Saturday, August 17, 2013

My Candid View – Part 4

This part begins my multi-part conversation with Edwardo prior to the RT interview. Edwardo agreed to do the interview as long as I would spend some time clarifying for him some aspects of my view on various topics. As most of you know, I consider Freegold to be a lens of sorts, a way to view the trail we all walk in a different light. And for the most part, what I try to do on this blog is to share with you the lens itself, so that you can see the view for yourself, rather than simply describing the view that I see through it. So that's what kind of sets this series of posts apart from others, and why I decided on the name 'My Candid View'.

I picked Edwardo in part because I think he already has the lens and the view. And as I said in one of the emails below, it is the details of the view that make for the most interesting discussions among those who share the lens as well as the most contentious debates against those who don't. It is therefore the view more so than the lens that tends to be sensational and which occasionally ignites that initial spark of interest in someone leading them to want to dig deeper. And it is the sensational which interviewers usually want. So Edwardo and I spent quite a bit of time discussing the view, and now you get to read that exchange at length!

Interestingly, this series seems to be attracting a few brand new readers. Not only has traffic doubled over the past three days which is not very unusual for new posts, but what is more unusual is that I have received multiple emails from people who have just stumbled upon my blog for the very first time and were then moved to send me an email. There's something to be said for the occasional exposition of the more mind-blowingly sensational conclusions drawn from the most logically consistent perspective out there. It's what first caught my attention too! ;D

Thinking about the year of the window, were I the interviewer, I would be quite keen to hear as much detail as possible about the issue of support and the end of support, as that bears directly on the question of (not just) when but how the transition is likely to occur. I may be missing some key ideas where this is concerned, but support for the paper gold markets, or so it seems to me, would not come primarily by, for example, an institution like the ECB buying shares in paper gold instruments such as mining shares or GLD. Availing themselves of the Futures market seems another matter. The problem with any of these notions, besides the possibility of them being just flat out incorrect, is there is no evidence one can point to make a case for such operations. My feeling is that the issue is less about support on the way up and much more about a lack of it once "the market" turned. How much support do you imagine was required before September of 2011?

Paper gold, must, as we know, offer allocation or it loses all credibility. I've written, perhaps ad nauseam, about this of late. Clearly, you have read those posts so you know my views and we are on the same page. I'll end it here except to say that my preference would be that we prep either by phone or Skype.

Hello Edwardo,

Sure, we can talk on phone or Skype. Assuming we have some time (days at least), I think it would be helpful to work out some basics by email first.

The first thing I would do would be to plan on side-stepping any of the more complex issues, especially the ones with no hard evidence and only logic and speculation to back them up. I see that you are on the same page with some of your comments!

Yes, the "official support" doesn't really matter. Maybe there was some, maybe there wasn't. But if there wasn't, then it was all "market support" for paper gold, and that's an even more dire situation. "Market support" = bull market or bull run. And that wasn't just in gold. It was in silver, oil, copper and almost all commodities. So was there even a "gold bull market" at all? Or was it a commodity bull market that has now ended because global economic deflation is a real thing and a real effect of the winding down of the dollar-based international monetary system?

Freegold is about the revaluation of the monetary reserve asset with no country and a 5,000 year history. It is not about a commodity bull market.

I want to talk with you more about how and why I think Comex is a side show and the real pricing for gold is, unfortunately, in the foreign exchange market. I think the most important thing to understand and internalize is that "the physical gold market" is nonexistent when it comes to pricing. You cannot drive the price of gold up by buying a bunch of physical. All you can do by doing that is to destroy the paper gold market. So physical demand does not drive the price of gold up.

Back during the London Gold Pool years (late 60s), physical demand did drive the price of gold up. And, perhaps in the late 70s and 80s and even into the mid-90s, Comex futures were more than just a side show in driving the price. But today I think it is clear that there's much more money chasing gold in the FOREX market than anywhere else. How else can we explain the volume in the LBMA survey? And I didn't come up with that explanation. It first appeared in 1997 right after the LBMA first revealed its tremendous clearing volume. Note that clearing volume was still shocking then, but it's also much smaller than total volume. From the Red Baron series circa Sept. 1997:

"The formidable volume of daily trading strongly resembles that of currency trading."

"This suggests (at least to me) the trades are non-Central Bank transactions - and more probably commercial operations related to CURRENCY TRADING."

Milamber posted a good quote from ANOTHER a few hours ago:

Date: Sat Oct 18 1997 21:04

I ask you now: "Is it hard to believe or hard to understand"? When it comes to money it's usually both.

Know this: "gold transcends human valuations thru time and life". . Take your time on this one!

"Gold is now caught in a crossfire of world thought. The traders are viewing it as a commodity and trying to make money on its moves using various paper trading vehicles. Their opinion of the market is flawed because the "real value buyers" would never deal with these people or let anyone in that circle know they are buying gold as "money"!

The major buying and selling is between CBs, nations, merchant banks, "the super rich" and the hordes of small buyers in forgotten places. That is one of the small many reasons wall street hates gold, they are not part of the real action.

Comex is a side show!"

It is, in fact, traders that are driving the price of gold. It is those who are buying and selling it as a commodity, while the real insiders are buying physical gold as "money" as Another put it. So the outsiders are the massive pool of traders, and the pool of "trading money" on the FOREX is larger than that in any other segment of the "gold" market, so that is the primary driving force in the POG.

This brings me to why gold stays correlated with oil and silver and everything else. It is not, as some people believe, a manipulation run by the USG intentionally stirring up trouble in the Middle East. It is because of something very similar to Mises' Regression Theorem. Correlated commodities are correlated today because they were correlated yesterday. And they were correlated yesterday because they were correlated the day before. As long as they trade in relatively free and open markets, their ratios or correlations will not change quickly.

Why? Because traders expect them to stay correlated due to the Regression Theorem and therefore they (the traders) act on that expectation. We normally call this arbitrage, but it's more of an effect of the Superorganism than it is the individual act of a conscious "arbitrageur".

If, say, silver is heading higher while gold is not, traders will tend to sell silver and buy gold because they see opportunity in the GSR being stressed. And at that point, it in fact becomes a democratic process. If more traders expect the GSR to remain static, then they win. If more expect it to widen, then they win. If more expect it to narrow, then they win. That's where TA comes into play in predicting what the majority of traders will expect at any given time.

So ratios do change slowly over time through this democratic process, but they never change abruptly as in a revaluation which Freegold predicts.

Now think about this in terms of the "gold thesis" of almost every gold bug in the world. They all have it basically right. They all think that gold should be much higher. But how can gold get there when it is chained to all of these other commodities through the regressive expectations of a massive Superorganism of traders that far outnumbers the gold bugs? It can't!

So in this case, all of the publicly traded commodities in the world constitute a weight around gold's neck holding it under water. If the gold bugs try to drive gold higher in isolation, the rest of the trading world will see a profit opportunity in selling gold and buying whatever their favorite correlated commodity is. This will keep gold correlated with all of the commodities it was correlated with yesterday. And if those commodities are not ready to explode in price, then neither will gold. The only way we get $3,500 gold is with $230 oil and $70 silver. And that's not a revaluation. That's either a commodity bull run or inflation.

So when we look at all of these other poor gold writers throwing in the towel, we should feel sad for them because they have the basic thesis correct—that gold should be much higher—but they are missing the bigger picture of how it will get there. And that's where the Freegold lens comes in very handy!

Think back to the Austrians (including Ron Paul) in the early 60s. They fully expected a revaluation of gold, because they clearly saw how Bretton Woods was unsustainable as it was. If the revaluation had come as they expected, it would have been only in gold!!! Very important!! If the US had chosen to revalue its gold reserves to, say, $200/ounce in order to extend Bretton Woods, it would have been only gold that was revalued. Not oil. Not silver. Not copper.

That's because revaluations always happen overnight and by surprise, which doesn't allow the traders (the army of unwitting arbitrageurs) the opportunity to act on their perceived profit opportunity as gold inches up. It takes their power away from them.

So what was expected in 1970 didn't come. Something else did. Likewise today, what is expected by almost every gold bug won't come. Something else will. Again, this is where the Freegold lens comes in very handy.

So that was the "market support" over the last decade. Everything else was rising, so gold went along for the ride. If there was "official support" it was probably a combination of providing physical, cutting deals to keep some big interests out of the public arena, and also possibly buying XAUEUR at key points in time.

Make sense?


FOFOA, what you've written is very clear. Now, for the purposes of making sure that I actually understand what you've imparted, I'd like to encapsulate […]

Last, but not least, the timing of this revaluation will almost certainly be dictated first and foremost by a critical state whereby the flow of physical has seized up and is threatening to shut down global commerce.

Hello Edwardo,

Yes, the revaluation of gold will be de facto instantaneous because of a shortage of physical. Physical gold is already "cornered" by the mere existence of so many dollars. But as long as there is enough flow at the top level at which it flows, the paper markets where traders operate will continue to function. The minute there is not enough physical flow at that top level, physical gold will be de facto revalued. But that doesn't mean we'll know the new price right away. All it means is that the phase transition has occurred. There's no turning back at that moment. We'll have passed the event horizon.

It is my view that it will happen behind closed doors where no one can see it coming. Think of it like the managers at MF Global discussing pulling the plug in the moments before they come out of the conference room and tell everyone in the office to stop all redemptions and freeze all accounts. At some point it must become clear to the insiders that actually trade physical at that top level that the game is over. And at that point there is great value in determining who gets the few remaining reserves. Consider also that central bankers at the BIS are probably involved in the bullion banks at that level insofar as they have assisted in the past in keeping certain interests out of the public arena.

So it's just like ANOTHER said, the BIS will have a say in the matter.

I don't know if we'll see any signs that something is "threatening to shut down global commerce." That's just a given, and presumably at that top level gold trade it is already known that the physical flow of gold is necessary.

The "Comex is a sideshow" meme is important insofar as it reveals some of the flaws in the standard gold bug perspective. XXXXXXX and XXXX come to mind, and of course XXXX. The problem is that whenever the term "paper gold" is used, they automatically think Comex futures. And that train of thought leads to the "short squeeze" conclusion. In their simplistic perspective, futures are paper because they are contracts for future gold. Futures are publicly traded contracts and forwards are "off market" or privately traded future contracts at the LBMA. But they are all "paper" contracts because they relate to gold in the future.

But just look at that LBMA survey!! What is that? It says at the bottom that it's 90% spot!!! Not futures. Not forwards. Not swaps and not options. And that's 2,700 tonnes changing hands every day!! It's actually much higher than that because that's only the LBMA banks reporting, and only a fraction of them at that. There's a bunch more trading worldwide. And the 2,700 tonnes is actually reported as 5,400 tonnes per day because of the way they report volume. So how does that compare to Comex? It dwarfs it any way you cut it.

So it doesn't really matter if we can prove that the LBMA survey is referring to FOREX trading or not. It is what it is. It is a SPOT market for gold that dwarfs Comex futures. Ergo, Comex is a sideshow. XXXXXXX and XXXX refer to the LBMA spot market as the "physical market" or the "cash market" as do many others. And when they mention "paper gold" they mean (primarily) futures contracts on Comex. This is a flawed view, and once again the Freegold lens comes in very handy!

The paper trading arena prevents physical gold from finding its true value as a monetary reserve asset because it chains it to commodities. In my Snapshot Day post I made the point that, among the CB monetary reserve assets, gold fluctuated much more wildly than the others. That's because it is chained to commodities. It can't break free until the physical flow runs out. Then it will break free and there'll be no more paper gold market for the traders to "arbitrage" between gold and commodities.

The new gold market will be physical only. And the price will be set by physical transactions at the top level at which it flows!!! Think about that. Small gold coin buyers and sellers will have a miniscule localized effect on the price of this physical market, because it will consist of a dealer network that traces back like a flow chart to the top level at which gold trades in volume. And that top level is the CB/Giant level where only the BIS is in a position to establish and run this new market. So once again we are back, logically, to somewhere that ANOTHER took us many years ago.

Traders that believe gold is overvalued at $55K or whatever will have no say in the matter. They won't be able to short it and buy up their favorite correlated commodity anymore. Gold:Whatever ratios will become meaningless, because the rest of the commodity world will continue trading in paper. The silverbugs will have to start worrying about the silver:copper ratio at that point, because gold will no longer be a commodity.

So it's not so much that, as you said, "All those pesky traders can only be neutralized by bringing about a revaluation in a very compressed period of time." It's more like revaluations happen instantaneously by definition. Therefore traders have no say in the matter. And all those silverbugs who say they'll trade gold for silver at that point won't have the gold to trade.

You asked, "How do you imagine the actual technical aspects would take place?"

I imagine the CBs, probably through the BIS or the ECB, will offer to buy and sell gold in bulk to get it flowing again after a brief disruption in the gold market. They may have to buy first briefly until people come to understand this new market (and new price!). And maybe it'll even go through London. Who knows?

Imagine the BIS opens a standing offer to buy gold in any quantity at $55K and sell gold in any quantity at $56K. They might even do that through the existing LBMA infrastructure. That will quickly spread out through the dealer network (think flow chart) as dealers offer to buy gold at $54K and make the $1,000 spread. Before you know it, we'll have a new physical-only global gold market with all eyes on the BIS, wherever it's operating out of. The price will become the price, and dealers will have their own spreads which narrow the farther up the flow chart you get (i.e., the larger the transaction, the smaller the spread).


Hello Edwardo,

I tried to come up with a few of my own "Freegold Basics" that may or may not help you. This is my view:

1. Freegold is not a theory. It is a conceptual framework for viewing events past, present and future. It differs slightly from the consensus historical narrative, but is it so surprising that consensus history might be slightly skewed and biased?

2. The public expression of Freegold began with the writings of Another and FOA, but it was never about them. It was always about the conceptual framework that, for those who understand it, makes much more sense than the consensus view. The conclusions drawn from this perspective are what is controversial. But I have yet to meet anyone who can demonstrate that they truly understand the concepts and also come to radically different conclusions.

3. Involvement in the gold industry is a HUGE impediment to understanding the Freegold framework. That's because anyone immersed in the gold business is going to try to incorporate their personal experiences in their gold-as-a-commodity business into the framework. I have yet to meet anyone in the gold business who could set aside their own experience enough to fully understand the conceptual differences.

4. Necessary conclusions drawn from the Freegold conceptual framework view make for very interesting discussions, particularly among those who share the view. These same conclusions also make for the most contentious and controversial debates with those who don't.

Probably the most interesting conclusion is the projected high price (value) of gold. When I say $55K, I only say that to demonstrate the magnitude of revaluation. Any price is really only a guess. It is not based on technicals in the way that most technical analysis works. No one else guesses $55K. Not even Another and FOA. Only me. That's why I say the conclusions drawn from the framework are just that, your own personal conclusions.

That said, I personally think that $200K (in today's dollars) is too high, and $20K is too low. And I have yet to meet anyone who can demonstrate a working/functional Freegold view who comes to a lower estimate than me in today's dollars. Those who do (those who say $10K or $17K) are usually trying to reconcile some other analyst's technical analysis with Freegold, which is a mistake IMO.

More of this later if you find it helpful!


Regarding #1 -I don't think that one should necessarily shy away entirely from referring to Freegold as a theory or thesis for the simple reason that we are dealing with certain suppositions which while circumstantially have, as far as we think, a lot of heft, are ultimately unprovable until, at the very least, the reset occurs. Be that as it may, as an interviewer, were I faced with your chosen idiom "conceptual framework" I would immediately ask to hear an elaboration on components of said conceptual framework.

With that in mind, here is what I am prepared to offer an interviewer right now. The conceptual framework is informed by the following key ideas:

-That the global monetary and financial architecture is set to experience a paradigm shift in which physical gold, freed from paper proxies designed to artificially expand the stock of gold, will play a prominent and vital role in the evolution to the new system. Understanding freegold involves exploring not just why this paradigm shift is taking place, (See FOFOA's dilemma -store of value and medium of exchange fused which creates a destructive engagement between debtors and savers) but how, and, to a lesser extent, it is concerned with the always fiendishly difficult question of when.

Re: #3 - Here's what I understand to be at least one major conceptual difference, that physical sales to certain select participants has been defined by price levels that have never been remotely reflected in any known exchange.

You're talking about the special deals Another told us about, right? The trading of gold at many multiples of the paper price?

Yes, that is one of the areas that those in the gold business have a really hard time with, but it's not the only one, nor do I think it is the primary stumbling block. This is a contentious issue because we only have Another's word and some logic to back it up. I would probably try to avoid this concept if at all possible.

But if it comes up, I think the simple answer is that one simply can't buy more of something than is being offered. So at some point there is an amount of gold that cannot be purchased at today's price. Conceptually this should be indisputable.

Here's a quote from Rickards that I have used before to lend credibility to the concept:

"Great essay Doug; you make some excellent points about the basis trade between physical and COMEX gold. One point that does not get enough attention is the impact of size in the physical market. It’s one thing to say that COMEX is $1,100 per ounce and physical might be $1,200 per ounce for one metric tonne if you can find it. But what about 100 tonnes? 500 tonnes? Physical orders of that size are impossible to execute outside of official channels. Size of order is relevant in any market but I have never seen a market (short of a full blown manipulation or short squeeze) with as much price inelasticity as physical gold which is why the buy side overhang keep their intentions to themselves."

Yes, I absolutely believe Another. But I think there were many different kinds of deals made. Some involved large mine forwards with future physical delivery guaranteed by the CBs. Since these deals also included oil contracts, plus possibly some physical, it's probably impossible to put a "spot price" on the deal even if you knew all of the elements that went into it.

The bottom line was to keep these Giant footprints out of the public arena but also to make sure they were satisfied with what they got through high level negotiations and deal making. Off-market gold deals happen all the time, and if you want more than is offered in the public markets, you are going to pay a hefty premium, just like if you wanted to buy all of a company's shares to take over that company. You are going to pay a lot more per share than the marginal shares are trading for on the stock exchange.

This is just part of being a Giant.


"That's because it is chained to commodities. It can't break free until the physical flow runs out. Then it will break free and there'll be no more paper gold market for the traders to "arbitrage" between gold and commodities."

That is the key, it seems, the arbitrage NOT between paper gold and the real thing, but the arb between gold and all other commodities.

And just to recap, because the following has become a part of my thinking. Physical must always be available for paper otherwise paper loses credibility as a mechanism for allocation.

Hello Edwardo,

Yes to the first part. And yes to the second part as well, but the one caveat is that it's not necessarily the multitude of paper gold holders asking for allocation that will break the market. I don't see it as a bottom-up phase transition. Simply that physical must flow. The fact that all paper gold is "allocatable" is a given. But it's not the failure of people trying to allocate that breaks the market. In fact, not all paper is directly allocatable. But it is in terms of the way it is used by the physical market, as a hedge. But yes, all paper gold backed by bullion banks that also deal in physical is the same as a plain-vanilla unallocated gold account that you don't even trade. It is all BB liabilities denominated in ounces of gold, and at the top level, anyone can ask for allocation or physical delivery. They won't always get it, and they don't. We know that! We have an eye-witness account of such. But that's not necessarily what will break the system. It will simply shut down because the problem becomes too obvious and unfixable.

"How do you imagine the actual technical aspects would take place?"

To quote Another: "I say, these persons will find a problem on their computer screens!"

I think I explained how it will "technically take place." So I assume you are asking how it will appear to "technical analysts." It will appear as the quote says, a huge theoretical opportunity that they have no way to arb. ;D

"Here's how I rationalize such lofty revaluations numbers. The fractional gold system uses paper to artificially expand the supply of gold. When that system is no longer in existence, the value of the artificially expanded gold stock must find a home in the actual physical stock that remains. Now, having said that, there are some very practical real world considerations that bear on how they determine the bid and ask which, from where I sit, pertain to debt writ large and the imperative to recapitalize "the system". Let's just say that from where I sit the new price is informed by a blended set of imperatives that include a price that coaxes sufficient supply of physical out of hiding and renders massive debts harmless."

Gold has never performed this precise role in recent history. So there is no regressive link to the new valuation. This is not the same as when gold was base money prior to WWI. This is not even the same as when gold was circulating as physical currency in Rome. We are in a new frontier, with gold as the primary reserve asset backing all money, in a world more wealthy (in real terms) than even imaginable 50 years ago, and with that reserve asset floating in value, which was also practically unimaginable 50 years ago.

Of course some semblance of technical practicality will play into this Freegold valuation, especially when we quote it in "today's dollars". That's how I can say that $200K is too high and $20K is too low. But beyond that, it's really a calculation beyond our comprehension. I imagine the CBs will start at something like $55K and it will settle from there over less than a year. Probably higher, but who knows.


Okay, so here's where my understanding is at this moment on "The problem". It is not necessarily, or even likely, that a classic bank run occurs where folks are lining up for their cold, hard, physical, but, rather, an increasing dysfunction, if you will, in the market's functioning of which physical availability is a key component.

Yes, that's basically it. Of course a classic bank run could occur (on the bullion banks), but it's not necessary. It's the gold flow at the top level that allows for the flow at all lower levels as well as allowing for the paper markets to operate. Bank runs are to be avoided at all costs. Bank runs are the reason Roosevelt called in the gold. Not to steal the value. Not to extend the dollar. Simply to stem the bank runs, and it worked.

In 1971 the bank run was by foreign CBs on the UST. That was stemmed by closing the gold window. So bank runs will always be avoided at any and all costs. At least systemic ones will. This time that will mean stopping paper gold redemptions (allocations and deliveries) at the top level before it spreads.

"Gold has never performed this precise role in recent history. So there is no regressive link to the new valuation."

-That line is, in my view, unsatisfactory, not to say problematic, with respect to the promotion of a lofty gold (re)valuations.

"This is not the same as when gold was base money prior to WWI. This is not even the same as when gold was circulating as physical currency in Rome. We are in a new frontier, with gold as the primary reserve asset backing all money, in a world more wealthy (in real terms) than even imaginable 50 years ago, and with that reserve asset floating in value, which was also practically unimaginable 50 years ago."

-I think a key "regressive link" must be imposed and must have something concrete about it. The thinking is as follows: Given that the primary reserve asset being thoroughly displaced is sovereign debt, particularly, U.S. Sovereign debt, it makes no sense, given the destruction of that asset's position in the monetary firmament, to not set a very high reval price. Since a revaluation destroys sovereign debt, to put it bluntly, it seems to me it really needs to count.

Fair enough! Go with it.

Okay, sorry to drag this one out, but I think when you answer the following question I will have all the bases covered and we can move on.

In your following comment...

"This time that will mean stopping paper gold redemptions (allocations) at the top level before it spreads."

the "top level" refers specifically to very large operators, or, what we might call, giants, yes?

Yes. That's the basic idea.

And this brings me back to another idea I hold as a result of my time hanging around FOFOA blogspot, and it's one that I can't imagine not coming up in the interview, (and probably fairly early on) which is that gold has never stopped being the primary wealth reserve asset for the most important "producers" on the planet, namely the oil states. The death of paper gold amounts to the complete manifestation of a condition that has been in a state of something akin to dormancy for generations.

The outlier with respect to the concept of a premiere store of value is U.S. Sovereign Debt, but its outlier status has been so attenuated we have lost sight of the fact that its position represents an unsustainable deviation. All this by way of saying that we are, in fact, returning to a gold standard, but a gold standard with one feature in particular that sets it apart and makes it a profoundly different animal than any gold standard that has existed before. Gold will not be fixed in currency/credit. That was the great and fatal flaw that brought down the gold standard that existed prior to the Nixon shock.

Yes, I do see the value in calling it a "gold standard" of sorts, because gold will be the foundation of the monetary system. But the problem with calling it a "gold standard" is the baggage that comes with that term. Alright, so you cut some of it away by saying the gold price will not be a fixed price. What baggage is left? Well, there's the idea that in a gold standard the CB must always redeem its currency in gold, ergo the gold window. But Freegold is a little different in that regard. Also in recent gold standards, the gold was really just for the CBs to settle up amongst themselves, and not so much about individual savers other than Very Thank You Mr. Chang. And if we really get into it, that was one of the big problems with the gold standard; that some people liked to save in gold which constricted the money supply by constricting the monetary base.

Anyway, you know what I'm saying. It's fine to use that term as long as you sufficiently destroy the baggage, but in general I prefer to instead distinguish Freegold from a gold standard. This also gets near the point of whether gold is being demonetized or remonetized. It is reentering the monetary system in a big way, but it may be more correct to say it is being demonetized since it will float in a physical-only market. In fact, it is both. Gold becomes the hinge between the monetary and physical planes. It becomes the one item that exists in both planes.

But yeah, the oil states are a good example of a people who have always used gold "properly" as a wealth reserve. A people who, incidentally, have something we need.

"The death of paper gold amounts to the complete manifestation of a condition that has been in a state of something akin to dormancy for generations."

Yes, this is true, but to me at least the sentence is confusing. The paper gold market was a good thing for a while, because it kept the gold flowing. Think about it this way…

1946-1971: The gold flowed to oil from the US Treasury. Then that flow was threatened because the system became unsustainable and unstable. They could have done a number of things. Revalued to a new fixed rate. Revalued to a new floating rate. Close the gold window. They did the latter.

1971-1980: The gold flow was chaotic during this time. What they learned was that as the price of gold skyrocketed, the flow of physical dried up because more and more people started to think of it as money. So the flow to oil was once again threatened.

1981-Present: The gold flowed to oil via the paper gold market. This flow came mainly from two sources. Unlike pre-1971 when it came from CBs (UST), post-81 the gold came mainly from the mines and Western dishoarders. They even expected the new CB-backed paper gold market to allow the mines to expand production 5 times over. Didn't happen, and the Westerners had mostly dishoarded by the late 90s.

What we see today is that the paper gold market is no longer capable of flowing the gold in sufficient amounts to where it needs to go. We are essentially back to 1971 with only two options now instead of three. Revalue to a new fixed rate. Revalue to a new floating rate. But the fixed rate is not a realistic option this time, HMSers notwithstanding, because we have already moved on from fixed exchange rates in currencies to floating, fully-fiat currencies. Moving to a fixed gold exchange rate would undo all of that just to get the gold flowing again. It is simply not going to happen.

So, as Holmes says, "once you have eliminated the impossible, whatever remains, however improbable, must be the truth."

To me, the "compete manifestation" simply means the completion of a full-circle monetary evolution that was required to keep physical gold flowing to where it needed to go.

The "paper gold market as the bad guy" meme and the "killing of the paper market" as a heroic event are really just constructs confined to the gold bug realms. In a broader perspective I would simply say that the paper gold market has reached its end the same way the Bretton Woods gold system reached its end in 1971.

There is nothing intrinsically wrong with government debt. It's been around for a really long time. But its use as a primary store of value, particularly by foreigners, is an artifact of this monetary evolution that, one way or another, always evolved in order to keep gold flowing. In 1922 the big problem was not enough gold. So rather than raise the price of gold, they admitted a new kind of reserve asset, paper notes put out by the US and Britain. So every step of the way it was about keeping gold flowing where it needed to flow. The gold must flow.


But what a monster they created when they fused the MOE with the SOV post Bretton Woods. It has just engendered the most massive misallocations of capital and insane credit creation that now amount to the chain around Ebenezer Scrooge.

Yes, post-Bretton Woods certainly stands out as an era of massive misallocation and malinvestment. But do you really think that's when the monetary SOV and MOE were fused? I guess it's when the US Treasury bond really gained ground as the monetary SOV which was certainly a big part of the problem (centrally-governed misallocation and malinvestment). But from a conceptual point of view, I'd be careful marrying that problem to just this era. The way I see it, the MOE and SOV being the same thing has been a problem for hundreds if not thousands of years.

When gold was both base money and circulating currency pre-WWI, it was even a problem then. It's like I've said in the past about the Barsky-Summers observation; the cause of their observation is that some portion of the savers swung back and forth between base money and credit as their savings, simply because there was no other choice for a saver who instinctively wanted physical gold in an environment where the very act of hoarding it caused monetary deflation and economic contraction. Back then, you couldn't save in physical gold without constricting the monetary base. And that's why Freegold is so unique to the modern era. In Freegold there will be no risk-free real positive rate of return that will beat gold's naturally stable appreciation.

You are absolutely correct, but the effects, as per my comments, in this iteration are different. They could never have created the unprecedented debt berg that we have in this era.

Correct! And what we learned from Another was that the European CBs "conspired" to "allow" (enable) this debt-berg to develop (perhaps without knowing exactly how big it would get) in order to buy the time necessary to launch an alternative system. And, once again, the Freegold lens comes in very handy! ;D

Yes, and, is there not a conviction that the system's attenuated demise is also owed to some degree to China "external" support?

Sure, but obviously it is debatable whether or not China would be better off today without having bought all that USG paper.

How much technology, infrastructure and gold has China been able to accumulate in the last 12 years? But yeah, China obviously supported the junkie's habit and so all codependent enablers should get their due credit. ;D


As you may know, JR linked to Just Another HI Part 3 today.

Is the idea below still your view?

"And as I said in an earlier comment, "I have predicted that the most likely and direct collapse trigger will be when gold **IN SIZE** stops bidding for dollars. That is, when the Giants withhold from the marketplace the gold they already have."


Yes. It is. But that statement doesn't take mining supply into account as much as it probably should. Obviously the supply side is made up of new gold from mines, old gold from dishoarders and old gold from recycling.

Take away the dishoarders and the mines/recycling are simply not enough supply without a revaluation.


What is Gold?

From What is Gold?, here's a very special version of The Ecstasy of Gold from Freegoldtube:


From Indicium, here's 'Crazy' by Gnarls Barkley. I guess you just have to really understand what I write about to see how Crazy is probably one of the great Freegold theme song contenders. I ended the Indicium post with this line from ANOTHER: "And gold? You will never know its price. It will stop all trading as it slices thru $10,000+." As the song says:

"Does that make me crazy?


Dante_Eu said...

Thousand Very Thank You FOFOA and Edwardo! You did well on RT Edwardo.

Best part so far. Part 3 also good, part 2 I struggle with. Looking forward for more fix, just as USG. :-)

Grumps LaBastard said...


Even though banks offer 10% on deposits the inflation rate that is admitted by officials is as follows:

The average inflation of India in 2011: 8.87 %
The average inflation of India in 2012: 9.30 %
The average inflation of India in 2013: 11.18 %

It doesn't matter what's the nominal rate, it's the REAL rate that counts and/or the direction of change of real rates. What good is a Greek Sovereign bond yielding 30% if Greek CPI is 40% and accelerating?

BrightAurum, 5% is a healthy allocation to gold in a nonstressed financial system. My point is that gold will go back to being portfolio insurance once the world is delevered and a REAL positive rate can be tolerated. The acolytes here want to be OVERWEIGHT gold indefinitely thinking that it will preserve purchsing power, but it won't for a shrimp's timescale. The pendulum will swing back to paper asset inflation over decades. Gold doesn't do well in paper asset inflation, it may sinusoidally track a money aggregate trendline but this will be below the real cost of living during this paper asset inflation phase. A shrimp does not have a giant's depth of capital to withstand gold's underperformance during this phase. A giant can afford to have gold underperform for decades.

Anonymous said...

Nice one. Clears all the cobwebs which can slow the processing of the current status of the RPG?

sean said...

"Consumer demand for gold up 53% in Q2 2013 led by strong growth in China and India" according to the latest World Gold Council Gold Demand Trends report, which covers the period April-June 2013. "Taking jewellery demand and bar and coin investment together, global consumer demand totalled 1,083t"


Michael dV said...

It seems gold holds the most value to those who are patient and who do not need it immediately...or is the ultimate security in the ultimate extreme condition.

Michael dV said...

thanks. Your comment on Barsky-Summers cleared up some confusion on my part that had lingered for years!

Grumps LaBastard said...

"In Freegold there will be no risk-free real positive rate of return that will beat gold's naturally stable appreciation."

This is the sleight of hand magical thinking on which the premise of a FG hereafter hinges. What is this stable appreciation? Is it a real appreciation? If so, then is this achieved w/o active CB intervention and consider the implications if gold was to be continually deflating.

Sam said...

@ Grumps

I suppose someone showed you a chart long ago that showed that when REAL rates are negative gold goes up and when REAL rates are positive Gold goes down.

Top down phase transition means the short term investment preferences of shrimps don't matter today and will not matter in the future. The whole game is going to change and you are obsessed with the old rule book

michael3c2000 said...
Great job FOFOA!

Roacheforque said...

That FreeGold Lens is like an "anti-spin" filter in articles like one recently posted at the Hedge which completely missed the point. China's "urbanization" is not some Chinese version of Keynesianism (urbanization for its own sake, as in spending for its own sake). That point of view reveals the writer's transference of Western values upon the East.

The point is that China is attempting to prepare it's middle class for it's soon to be newly revalued wealth.

It's just trying to get a head start on reality, not create a something for nothing fantasy.

We can see through the FreeGold lens, but we never quite see the lens of others, or the point of view it provides them, unless we understand their intent (propaganda? bias? a warped lens?).

A thought for times to come.

Keep up the wonderful flow of FreeGold viewpoints!!

Anonymous said...

Gold will merely be the grease that enables the gears of trade to function, nothing less and nothing more. The imperative of which is to exchange things of value that aren’t gold. I have no doubt that gold along the path towards that imperative could hit 55K or higher in terms of expanding piles of fiat; primilarly employed to release liens in terms of fiat debt held on real assets. But after this crisis is past, gold will assume its proper role of reconciling trade imbalances. Imbalances significantly lower than now thanks in part to gold.

There is no need to ‘also’ counterbalance the world of all other SoV. These other SoV are completely self-sufficient in their own right. Thus gold need not ‘retain’ a value out of proportion to all other assets that circulate amongst men and nations for all eternity. Fiat will also stabilize in its relative value to gold thanks to the counter balance of gold. Thus resetting the foundation in the minds of men necessary to restart the next debt based monetary system; which always begins with the false notion of paper being equivalently to gold.

In short I have no more faith in a piece of paper that the BIS 1.0 claims is worth 55K than a yellow rock the BIS 2.0 may claim out of desperation in the future is worth 55K relative to all other objects of value. As a serious gold holder I’ll be more than happy to diversify into other assets if given such a ‘golden’ opportunity.

While it is indeed true that this yellow rock is unprintable by men, the same can be said of other assets. Further, if the present monetary order has taught us anything its that such a monetary foundation, however elegant, is just as easily discarded by the same foolish souls when it suits them.

The only thing that is permanent is change.

Perhaps this is why giants don’t just hold gold?

Anonymous said...

Fofoa, it's a shame you introduced new thinking in this article. It needs at least a week of comment/brewing before it sinks in.

Congrats on finally throwing off the shackles of Another's 13-year old perspective and going further down the path than he ever did. Yes -- I've been trying to make this point... the paper price of gold and all the volatility is simply speculation and hedging. Folks like Paulson and other large hedge funds are mainly momentum/technical traders. They love a good trend, and are bandwagon followers. As such, $1900 and $1200 are not terribly significant events. They just indicate changing levels of speculator enthusiasm for short term appreciation.

Anonymous said...

I spend a lot of time imagining the end game of the US dollar. I do this out of self preservation, because most of my savings is dollar denominated (3-4% phys AU) -- and I'd like to retire some day. I agree with most others on this blog that it would take a hyperinflation. However, where I respectfully disagree is that it can happen this year... or likely in the next decade.

In order for the dollar to hyperinflate, there has to be a credible alternative. The euro is the best candidate. But the euro isn't credible and stable until their county's sovereign debt issues are resolved.

Every time there is an economic crisis, the dollar comes out stronger as the safe haven outlet. How many years have the Europeans been dithering with the sov debt of Greece? 5 years? Until Greece is resolved, and Italy, Spain, France, UK and Japan "go Greece" the dollar will continue to be the safe haven.

Once those dominoes fall and have their rebuilding phase, we will have credible alternatives to the dollar. Until then, I have no worries about overnight HIs or revaluations. It simply would not and could not happen.

M said...

@ Grumps

"once the world is delevered and a REAL positive rate can be tolerated. "

The world you say ?

Have you ever looked at the price of gold in Indian Rupees over the last 30 years ? They did not experience any "paper asset inflation phase" that was capable of dragging gold down in real terms priced in their currency for any meaningful amount of time.

M said...

@ Wily Coyote

The Eurozone (net creditor)is actually having a real recession. Governments are shrinking, trade deficits are turning into surpluses. Europe is in fine shape to be an alternate to the IMFS.

Japan will eventually sell its US debt when faced with the choice of defaulting on its own people.

But the process of hyperinflation is not limited to alternatives at all. Even if the whole world complies with the US and buys as much debt as it can, they could still run out of the physical output they need to meet the US's demands. That still wont stop the US from still trying to QE imports.

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