawn dump" by the Fed,
the principal purpose of which is to save the NOMINAL value
of debt, (and by extension, equities) which are the backbone
of the pension and retirement system.

Regardless of how the conversion from old dollar to new is
accomplished, it is bound to be both messy and tumultuous.
I am particularly curious about how vast US wealth, held off-
shore in tax havens, will find their way back home, and how
such wealth will be treated. To the extent that is is paper, it
will not fare well in any case, but no doubt some (large?)
portion is a claim on real assets in a variety of sovereign

We watch this "Cirque de Merde" together, yes?

(As an aside, please note that the clowns perform ONLY
under the big tent, and NEVER in the side shows. As the
ghost of former Chicago mayor Richard J. Daly put it:

"Gentlemen, please; The politicians are not here to create
disorder. The politicians are here to preserve disorder!"

Michael H said...


This will cause a great
tension between those dollars held OUTSIDE the US and those
held within. The resolution to this dilemma will be found in a
very different exchange rate offered (lower) to non citizens,
(dollars or deposits held outside the US) than to US residents.

I tend to interpret the likely outcome differently, as in: first the current USD will hyperinflate, and then a 'new' dollar will be introduced once the currency stabilizes, removing a few zeroes from the 'old dollar'. Thus, old dollar outside and inside the US will both be converted to new dollars at the same rate.

Lisa said...


New 100 bills perhaps like this?

The New $100 Note


Lisa said...


Many of which disappeared recently on their way to a Fed facility.

New $100 bills stolen en route to Fed

Dante_Eu said...

Funny thing there Lisa:

Gold 100:
Look for a large gold numeral 100 on the back of the note. It helps those with visual impairments distinguish the denomination.

Symbolism or irony?


Woland said...

Hi Michael;

You may well be right. I said what I did above as much to
provoke discussion as for any other purpose. I hope to hear
what others think.

On a slightly different topic, I have been reading with great
interest a 3 part series at one of my favorite blogs, Golem XIV,
regarding the saga of the vulture funds' purchase of Argentine
debt, ant the lengthy court battle which is winding its way to
a conclusion. It involves issues of "champetry", which is well
covered in part 2.

It gave rise to a WEIRD thought which relates somewhat to the
old/new dollar meme.

Just as linking gold to the present dollar by the USG could
result in the BIS issue raised by Another, is there ANY risk,
now that Treasury is the repository of the US gold stock,
that COINS, issued by the Treasury before 1933, (that would
be prior to the now rescinded ban on citizens owning gold)
might have a claim on treasury gold?
Like I said, a weird idea, particularly since US law (whatever
the hell that is) would apply. Still, it could give a new shot
in the arm to the silverbugs! ("Ha ha ha! Then we all had a
big laugh")

Woland said...

Oh, Lisa: Don't ask, don't tell is the watchword! Cheers!

Edwardo said...

A question to the panel:

But first a brief preface.

We surmise that QE does two things A.) Keep large commercial banks on life support, and B.) makes up the budgetary shortfall of Uncle Sugar?

With that in mind, what percentage of newly issued sovereign debt is being supported by U.S. monetary entities presently?

KnallGold said...

Telepopmusik with "Breathe", I could listen to it endlessly...

Good Weekend!

The Dow Theorist said...

Fofoa is becoming mainstream.Interesting read:

and MF and DoChenRollingBearing post good comments against the usual objections.


Edgar said...

@Dow Theorist,

a well written paper indeed by GBI. In essence, they describe a fractional gold banking system, where gold is rehypothecated over and over again, to the tune of 16x physical flow.
Eventually, when confidence in this game ebbs, the bullion bank-run starts and it will be game-over within 24 hours.

The Dow Theorist said...


we better stick to the original, that is Fofoa...:=)


Edgar said...

What I never understood is why people would want to hold paper gold claims as "savings" instead of the real deal.


Unknown said...

No storage fees!

Right, duggo?

Edgar said...

Wrong Barry. Buying paper gold like GLD also incurs fees.

Edwardo said...

Perhaps they would be best referred to as feeces.

Anonymous said...



Barry said no STORAGE fees.

Right Barry?

Edgar said...

LOL, ok you're right. It's all in the adjective. Isn't it? :-)

Dante_Eu said...


No, not laziness.

At this prices, there is not enough physical. Even those that really want physical have to play the paper game. It’s in their best interest at this point in time.

Shrimps as us, on the other hand, don’t have that problem. We can have all the physical we want! At least at this point in time.

What the future brings, well, that’s anyone’s guess.

Anonymous said...

@ dieuwer

"What I never understood is why people would want to hold paper gold claims as "savings" instead of the real deal."

You've obviously not thought about it. There are certain "strange" benefits.

Perth Mint have "unallocated" Gold which incurs no storage fees. This means it's cheaper to store "Gold" than at BullionVault or GoldMoney (which after all, in reality, is just paper or electronic Gold (even if you have the bar number).

Now imagine you have saved all of your Gold and decide that you want to take possession from the people you have been storing it with. You pay all of the costs and transportation and then you decide after a couple of years to sell and the purchaser discovers it's a tungsten salted bar. Who stands the loss?

At least with unallocated "paper" Gold at Perth Mint you can't get stuck with a dodgy bar.

"Eggs in different baskets" is always a good bet. The people who only advocate Gold in their hot sticky hand sometimes come unstuck as many Roman Gold hordes dug up in England can testify to.

Unknown said...

Tell em how it is, duggo!

Back for more rouge for me... cheers! ;)

burningfiat said...

At least with unallocated "paper" Gold at Perth Mint you can't get stuck with a dodgy bar.


Indenture said...

FoNoah: "How embarrassing – but it’s harder than it looks. Anyway they told me to just wave the gun around “and look threatening” – it might help to scare the bad-guys away." NO! Let me rephrase that. HELL FUCKING NO! Directly behind me there are four woman on my range learning how to handle a glock 'right now'. One of the women knows how so she insisted on showing her friends the 'right' way to shoot. HELL FUCKING NO you are never to just wave a gun. Get your ass to a range and pay a little bit of money to be trained. I look at it like swimming. You better know how to swim and you better know how to shoot. Yes this is coming from the guy in Appalachia who per capita is feeling just fine about the percentage of his neighbors owning a gun but when HI hits humans will turn mean. When the moment comes you want to know what you're doing.

Now, on the chance that you were just joking I would like to politely say that anyone who is interested in ever, ever, ever using a firearm should practice with the weapon.

burningfiat said...

You also can't get stuck with a dodgy bar, if you only stick to treasuries!

Treasuries and Paper Gold: No chance of dodgy bars!!! #Biwinning!

burningfiat said...

The Dow Theorist,

Thanks for the link to the zerohedge discussion. Normally comments there are pretty forgettable. But I found this be on spot:

Supernova Born: Paper "gold" is ironically one step FARTHER away from actual possession of gold than is $1714 in paper FRN currency.

Think about that. It is true.

Anonymous said...

The Engineer: What that chart shows is mainly that Lighthouse Investment Management, who made it, aren't to be taken seriously. At least ZeroHedge, when reproducing the chart, had the good taste to link to US Mint, so the reader can check for himself. Lighthouse, when first showing it on their own web site, didn't.

In the US Mint statistics you can see that sales in January, a month which was very curiously omitted from the chart, were about as high as in November. And when looking at year on year total sales, 2012 is so far not set to reach any noteworthy levels.

costata said...


TA notwithstanding, this are disturbing numbers for gold mining stocks:

A complete breakdown of costs, an all-in cost figure, courtesy of CIBC, shows cash operating costs pegged at $700 an ounce, sustaining capital, construction capital, discovery costs and overhead at $600. Add in $200 for taxes and you get US$1500.00 as the replacement cost for an ounce of gold.

Using the all-in figure provides a more accurate and definitive picture of actual mining cost and profit. Also, according to CIBC World Markets, the sustainable number gold miners need is $1,700/oz. As I write this gold is trading at $1726.00/oz.

A lot of people don't factor in that the ounces these guys pull out of the ground have to be replaced with new reserves or they are mining themselves out of business.

Motley Fool said...


Two comments.

Since gold exists on earth in finite quantities, eventually discovery and replacement costs approach infinity. As it is good deposits are hard to find already. I am not sure your comment is relevant in the long run.

The other comment, miners profits slightly above costs...hasn't this been the case since 1999? ;)


FOFOA said...

Thanks to Martijn who just emailed me the source text he used to make the pdf, the new archive links are now cleaned up and quite readable. No more work is required, so thank you very much to those who graciously offered to help!


Michael dV said...
this will not be for everyone...Ann Barnhardt is the broker who gave up her company because of MFGlobal. She comes from a very religious type of morality and it is apparent in her talk. The link is to about 2 1/2 hours of video explaining the GFC and the current state of the financial world. I could not find fault with the information she presents (NO she is not a HMS) and I have recommended it to others who might just be getting started in their thinking or want a more in-depth approach. I have watched the whole 8 parts. Most here will not learn much but it might be something to pass along particularly to religious folk. She does place blame on the bankers and would execute Corzine (but I would too ) so fore-warned is fore-armed.

Tyrone said...

Courtesy of Jim Sinclair...

Washington Proposes $1 Trillion Bailout for Delinquent Student Loans
A possible $1 trillion bailout is coming—and soon.

America’s now-nationalized student loan industry just reached a value of $1 trillion, according to Citigroup, growing at a 20 percent-per-year pace. Since President Obama nationalized the industry (a tacked-on provision of the Obamacare bill), tuition has gone up 25 percent and the three-year default rate is at a record 13.4 percent.

...policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn!

Michael dV said...

Fofoa may fool some with his "gold is the very best' way to carry value forward but now we can all see he is really invested in the autographs of financial thinkers ....great and not so great....who else does he have besides Morgan and Schiff? ...and why isn't he sharing this investment secret with the rest of the forum?

FOFOA said...

Here's another one, Michael dV! Also, I haven't watched the video you recommended but, FWIW, Gary North seems less impressed: Ann Barnhardt Has Lost Her Mind. Avoid Her Like the Plague.

costata said...


At present there are many people still pushing gold mining stocks as a complimentary holding to bullion. So I like to post material that presents other perspectives.

I hold to the opinion that production cost is the line in the sand for the BIS. If history is any guide a move up to a new trading range is on the horizon.

tintin said...

Is this China's move to enable "gold bidding for RMB"?

China Moves Forward in Opening Gold Market

"China will allow over-the-counter gold trading between banks for the first time Monday, a significant financial reform for the world’s second-largest buyer of the precious metal.

The move reflects the Chinese government’s latest effort to develop Shanghai into a major gold trading center, and mirrors similar developments in the country’s currency and oil markets."

Motley Fool said...

Michael dv

Excellent point! He has been holding out on us, the filthy hoarder!


FoNoah said...

Thank you very much FOFOA. I'd say that Lapel Pin looks just like FoNoah's Ark.

Actually we've been in email contact for a very long time. Remember when you sent me those pics of "the largest air transport in the world" when I asked if your background was with "big oil"? (Well at least your friend's was . . . )

How marvelously these events do unfold.

Cheers - FoNoah

Anonymous said...

Hi Costata

Hope you don't mind me asking a question but it's the only place I know where I can contact you.

Can you tell me why you think Perth Mint "certificates" are better than "depository unallocated Gold account"?

Lord Sidcup said...


Anne Barnhardt is mentally ill.

Edwardo said...


Thanks for the new post on mining funnymentals. You kind of beat me to it when you wrote (in response to MF):

" a move up to a new trading range is on the horizon."

This would harmonize the technical and fundamental outlooks which presently seem a bit at odds if your data and mine are accurate. Saving that, one of the outlooks is wrong, which is always possible.

In any case, I think the idea of a frame shift up in price is the most elegant solution.

After all, if the marginal new physical supply (generally referred to around here as the planet's gold which is not cornered)ceases to be available because the gold extractors are constrained from extracting, well, it's game over for the paper markets with all that entails. Now, of course, there is always the possibility that some critical mass is about to put their foot down in favor of a physical only market, but my bias is that is not the case.

The U.S. authorities for what it's worth aren't likely to be in favor of that as they would like their gold revalued only after the worst effects of HI have reduced most, if not all, of their massive bar tab.

To conclude with a bit more TA talk, all the action since last year's price spike looks to be "corrective" and from where I sit is forming a massive plateau (or, if you prefer, base) from which a big move higher will be launched. As the wicked witch of the west was wont to say, "All in good time."

Woland said...

Fofoa; You just gave me an idea. It could be a moneymaker!

With each gram of gold sold from the dispensers (such as are
now available in the Gulf, and some European locations, you
get 3 - "Dead Economist" - cards, each with a picture,
signature, and a brief summary of his contribution. These
could be collected and traded, just like the old baseball cards
that came with bubble gum. In time, they could become more
valuable than the contents they came with. What a great way
to encourage saving! And so educational too!! Greetz

byiamBYoung said...


Instead of bubble gum, these cards would need to come with a grain of salt.


Michael dV said...

Lord S
I do not think Anne is mentally ill at all. She is a true believer. Hers is the passion for religious belief seen frequently in the muslim world and often in certain Christian sects.
Do you find fault with her statements on the economy?

Woland said...

Over at Chris Martensen's blog, he has an interview with
Robert Weidemer. He has a great deal in common with the
FOA/Another view regarding the front lawn dump, and the
corner the Fed has painted itself into with ever lower rates,
which can never be raised. You won't learn much that you
don't already know, but it's nice to see the view we share
being promoted by a recent best selling author. He does
think that both equities AND real estate are vulnerable in the
coming hyperinflation, due to a shut down in new privately
created credit. I think that will be true relatively, but not
nominally. FWIW

Michael dV said...

Weidemer was the guy who first opened my eyes with 'Aftershock". Oddly in the 2011 edition the authors seemed to feel that hyperinflation was NOT in the future, merely high inflation and then some magic fix I guess.
I'll read this one at Martensen and see if anything has changed.

KnallGold said...

Things you might like, check out also the t-shirts ;-),574134725

Michael dV said...

I read Gary North's comments on Ann Barnhardt. There is no doubt that her rage is based on a religious sense of moral failure. She frames the argument in these terms. The specific criticisms he notes are from her blog not the videos I have suggested. If you are a deeply religious Catholic you may find her words similar to a good old (pre Vatican 2) sermon.
My point is she does a well organized, concise 2:30 hour synopsis of the GCF. It is similar to Chris Martensen's Crash Course in that it is for people who do not know what a CDS is or those who do not know a balance sheet.
It also counts as going to Mass....unless she does get excommunicated as Gary suggests.

Michael dV said...

Another comment on Ann Barnhardt, she did not go off the reservation until MFGlobal. I'm not sure if her clients were hurt but Corzine did enable the transfer of 1.6 billion from the producers to bankers who did not deserve it. Like Ann I would not have a problem with compassionate capital punishment for such a theft. It was one of the greatest crimes in financial history not involving a classic Ponzi.

Michael H said...

Unbeknown to most, God actually told Moses "though shalt not kill, except when people really, really, deserve it", but unfortunately Moses had to cut the statement short so it could fit on the stone tablet.

Michael dV said...

It is too bad stone tablet 'real estate' was so dear back then Michael H.

Naughty Slumdog said...

FOFOA & All,

What IS INFLATION? Or, to properly say, what is the essence, the root cause of inflation? Increase of consumer price index is just and effect of THE REAL THING that is happening to the economies. INFLATION is the mortal sin of the fiat. It is what prevents the paper money to become store of value without getting into the marvelous bank world. So basically doing some sort of trading to keep the value.

On the other hand, I keep hearing that 2% of inflation is “GOOD”. Below is bad, above is bad as well. Why so? How the “h”uck the progress of mankind functions? There is always some blood and sweat on our way to the future ?

I read once about “creative distraction”. About painful but unavoidable costs of economic failure of lesser businesses, that allegedly the central planned economies were supposed to optimize to eliminate. How much of that is the unavoidable cost of the undeniable growth is wellbeing of mankind?


Naughty Slumdog said...


look a nice little innocent statement:
“On the revenue side, the answer seems to be imposing fees for checking accounts and/or debit card use. This move is essentially an effort to better match revenue and cost drivers, as the crisis ended many of the sources of cross-subsidization masked by the high-growth era.”

I think it is somtehing big. Shifting from interest differentiator driven profit to transactional fee profit is a major dramatic change.

I guess it’s the pinnacle. Beyond fractional reserve and accepting to be a tool of profligate, the banks have quitted exerting their primary role, to optimize the capital deployment in best projects, but they become mere facilitators of transactions. They largely surrendered to do their part of the job in the superorganism, they no longer bear the risks and rewards of lending money, and largely this function has been taken over by credit risk insurance. Originally, all this credit risk agencies has been created to access exotic markets or to provide support to commercial, business to business risk, not to substitute the banks own judgment. Moody’s and S&P’s should not preclude the loan officer’s and bank’s credit risk committee, but rather to be an expert advice or add on for the crediting activity.
The productive and wide spread activity of facilitating payments/depositary of value become a challenger if not a substitute for bank’s core activity which is lending money to right people at right interest.
Who that have taken over the activity of assessing the credits? Who is ultimately directing the flow of funds ? More and more, the government. And, OMG, there is no World War going on …

Motley Fool said...


The essence of inflation? Transfer of value.

Some inflation is good in a currency to counteract some human psychological responses to deflation.

Ideally perhaps 0.1% inflation, but that would be hard to maintain without at times slipping into deflation, so perhaps 1%. 2% is just a safe margin.


burningfiat said...

Inflation is just honest paper's way of saying:
"I'm paper, My purpose is transaction, please don't hoard me for savings!"

Paper hoarding is what causes the current economic ill's of the world.
Why do TPTB try to dissuade people from hoarding paper by installing zero percent interest rates at the moment? I guess, TPTB (even if not consciously) also sense that paper is best in the medium of exchange role and will do best if it is out there transacting/lubricating the economy (aka TPTB also realize that deflationary collapse of credit money is not good).
2008 till now and the ensuing collapses of lots of paper investment vehicles was a painful reminder (personally for many) how bad paper really is for saving wealth. I almost don't feel sorry for people who hasn't realized this during the last 5 years. They have been given every chance to wake the fuck up!

Michael dV said...

Drudge just linked directly to ZH...not sure if he has done this is an article about gold

Bron Suchecki said...


PMCP & PMDP are the same underlying service, just different ways of them being sold. All information is on our website and it is a case of DYODD as to what suits your particular circumstances.

Michael H,

Good to see you are getting some use from my free banking link. I have a theory that the bullion banking system operates very much like free banking, considering they don't have a central bank who can print gold.

costata said...


I left a further comment on Perth Mint certificates over at Bron's Goldchat blogspot which you may not have seen yet.

In regard to explaining their services I think you should direct your questions to them and make use of their Website. I think you'll find them helpful.

Bron and Michael H,

I don't think there is much room for doubt that the clearing members operate on a free banking model. From a bullion bank's perspective this is the next best option to having a central bank. IMO it would be a big stretch to think they invented something totally new in banking when the free banking model was available "off the shelf".

Factor GLD into the picture and you have the emergency liquidity function of a central bank as well. GLD ensures that they can always get gold at some price provided they can get their hands on GLD shares. Folks who have brokerage accounts with these banks in which they hold GLD shares which are registered to the brokerage would make this easy to do without tipping their hand.

Obviously they could still be exposed to a cash loss if the price of gold moves against them but, as you know, they have plenty of ways to hedge. Under normal conditions this overall structure should be low risk for the BBs.

Bron Suchecki said...


As I said in my article, I don't see a lot of borrowing going on in GLD so it doesn't seem like bullion banks are using it as a source of liquidity.

However, pre-ETFs retail investment would have went into coins/bars and thus would not have been accessible. With ETFs and street name registration, you are correct that now this metal can be borrowed directly from investors' brokers. So it has increased potential liquidity I suppose.

I don't really think much of the "get physical by buying GLD shares" theory as raising the price to induce sellers works just as well in the OTC market - that strategy is nothing special to ETFs. Secondly, if they are going to hedge it then they just create an arbitrage for someone else to take advantage of, which negates the strategy.

Note the above strategy works if only one or two are doing it for little volume - it doesn't work if they are all desperate for physical, which is the situation I think we are all interested in.

costata said...

Hi Bron,

I don't see a lot of borrowing going on in GLD so it doesn't seem like bullion banks are using it as a source of liquidity.

Noted. It makes sense that the BBs will source from the best option under normal conditions. The key phrase in my comment on GLD-as-CB is "emergency liquidity". And that doesn't preclude using GLD shares creatively as part of their overall book management and client servicing.

..the "get physical by buying GLD shares" theory as raising the price to induce sellers works just as well in the OTC market..

Agreed. All of these theories based on what the punters can see are doubtful to say the least. This market is mostly opaque. doesn't work if they are all desperate for physical..

Again this is where I'm also 180 degrees opposite the goldbug and silverbug pundits who scream about how much pressure the BBs are under for X reason or Y reason.

The "spiders" have this game sewn up for now. It will take a crisis of some kind to change that and I think Jim Sinclair is dead right FWIW. The BBs will make out like bandits on the upside as well.

costata said...


Central Bank Gold Reserves

I have been chatting with FOFOA offline about IMF reporting rules, bank reserves and so on. I would like to bring something to the readers attention that I think everyone should know. CBs create gold reserves by classifying them as reserves.

It doesn't automatically follow that when a CB, Treasury or some other branch of government acquires gold that it will be part of their reported reserves. They have no obligation under IMF rules to report gold purchases or to record them as reserves. Likewise FX purchases are reported voluntarily to the IMF and there is wide latitude in how FX can be classified as well.

So when you see folks trumpeting that this CB or that CB "bought" gold recently kindly note that this may or may not be when they actually acquired the gold. Note also how many of these announcements are worded as "added X m/t to reserves" or similar wording. They could have acquired gold, or the rights to gold, many years ago and merely reclassified it as a reserve prior to the announcement.

To be as clear as possible, the announcements of CB gold reserve "purchases" tell us nothing about when the gold was acquired or the current demand for gold. One way for the BBs to play these announcements is to let the punters think supply is tight when it's not and short the crap out of paper gold.

costata said...


Likewise FX purchases are reported voluntarily to the IMF and there is wide latitude in how FX can be classified as well.

This should read:

Likewise FX holdings are reported voluntarily to the IMF and there is wide latitude in how FX can be classified as well.

costata said...

Correction to comment at December 2, 2012 5:08 PM above.

GLD shares which are registered to the brokerage...

Should read:

GLD shares which are registered in "street name" only...

h/t to FOFOA for the link to this concise explanation of the term 'street name'.

costata said...

VtC et al,

The question of debt forgiveness, or a “haircut,” can be revisited after the current bailout program will be successfully concluded and the government in Athens no longer takes on new debt, Merkel said in an interview with the German Sunday tabloid Bild am Sonntag.

In other words when they have a positive primary balance in their budget. For other readers, that basically means no government budget deficit before interest payments are factored in.

h/t jsmineset for the link.

Will they get there with the current policies? Wait and see I guess.

When asked about a haircut on Greece’s debt as a way out of the situation, Merkel told the newspaper “when Greece one day again manages with its revenue, without taking on new debt, then we have to look anew at the situation and reevaluate.”

“That won’t be before 2014-2015 if all goes as planned,” she added.

Greece has promised its international creditors to achieve a budget surplus of 4.5 percent of its GDP by 2016, which would enable the country to start paying back part of its debt.

Victory said...

Interesting WSJ article on Iranian gold imports, says Turkey is paying for natural gas with gold but fails to mention how they are paying for Iranian oil. They import a lot more Oil than NatGas...made me think of the oil for gold trade Another spoke of....perhaps the oil imports are hiding in the true value of gold to Iran.

Anonymous said...

@ Costata

Thanks for the response. I've been over to Bron's site and take your point.
I am of the same mind for "unallocated" being the way to go.
The people at Perth Mint are very helpful and responsive but you can't beat an independent person's opinion.

costata said...


Glad to share our thinking with you. All the best.

Edwardo said...

Yve's take. I tend to agree.

Michael H said...


I don't think there is much room for doubt that the clearing members operate on a free banking model. From a bullion bank's perspective this is the next best option to having a central bank. IMO it would be a big stretch to think they invented something totally new in banking when the free banking model was available "off the shelf".

To clarify, I think the free-banking model is an 'analytical model', not a 'business model'.

The question would be whether the conditions of bullion banking fit the conditions of the free-banking model, and thus whether the free-banking conclusions are applicable.

Michael H said...

On free banking:

I have a few more comments to make regarding the free banking publication suggested by Bron. To repeat the link:

George A. Selgin,
The Theory of Free Banking: Money Supply under Competitive Note Issue [1988]

First, free banking defined: free banking occurs when there is little bank regulation and no central bank to monopolize note (paper money) issue. Each bank issues its own notes as part of their liabilities. The author assumes a base of commodity money, by which I think he means precious metal coins minted by the sovereign.

The conclusions appear to be:

1. Under free banking, the commodity base money would form the banking system reserves. Each bank would manage its own reserve ratio to maximize its profit (by profitably expanding the credit volume) while a) keeping in balance with the rest of the banking system and thus preventing its reserves from being drained by its competitors and b) keeping an emergency reserve in case random fluctuations in redemptions of its liabilities stack up against it.

2. The free banking system would be able to adjust to changes in demand for credit money, and should always keep the supply of credit in balance with its demand.

3. These conclusions do not hold when a central bank monopolized note (paper money) issue, since in that case the CB notes tend to become the reserves of the banking system, and the CB must manage the reserves to manage the credit volume.

4. It is assumed that the public holds bank liabilities and the banks hold commodity money as the reserves; so far I have not seen discussion about the possibility of bank runs.

I have read about half of it so far, so I’m sure there’s more I’m missing, but I see two angles from which to view this work:

The first is, as Bron suggests, that the bullion bank operations can be described by this model. I think he is correct. While the BBs do not issue ‘gold notes’ that circulate, I do not think that is the key to the model. The key, rather, is that there are no CB notes to use as a reserve upon which to expand credit.

Interestingly, perhaps leased CB gold, i.e. ‘the CB’s good name on paper’, could have been a type of ‘reserve note’ used by the BBs before the launch of the Euro, so that the BBs transitioned from an informally-CB-backed system of sorts, to a completely free bank system.

When I finish reading the book perhaps I will find some more insights into BB operations.

In the meantime, some more thoughts regarding bullion banking:

1. Who is transacting in all that gold that the LBMA clears? I previously had pictured paper gold as being something that you trade back and forth from within your own holdings, like switching your cash between currencies. But the LBMA clearing between members means that account holders are writing ‘unallocated gold checks’ to each other, and in very large amounts. I suppose this all goes back to the original ‘Red Baron’ question.

2. How do these gold transactions fit into a transition to freegold? How would they fit into a post-transition system?

3. How did bullion banking come about? Did it start with the closing of the Dollar gold window, or does it go back further? On the face of it, bullion banking is a strange concept.


Michael H said...

The second angle from which to view free banking is as a clue to how things might work after a transition to freegold.

I do not thing central banks are going away any time soon, since, as the author notes, most central banks were chartered for the purpose of securing favorable borrowing terms for the government.

However, perhaps what we would see is a system of ‘free central banks’, where gold is the underlying commodity money reserve that is used for clearing between the CBs (I assume the clearinghouse for these transactions would be the aptly-named Bank of International Settlements – the ‘central bank of central banks’ nickname being a misnomer). The differences between this arrangement and the standard free banking arrangement would be:

1. The commodity reserve floats in value.

2. The notes issues by the CBs float in exchange rates against each other.

3. Credit is issues into the economy by commercial banks which use the CB notes as a reserve, and thus credit volume is a step removed from reserve management.

I think for this arrangement to work properly, clearings between CBs would have to happen quite often.


DP said...

I think for this arrangement to work properly, clearings between CBs would have to happen quite often.


Michael H said...


The thought did cross my mind. Initially I thought 'weekly' or 'monthly', but then decided to leave it vague.

The question is, what will the CB do with the information it gets from the clearings? If the resulting CB actions are long term and slow responding, then quarterly clearings are probably fine.

It depends on the connection between the CBs and the commercial banks, and how quickly the base money / credit volume needs to be adjusted, and the effect of the floating exchange rates on these adjustments.

If the exchange rates (including gold exchange rate) make the necessary adjustments on-the-fly, then CBs will be able to afford to act slowly.


A further implication of the 'CBs acting as free banks with gold reserves' system would be that the CBs gold would truly be the reserves of the banking system in that CBs zone. The amount of gold held would be proportional to how much credit gets cleared between a zone and the rest of the world.

Michael H said...

And now for a thought experiment:

Let’s pretend that short-term interest rates become persistently negative.

Would some enterprising financial institution start a ‘cash-backed ETF’? It would be a brilliant move, yielding exactly zero (minus fees).

At first, we would have an open ended trust, with free creation and redemption of shares. Then, another fund manager would get the brilliant idea to form a closed-end physical cash trust, because ‘those guys do not really have the cash they say they have’. Then we could have a ‘cashogosphere’ prop up on teh internets, and the closed end fund’s premium to NAV would skyrocket and the cashogosphere would hyperventilate about the ‘true premium of physical cash to credit’.

Woland said...

Perhaps I'm just to thick to get the joke? In an imaginary
world of negative interest rates, the "volume" of cash (credit
money) evolves to zero, and we return to the world of barter,

Michael H said...


Although I was half-joking about the 'cashogosphere', I think the prospect of a cash-backed etf should be considered.

Cash is not exactly the same as credit money, in that cash is a direct liability of the central bank (which can print more cash).

But you are correct, if interest rates are negative then we would expect the volume of credit to contract until people only hold cash.

I suppose we might find out just how much value is ascribed to the convenience of a checking account.

DP said...

I think the prospect of a cash-backed etf should be considered.

Yes, the administrative fees could be less than the negative yields on bonds. #Outperform #BUY :-\

Woland said...

I have such an ETF. It's called "my sock drawer". My wife
manages it for NO FEE!

Motley Fool said...

Michael H

"and the cashogosphere would hyperventilate about the ‘true premium of physical cash to credit’."

The hyperventilation may be closer than you think. :p

Swiss Capital Controls Escalate As Credit Suisse Sets Negative CHF Deposit Rates


Edwardo said...

In the land where cash is king, the best counterfeiter rules. And here's another thought, since there seems to be a discussion about cash, when they phase out the smaller denomination coins, does that mean that the dime will be the new penny?

Jesse McL said...

Lol, comment from that ZH article re: Swiss NIRP

"And if your account balance is less than zero, do you collect interest on owing money?"

Butt-hurt MMT said...

Yes, the administrative fees could be less than the negative yields on bonds.

I have been thinking about this whole "negative yield" thing, and I think it might pose a problem for the magic money tree. We can't have our livestock erm... I mean "savers" letting their "leaks" come back up the sink. They have to keep leaking so G can fill in those leaks with moar printing & spending! That means they have to keep seeing nominal gains in order to maintain their good feelings & confidence!

Luckily, yields don't have to go negative to perpetuate credibility infl... erm I mean this wonderful magic money tree! We can make this bond rally roll into infinity & beyond! Just keep managing yields so they keep approaching zero but never actually get there e.g. .1%, then .05%, .025%, .0125% ... .00000001% ad infinitum!

See, you guys?! The system is A-OK! Now stop being anti-social cheats and put your savings into gov. debt! :D

Woland said...

Just a thought; When deposits are held outside the taxing
authority of the domicile of their owners, and the rates on
those deposits go negative, what sort of flows would you
expect to observe. I think this action pressures these funds
to shift into some non-negative asset, or to move to another
haven, perhaps? The fact that it is Switzerland, the main
haven of the Eurozone, makes me wonder if there is some
purpose in flushing out some of these deposits. Is there
any linkage to the "Lagarde list", such as Mme Pappendreiou?
Perhaps it is just my inner conspiretard. We shall see.

Woland said...

A propos my comment directly preceding, permit me to
offer Fofoans a little treat. (At least I think it's a treat)

Google the title, "Greece; Our Debt, Your Problem". There
are several links,I used Paul Kedrosky's "Infectious Greed".
The second half (it is rather short) concerning who owns
Greece, and what they do with their wealth. This was
written almost 3 years ago, and not much has changed.

burningfiat said...

Dear Costata and Duggo,

I see you favour (just short of advocating, to be fair) holding a certain type of unallocated gold (Perth Certificates).
Personally I've only had former experience with Bullionvault. Had my fingers burnt there as my own bank went tits up. If state bad-bank (covering up to €100,000) hadn't taken over it would have been very cumbersome to get my BV funds.
Since my experience with BV+failing banking system I've been a happy owner of phys. gold in my possession solely.
If you have found some new revelations regarding a more trustworthy form of unallocated gold than the usual unallocated alternatives, please share your line of thoughts with us! Maybe there is some way to enjoy the comforts of paper gold, while still being certain of receiving the phys. gold in a (gold and/or banking) market lock-up without too much (legal) hassle.
Or maybe you are just playing the $PoG with a fraction of your saving? (As I assume you both think Freegold is highly probable, that would make it easier for me to understand your bets)

Thanks in advance for your replies...


costata said...


I'm not advocating paper gold. The discussion was about alternatives to having all of your gold in your possession if, for some reason, that was a problem. (Please read the comments in the link below.)

The Perth Mint certificates we hold are for the purpose of hedging an exposure to Australian dollars. They aren't part of our long term savings. As soon as the AUD can be drawn down we intend to spend the cash.

The bulk (multiples of the certificate "weight") are in physical gold we can access very quickly if we need to do so. But we decided not to store this gold at home.

burningfiat said...


Thanks for your answer! Makes sense...

To further clarify my questioning: Is anyone here holding some of their long term savings as unallocated gold, while still thinking the FG theory has merit? That would be and interesting combination, yes?


costata said...

Michael H,

To clarify, I think the free-banking model is an 'analytical model', not a 'business model'.

It's not an "analytical model" it's an operational model for a banking system without a CB. This kind of system operated at various times in various places. One of the most often cited examples operated in Scotland until around 1845 (if memory serves me).

Google 'free banking school' and 'modern free banking school'. The philosophy of the advocates in this school has, IMO, morphed into an anti-CB movement. This is hardly surprising given its roots in the "School of Salamanca" which opposed the regulation of prices and, de facto, interference in markets by a central authority. The "moderns" take this perspective a step further:

The most beautiful justification of the free market that I know of is theological in nature. In his Disputationes de justitia et jure, published in 1642 in Lyon, the Spanish cardinal Juan de Lugo (1583–1660) wrote that the "just price" depends on so many factors that it can be known only to God.....

.... The arguments of both schools of thought — the School of Salamanca on the one hand and the Austrian school of economics on the other — are powerful critiques against the central banks' role in regulating interest rates (the price of the product) and money supply (the quantity of the product).

For the priests writing in Spain, to regulate the interest rate through a centralized authority would be to presume that one man could know that of which only God has certain knowledge....

The LBMA clearing members appear to have taken the free banking model a step further by forming a jointly owned clearing company which settles transactions at the end of each trading day. From my reading, the gold which supports the paper they are issuing is held by this jointly owned company as an unallocated pool of around 700 m/t. (And I think that it would be a big mistake to assume this is client-gold as opposed to bank-owned gold.)

It appears to be a fractional reserve system based on gold but instead of issuing notes (currency) like those Scottish banks they are writing other types of 'paper' contracts and settling in gold.

The key feature of a free banking system is that the participating banks guarrantee to accept each others paper from clients on presentation. The banks then (as a group) settle those transactions among themselves. Instead of just relying on the good reputation of the participants the LBMA clearing members appear to have pooled their gold to underwrite the system.

Looks like the BBs 'got religion' after their near death experience in the late 1990s. LOL

burningfiat said...


Just to wrap my (stoopid) head around your explanation one last time. What you say here:

Does that mean that you accept your certs will potentially be cashed out at lower prices right after revaluation, or do you expect to get the "new" price for your certs after revaluation (maybe after a period of legal back and forth)?
I don't quite follow that "you get what you want" if the sell-side dries up... (Or maybe you're happy enough to get low paper-price compensation for this part of your short term savings?)


Edgar said...

Credit Suisse Lectorem:

"And Giants will become Shrimp, and Shrimp will become Giants."

costata said...


I expect the certificates to be cashed out at the market price or a fixed weight at the face value of the certificates (which only specify a weight). Do you see the trick?

If the price of paper gold drops and physical gold goes sky high we'll ask the Mint to fabricate the gold, pay them the fabrication premium and get them to ship the gold to us.

At present we can either cash out the certificates (by selling them back to the Mint) or asking them to fabricate the gold and ship it to us with the free, autographed photograph of Bron from the Sports Illustrated centrefold he did a few years back that the Mint gives out to long term clients.

All we are trying to do is to protect the purchasing power of those Australian dollars we are exposed to. To date there hasn't been an issue as the AUD price of gold has been relatively stable. If the Aussie falls out of bed then I expect the price of gold in AUD to compensate.

Bear in mind too that we are only talking shrimp quantities as well. If there was a legal problem with the Perth Mint we would be riding the coat tails of giants in any legal stoush such as a class action. And I hasten to add I don't expect it come to that. Probably just a brief period of confusion if the transition to Freegold-RPG occurs before we cash out the certificates.

costata said...

The recent jump in [US Mint] coin sales had to do with the coin public believing there was an error in stamping the recent coin issue. There was, in all of them, making it zero error value.

If an entire run of stamps had a plane upside down it would not be spectacular in error value.

Bron Suchecki said...

costata: "the gold which supports the paper they are issuing is held by this jointly owned company as an unallocated pool of around 700 m/t"

My understanding is that the does not hold physical or run accounts, it is just a system for clearing. From their website:

"... settlement instructions through an electronic settlement system hub called “AURUM” run by the not for profit company LPMCL. ... Each bullion clearing member uses their respective banks’ bullion operations group to control the clearing function."

It is like a SWIFT for the six clearing bullion banks.

costata said...


Thanks for the correction. So let me see if I have this straight now. For the sake of simplicity let's ignore any other users of this system except the clearing members.

Each clearing member has their own stock of bullion. After netting out the daily transactions conducted in-house by each clearing member they supply the data to the LPMCL AURUM system used to determine the external transfers required for physical settlement.

LPMCL isn't involved in physical transfers. The clearing members arrange any inward or outward transfers of bullion from their stock required to settle with another clearing member. Does this describe the process as you understand it?

Bron Suchecki said...

Michael H: “BBs do not issue ‘gold notes’ that circulate”

But they do “issue” unallocated account credits that are used within the industry to settle transactions, that is, “account holders are writing ‘unallocated gold checks’ to each other”

Michael H: “perhaps leased CB gold, i.e. ‘the CB’s good name on paper’, could have been a type of ‘reserve note’”

Michael H: “How would they fit into a post-transition system?”

Pretty well I think. In Selgin’s paper he does assume gold as the unprintable thing that the banks agree is the reserve which clears imbalances, that is, extinguishes liabilities between them.

The key difference between freebanking and banking is that the reserve medium cannot be printed, it is fixed. I think this is needed otherwise there would not be a control over credit issuance by the banks in an environment where the amount of reserves changed/could be manipulated.

Note that the paper was written in the late 80s, so the idea of bitcoins was not envisaged. Bitcoins would probably work fine as the reserve medium and maybe better than gold because with gold there is a small increase in its stocks every year.

Selgin’s paper does not envisage gold circulating as money as that would not be practical. I think the idea that the gold is “still” in the banks’ reserves is compatible with the idea of gold as a store of value only. In essence freebanks are using gold purely as a SoV with bank paper circulating as the money.

Michael H: “On the face of it, bullion banking is a strange concept.”

Only if you haven’t shifted your frame of reference to consider gold as an accounting unit. Perth Mint runs accounting books in gold and silver alongside our AUD accounts. Banks pay for our coins with unallocated gold, which we use to pay miners for their physical to make more coins. It is all very natural.

Bron Suchecki said...


That is how I understand it. Keep in mind that one of the transactions is metal account transfers (no trade for cash). For example, Perth Mint requests JPM to transfer unallocated from the Perth Mint's account with JPM to Miner's account with HSBC.

Clearing is a system by which HSBC will give the Miner unallocated and recognise a claim on JPM and JPM extingusih a liability to Perth Mint and recognise it has a liability to HSBC.

costata said...


Thanks again. So each of the clearing members maintains an unallocated pool held with other members. From the LBMA website:

Members offering clearing services utilise the unallocated gold and silver accounts they maintain between each other for the settlement of mutual trades as well as third party transfers.

These transfers are conducted on behalf of clients and other members of the London bullion market in settlement of their own loco London bullion activities.

This system avoids the security risks and costs that would be involved in the physical movement of bullion.

So from an overall market perspective this network of BB owned unallocated pools (in aggregate) functions like a single virtual unallocated pool that provides the liquidity to the whole market and it's also the capital of the bullion bank clearing members.

Bron Suchecki said...

Yes, and the point of the clearing process is when those unallocated account balances between a pair of clearing banks gets too big for the sort of risk they are prepared to take against each other (they would take some credit risk), then that is settled by either:

1. the owing bank allocating the unallocated account of the owed bank into physical with the owing bank (allocated is not a credit risk); or

2. the owing bank transferring physical from its allocated account to the owed bank's allocated account with Bank of England (with whom all clearers would have an account); or

3. the owing bank shipping physical to the owed bank's vaults.

The above is probably in order of preference, so as to minimise physical movements.

To the extent that the clearing banks have the same mix of clients there would probably never be any sustained/ongoing movement of physical from one to another as over time a bank's flows would net.

However if the mix of clients is not even (eg one bank predominantly has mining/selling clients and another has jewellers/buying clients) then there would be ongoing movement of physical from one clearer to another.

This was a debate I was having with FOFOA around the LBMA survey imbalance as if the mix of clients between banks is not symmetric then you will have an imbalance in the trading reported (yes, I have not forgotten, it is still on my to-do FOFOA). FOFOA doesn't think so, I do, but maybe I need more time to get to where he is.

Motley Fool said...


Fwiw, that survey was actual reported volume(divided by two in the table so as not to double count). Any additional banks reporting would only have added to the total. Even if the rest did the smaller volume, that would not have reduced those totals given. So that is why it can be taken as a minimum.


Anonymous said...

That's right MF, but the question FOFOA (and I) had was whether LBMA in aggregate sold more unallocated ('gold') than they purchased. The net difference between purchases and sales was some 7500t over the surveyed quarter, and this is too much to be hedged in non-LBMA 'gold' instruments such as COMEX, TOCOM etc.

So if they indeed sold more than they bought, this would indicate that they are not flat 'gold', but that they rather delta-hedge their net exposure to 'gold' using correlated instruments, say AUDUSD, CADUSD etc.

The question that got us there was the question of why the 'gold' price goes up after a GLD puke. The puke is just a small amount of physical, say about 13 tonnes, which is a lot less than the 2700 tonnes of paper that are traded every day. So how can that little puke move the price over the subsequence 2-6 weeks?

If LBMA in aggregate does delta-hedging, this might be the explanation: after the puke they shift their hedge from 'gold' correlated instruments to proper 'gold', thereby running up the 'gold' price. (They would lose a bit due to friction if they do this, but, hey, you are the market maker and if you fleece everyone by a fraction of a percentage point, you should still come out even).

If Bron is right, and LBMA in aggregate is flat 'gold', then the GLD puke indicator still awaits an explanation.


Bron Suchecki said...

My suggestion as to why the GLD puke indicator may work is that in the fact of net selling the APs and others will use all and every means to arbitrage GLD to spot except redeeming (as that has a slight cost). They would build up "stock" of GLD shares in the hope they can resell it later (and avoid redemption and subsequent creation costs).

If the selling continues they build up too much GLD shares (long) and too much leased unallocated (short) so at some breakeven point it is less costly to redeem GLD and collapse the hedge. These capitulations by the APs signal their assessment that the selling is "real" (ie not temporary).

On a sentiment basis this represents a low point, from which on probabilities, the price has more of a chance of rising.

Just a theory.

FOFOA said...

Hello Bron,

I'm glad to see that you brought this up again, because I was just explaining my take on our debate to Joe Yasinski and Dan Flynn of GBI the other day. Did you happen to see that they mentioned the discrepancy in the LBMA survey in their latest post?

The way I explained it is basically this. We have three proposed explanations for the 7,575 tonne (aka $337B) discrepancy between purchases and sales in the 1Q11 LBMA member survey. As you correctly pointed out, it is likely a combination of these explanations, because as I recall you finally conceded that the discrepancy is far too large to be solely explained by the survey methodology. But even still, that "halving of interbank transactions" is our first of three explanations.

The second explanation is yours, which we called "asymmetric reporting". And the third is mine which is basically that demand shocks are being contained/absorbed by expanding or contracting paper supply rather than by price. Three competing/complementary explanations for the reported discrepancy:

1. Statistical methodology
2. Asymmetric reporting
3. More paper gold sold than bought

As Victor just mentioned, we have an explanation for the hedging requirement of the price exposure implied by my explanation which is similar to what they do for FOREX exposure. So having given this brief synopsis of our debate, here's an excerpt from one of my emails to Joe the other day:

Bron's explanation is that there is a difference in clients between the LBMA members who chose to report on the survey and those who chose not to report, and that this difference informed their decision of to report or not to report. In order for Bron's explanation to explain the entire discrepancy, there needs to be a flow of physical gold twice the size of the discrepancy, or 15,150 tonnes (7,575 X 2) from the non-reporting members to the reporting members and then on to their (the reporting members') clients. It must be double because of the halving of the interbank transactions in the survey. This is simply a ridiculous notion given of the sheer size of physical gold flow (15K tonnes of physical in one quarter) required to explain the entire discrepancy between purchases and sales given the methodology of the survey.

But Bron may have a point that, on some level, certain types of LBMA members might have been more prone to report than others. His theory is that the BBs selling to Giants and industrial users are reporting, and the mints and refineries buying from mines and scrap dealers are the non-reporting members. Something like that anyway. So that phenomenon might contribute to some of the discrepancy. So how much?


FOFOA said...


As you point out in your post, new mining supply in one quarter is only about 625 tonnes. Add some reasonable number for scrap supply and then halve the total, and that's the very most that Bron's explanation could account for in the discrepancy. So let's say (generously) that 500 tonnes could be accounted for by asymmetric reporting.

So now we have three explanations for the discrepancy, and we can assign reasonable numbers to two of them. Statistical methodology could possibly account for around 750 tonnes of the 7,575 tonne discrepancy. And asymmetric reporting could maybe account for another 500 tonnes of the discrepancy. So…

7,575 – 750 – 500 = 6,325 tonnes discrepancy unaccounted for

And that leaves my explanation as the winner for the remainder, IMHO.


(Note: The 750 tonnes potentially attributable to the "halving methodology" is just my guess as an amateur statistician. But I think it's a generous and close guess. It could be a little more, but not more than twice that number, and it's probably less. I mentioned p-value in one of the comments before our debate moved to email. It is a way of distinguishing what is statistically insignificant from what is significant. In this case, up to the limit of statistical insignificance is possibly attributable to the "halving of interbank transactions without all banks reporting", in my amateur opinion of course. ;)

Bron Suchecki said...

I saw his article, but this comment:

"Based on the survey, we deduce that in 1Q11 excess demand for gold was 243,560,000 ounces which translates into approximately 7,575 metric tons. In a typical year, quarterly physical production (new mining supply) is approximately 625 tons. One would imagine that with a traditional commodity, physical demand outstripping new supply in a given quarter by a factor of 10 would cause a significant increase in price!!"

Is really not a correct way to look at it, because the 7575t is not all physical demand and 625t is not the only physical supply in that quarter.

Bron Suchecki said...

I disagree with this statement:

"...there needs to be a flow of physical gold twice the size of the discrepancy, or 15,150 tonnes (7,575 X 2) from the non-reporting members to the reporting members and then on to their (the reporting members') clients."

The survey was of bullion bank trades/turnover, which would not relate to flow of physical gold.

The reason I'm not so keen to jump to a conclusion is I have an idea of how trades (paper and physical) are recorded in trading systems and the errors that are likely to inflect the data based on how the database was interrogated.

For example, head of precious metals passes on LBAM request to IS guy who has a lot on their plate, they run a query which they think is OK, but they haven't thought about whether the two legs of a swap should be treated as two trades or one, or if they have excluded reversing (error) trades out etc etc.

Then assuming no errors I need to think through typical transctions and how those may be reported once summarised into the LBMA requested data and whether they will result in the correct result, which is what I'm trying to do with my spreadsheet.

And I think you are underplaying the importance of a correct/representative sample size in determining statistical significance. That sort of stuff relies on normal distribution and representative samples. If a certain group bullion banks of the same type have not reported for strategic reasons then you can't rely on statistical assessments but need to go back to understanding the underlying data.

FOFOA said...

Hello Bron,

If asymmetric reporting is to account for the discrepancy, then "there needs to be a flow of gold twice the size of the discrepancy, or 15,150 tonnes (7,575 X 2) from the non-reporting members to the reporting members and then on to their (the reporting members') clients."

I removed the word physical. Do you still disagree with the statement given this change?


burningfiat said...


Thanks for your answer.

I expect the certificates to be cashed out at the market price or a fixed weight at the face value of the certificates (which only specify a weight). Do you see the trick?

I only see the trick if you really, really, really trust that the mint will not default and give you cash at the worst possible time (when paper price tends towards zero)...
You must trust them a lot since you bank on them to fulfill your wish and fabricate gold for you after FG revaluation has happened. How can you be sure that other more important customers aren't served before you regarding the physical (or the government owned mint decide to keep the gains themselves)? All you have to show for it is some stamped paper certificates, right?

Anyway, maybe their promises will indeed perform. If not, good for you it is only a small part of your savings...

With respect to hedging, I employ this strategy myself:
*) My long term phys. gold savings are a hedge against my short term paper savings and my paper income.
*) My short term paper savings and income (my economic performance basically) is a hedge against my long term gold savings.

If you already have physical gold savings, you don't need to have extra paper gold to hedge against your currency...
Your phys. gold already hedges your currency. All that the paper gold is adding is extra counter party risk to a part of your savings... Superfluous IMHO.


Motley Fool said...


Thanks for the clarification. I will give it some thought. :)


Bron Suchecki said...

"I removed the word physical. Do you still disagree with the statement given this change?"

Taking physical out helps.

"there needs to be a flow of gold twice the size of the discrepancy, or 15,150 tonnes (7,575 X 2) from the non-reporting members to the reporting members"

Don't agree. From my model of the 56 banks, random spread of trades between them all, this is how one of the random runs plays out:

Reporting Banks Buys 5780t
Reporting Banks Sells 5627t
Reporting Banks Discrepancy 153t long

This is a 2.71% compared to 4.35% in the actual LBMA survey. Good enough for an example, I don't have time to run through all iterations to find a 4% discrepancy. For those "reported" figures above, the model shows:

Non-Reporting Banks Buys 3096t
Non-Reporting Banks Sells 3232t
Non-Reporting Banks Discrepancy 136t short

All Banks Buys 8876t
All Banks Sells 8859t
All Banks Discrepancy 17t long

So from a simple model of 56 banks summed buys and summed sells with each other bank (a total 3136 bank-to-bank data point relationships) with random data we get a overall 56 bank universe trading position of 17t over 17734t of turnover.

However, that minimal net position of 17t "appears" when we look only at the reporting banks to be a 153t position over 11407 of turnover. The key point is the non-reporting banks are net short 136t.

The mathematics don't work out as you think.

FOFOA said...

Hello Bron,

The very idea of your asymmetric reporting explanation for the discrepancy (as you are standing it in opposition to my explanation) represents a net flow from LBMA members more heavily weighted in one kind of client (selling clients) to BBs more heavily weighted in a different kind of client (buying clients).

We are both operating on the premise that the banks are not exposing themselves to a large net-position. Your explanation opposes mine in that the banks' "net-neutrality" comes from the non-reporting members as opposed to derivative hedges in other markets as described above by Victor. This neutrality would obviously be reflected in a net-neutral position, aka an "All Banks Discrepancy" that is zero or much smaller just as your model puts forth.

So I think that in your example above you are conflating statistical insignificance and the asymmetric reporting explanations. Let's stick, for the moment, to the question of my statement about the flow required for your asymmetric explanation to fully suffice.

Here's your model, except I reversed the buys and sells to make it directionally the same as the real LBMA survey (easier to discuss that way IMO):

Reporting Banks Sells 5780t
Reporting Banks Buys 5627t
Reporting Banks Discrepancy 153t short

Non-Reporting Banks Sells 3096t
Non-Reporting Banks Buys 3232t
Non-Reporting Banks Discrepancy 136t long

All Banks Sells 8876t
All Banks Buys 8859t
All Banks Discrepancy 17t short

In your model here, the top portion (reporting banks) represents all that we can see in the LBMA survey (magnitude doesn't matter in this discussion because we are discussing the flow issue related to the asymmetric reporting explanation at any magnitude). So this is our "toy LBMA survey":

Reporting Banks Sells 5780t
Reporting Banks Buys 5627t
Reporting Banks Discrepancy 153t short

My statement would therefore be adjusted to read: "there needs to be a flow of gold twice the size of the discrepancy, or 306 tonnes (153 X 2) from the non-reporting members to the reporting members"

We are both assuming that the individual banks (as well as in aggregate) have no (or little) net position/exposure. So what we are seeing in this toy LBMA survey is that the reporting banks are short vis-à-vis their clients but long vis-à-vis the non-reporting banks in nearly equal amounts so as to be net-neutral. And the non-reporting banks (because they are more heavily weighted with selling clients like mines and the Perth Mint) are long vis-à-vis their clients and short vis-à-vis the reporting banks (which have more buying clients). All in all, the banks themselves are net-neutral (or at least close to that; your model shows them with a real net position almost an order of magnitude smaller than the reported discrepancy).

The point is that your reporting members in aggregate hold the same (or similar) net position in magnitude, but opposite in direction, vis-à-vis their clients and vis-à-vis the non-reporting members as the non-reporting members hold in aggregate. This is the asymmetric reporting explanation!


FOFOA said...


So if the banks are essentially net-neutral, why are we seeing any discrepancy at all? We are seeing it because only the interbank transactions were halved, not the client transactions. So the reporting members are net short vis-à-vis their clients and net long vis-à-vis other banks in equal/similar amounts, yet because we halved only the trades with other banks, we see a discrepancy of 153t. So the discrepancy is the product of the halving the directional net flow, therefore the magnitude of directional net flow must be twice the discrepancy.

This applies in all of your models, from your simplest to your most complex, if we assume asymmetric reporting.

So let's adjust my statement one more time and see if you still disagree with it…

"For whatever portion of the discrepancy asymmetric reporting is to account for, there must be a flow of gold twice the size of that portion of the discrepancy from the non-reporting members to the reporting members and then on to their (the reporting members') clients."

Do you still disagree with the statement given these changes?

Bron, your model is describing asymmetric reporting, intentional or not, so you really should consider this flow issue and whether it makes any sense at larger magnitudes like we saw in the actual survey. In your model we can peek at the non-reporting banks and thereby know the "all banks discrepancy" which your model is keeping low through asymmetric reporting. But asymmetric reporting requires this flow, and if you can get your model to spit out a 4.35% discrepancy like the real survey while still keeping your "all banks discrepancy" low then it requires that much larger (and therefore that much less likely) of a net-flow from one group to the other.

If, on the other hand, you allow the "all banks discrepancy" to rise (perhaps offset by derivatives in other correlated markets), you eliminate the asymmetric reporting and the need for this unlikely net-flow of gold, be it paper or physical. So whatever the actual net-flow from non-reporting members in aggregate to reporting members in aggregate is in reality, half of that number is the portion of the 7,575 tonne discrepancy which can be accounted for. If it's not the whole thing (i.e. 15K tonnes in one quarter), then that forces your "All Banks Discrepancy" up which is a net-position they must be hedging elsewhere.

You wrote: "However, that minimal net position of 17t "appears" when we look only at the reporting banks to be a 153t position over 11407 of turnover. The key point is the non-reporting banks are net short 136t.

The mathematics don't work out as you think."

Your statement backs my point. You need the non-reporting banks to be net in the opposite direction which requires a net flow of twice the discrepancy. My math is fine. I think the true net position is higher, close to the reported discrepancy, and that the non-reporting banks are probably not as different from the reporting banks as to be exactly opposite as your model requires to keep the "net position" low without the need for derivative hedges.


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