Thursday, August 22, 2013

My Candid View – Part 9

"Gold is the only money the world has ever known"
Sounds like a simple thought, but it isn't.
To understand the following you must rethink your basic
knowledge of money and investments. Get your aspirin ready.

What will change is how we view money and wealth
Everything else in Freegold flows from that!


Your e-mail to XXXXXX on GOFAUX has, so far, left me with just one question, is the warehouseman draining his inventory (of gold) simply a matter of price? If not, what allows the warehouseman the ability to "drain"/reduce his inventory?

On a very different note,

You wrote the following in an e-mail to me:

"but if you could frame this detail (the monetary history of paper gold which extends from the 1922 Genoa Conference up to the present day) in a way that dovetails with Rickards' recounting of a few events…"

I think what would be meaningful, and what I am guessing you may have in mind, is discussing how the freegold narrative views paper gold as an approximately 91 year old phenomenon featuring a few different iterations that were designed to prolong whatever system was in place at the time. Freegold is a solution to approximately a century of paper gold machinations that were either erected to save whatever gold standard existed at the time or to cope with the problem that was incurred when the gold standard was terminated. The gold problem (and the monetary system's state of chronic crisis) is, in large part, down to nothing less than the inability for prior generations to employ gold most effectively, i.e. floating against all currencies in the absence of paper proxies.


Hello Edwardo,

"is the warehouseman draining his inventory (of gold) simply a matter of price?"

No, not at all. The warehouseman doesn't care about the price, because all he is essentially doing is arbitraging two different prices, the spot price and the future price. When that spread is wide, he's adding inventory. When it is tight (or negative), he's draining inventory. But don't get hung up on causation, because maybe the spread (contango) is tight because he is draining inventory, or because of that which is actually causing him to drain inventory. So then why is he draining inventory? Perhaps because the supply flow (at the top level, not in our field of view) is so tight that he has no other choice.

If you are interested in this perspective, Fekete's seminal paper on it was in 2004 and it is here:

The paper is 16 pages long, but I only recommend the first 9 pages, up to the sub-heading "Understanding the Silver Market". Even though it is peppered with bits of HMS nonsense, it is a great description of the basis, contango and backwardation which I reread to refresh myself whenever discussing this subject. If you can understand it in the grain elevator terms like he explains, then I think you will have a deeper understanding than even someone who has mastered more complicated explanations.

Regarding this: "Freegold is a solution to approximately a century of paper gold machinations that were either erected to save whatever gold standard existed at the time or to cope with the problem that was incurred when the gold standards was terminated."

I think (and so do you) that Freegold is the solution to thousands of years of problems stemming from the use of the same medium in two contradictory roles. So I would say that the last 91 years since Genoa is more like the period of evolution of the thoughts underlying this elegant solution. Jacques Rueff's 1932 speech, which was focused on comparing the Genoa monetary conference 10 years earlier with another monetary conference that also occurred in Genoa back in 1445, is the oldest text I have read that hints at the beginning of this evolution of Freegold thought. In fact, I would probably call Rueff the father of Freegold thought. Here's how that speech in 1932 began:

"The story I am going to relate covers a long period. It is the life story of the gold standard, now afflicted with so grave an ailment that only time will tell if the victim will succumb or be left, at the very least, in a state of virtual paralysis."

This is the same person who, 40 years later in 1972, wrote:

"The situation I am going to analyze was neither brought about nor specifically wanted by the United States. It was the outcome of an unbelievable collective mistake which, when people become aware of it, will be viewed by history as an object of astonishment and scandal."

So that's how I would portray the period consisting of the last 91 years; as the period in which Freegold as the solution emerged through trial and error, some planning, some theoretical thought, and the practical efforts of self-interested players at the highest level.


Regarding the drain from the warehouse, I have this silly remnant of an idea in my mind that amounts to "drain=removal" as in the warehouse is literally being emptied of its physical, which is not the case. It could be that pallets of gold go out, but it is by no means de rigueur.

Regarding freegold as an evolution that solves thousands of years of years of problems stemming from fusing the MOE with the SOV, well, that is going to make a very powerful talking point, and one I look forward to introducing.

Think about the warehouse as having two sections, or two sides. On one side they simply offer the service of storing your gold for a fee. That's where all of the allocated gold sits. On the other side they store gold that they bought, mostly from the mines, while collecting the fee from the speculators playing in the futures market. They buy up any slack in the flow and sell futures at a higher price keeping the difference as the storage fee, rather than collecting a fee directly from the owner of the gold.

That way, you can think about the "draining" of the warehouse as all of the gold either a.) leaving the warehouse or b.) being slid over to the other side where it's all allocated to specific customers.

Drained gold going to allocated vaults I understand, but what about gold that is leaving the warehouse that is not going to an allocated account?

Where might that gold be going? To folks who want to store it somewhere besides the warehouse vaults? Sorry to keep banging on about this but I wants to know.

Some might be going East or Mid East, but I doubt it's as much as people think. At least probably not as much LBMA LGD bars. Remember, there's still some flow of new gold coming in, so that would go to supply "outside of the LBMA demand" before LBMA bars would be shipped. Some might be going to Switzerland to be melted and recast into kilo bars which are very popular in the East. Bron and Warren speculated that this is why it seemed like more "four nine" bars were being redeemed from GLD than the lower purity bars. Kilo bars are all "four nines" whereas London Good Delivery bar specs do not require that much purity. So if they were going to melt them to make kilo bars, the lower purity LGD bars would require additional refining i.e., additional cost.

But I'm not so sure about that explanation. Today more gold is being refined to .9999 anyway, so the "newer bars on top" might tend to be higher purity and, like I said, the "new" flow should be going to fill that "outside demand" before they move a single LGD bar. Remember also that XXXXX said HSBC was requesting gold shot from the refinery's scrap recycling. That would likely go toward the "outside the LBMA flow".

I think that there's probably enough "inside LBMA demand" to prevent too many LGD bars from exiting the system. So I think that a lot of the movement we see is probably just location swaps within the LBMA system. Think about the tight flow being asymmetrical amongst both individual bullion banks and locations. Gold coming in doesn't necessarily match the demand for gold going out in terms of which BBs are taking in versus which BBs are putting out, and the locations where the gold is being demanded.

So, netting out the entire LBMA system in aggregate, I tend to think that there's probably not as much "physically leaving the warehouse" as most people think. Basically just the entire new inflow is "leaving" while the bars already inside are being shuffled around to match allocation requests. I'm sure there are some LGD bars leaving the LBMA and heading east or being melted down, but probably not too many IMO.


Are you ready for your interview? Do you have your hair, make-up, wardrobe and set design sorted?

My shirt has been picked, my hair will be in reasonable shape, so to speak. My background will likely be a bookshelf, though it may be a window (a symbolic reference that some on the blog might appreciate) or even just the wall behind my chair.

I have some questions: One is about gold for trade settlement come freegold. Will gold move a great deal or will the flow not necessarily require it to actually leave vaults. I feel silly asking, but I'm just not sure.

Also Another and FOA's predictions and analysis that have come to pass/been borne out. Care to offer a list?

"I have some questions: One is about gold for trade settlement come freegold. Will gold move a great deal or will the flow not necessarily require it to actually leave vaults. I feel silly asking, but I'm just not sure."

I think it will be a bit of both. The flow will be automatic, not unlike how the US trade deficit has automatically equaled demand for new issue Treasuries. Of course today the supply of Treasuries has overtaken demand, but that's another subject. The supply of gold will not overtake demand in the way it has with Treasuries, it will simply meet it. So gold will simply flow opposite the net flow of goods and services.

It will do this in a much more distributed way as compared to the more centralized way Treasuries flow. So distributed, in fact, that we will likely not even track it other than reporting its net movements on the BOP, which will magically balance once gold is figured in.

Those who trade inside the LBMA will likely be mostly private Giants, and in some cases London will be, by far, the safest place for them to store their gold. I'm not really sure how those capital flows (changes in ownership) will be reported on the BOP, and I don't really think it matters. It'll probably show up as some form of foreign investment or something.

But basically trade will balance without the need for massive and ever-increasing debt to keep it balanced. Gold will flow across borders in sizes ranging from grams in envelopes to pallets on planes. Geographical demand will come from zones shipping out more goods and services than they are shipping in, so the balance will be filled with gold. And if some of that demand is from Giants who want to buy gold that's already in London or Zurich and keep it there, that'll probably be recorded the same as if they bought some other immovable asset, like a building, although gold may get its own category in that regard.

"Another and FOA's predictions and analysis that have come to pass/been borne out. Care to offer a list?"

Most people would say that their predictions have not (yet) been borne out. And of course I focus more on the conceptual truth in what they exposed. But here's one courtesy of Michael H:

Monday, August 6, 2001 - GOLD @ $267.20 - FOA: "The result will be a massive dollar price rise in gold that performs over several years."

Michael H: "Who says that events since 2001 haven't played out as A/FOA expected?"

Tuesday, January 1, 2002 - Launch of euro notes and coins
Friday, February 8, 2002 - GOLD ABOVE $300
Monday, December 1, 2003 - GOLD ABOVE $400
Thursday December 1, 2005 - GOLD ABOVE $500
Monday, April 17, 2006 - GOLD ABOVE $600
Tuesday, May 9, 2006 - GOLD ABOVE $700
Friday, November 2, 2007 - GOLD ABOVE $800
Monday, January 14, 2008 - GOLD ABOVE $900
Monday, March 17, 2008 - GOLD ABOVE $1000
Monday, November 9, 2009 - GOLD ABOVE $1100
Tuesday, December 1, 2009 - GOLD ABOVE $1200
Tuesday, September 28, 2010 - GOLD ABOVE $1300
Wednesday, November 9, 2010 - GOLD ABOVE $1400
Wednesday, April 20, 2011 - GOLD ABOVE $1500
Monday, July 18, 2011 - GOLD ABOVE $1600

Another one was this comment:

Date: Wed Nov 12 1997 20:41

Date: Wed Nov 12 1997 14:26
Markus ( BIS Decisions ) ID#283277:
ANOTHER: Could you please enlighten us as to the Bank of International Settlement decision you allude to in your recent post?

A BIS meeting was held and from those doors the world did change. The Bundesbank has now made clear to all what will now be policy for CBs. A crisis is at hand! All physical gold sales will stop. All gold lending will wind down.

Less than two years later we had the WAG. And more recently, we have the release of the Bundesbank's gold actions over the years, both of which support the idea that ANOTHER must have been an insider of some kind.

I'd have to say that my fascination with them has very little to do with their predictions that have already been borne out. But it has everything to do with the perspective they shared, a perspective which I have endlessly explored from countless different angles all leading to the same inescapable conclusion that the Freegold revaluation they described is inevitable. Of course their predictive powers will amaze one and all once it happens, but until then it's all about the lens they gave us and how we can use it to view events as they unfold in a different light. Of course this is one of my favorite FOA quotes, one which you might want to print out:

FOA: "I (we) expect none of you to consider anything said here as credible. Everything is given as I understand it. If you came with a notion that I am someone who sees the future, grab the children and run far away. For these Thoughts, and my ongoing commentary, are meant to impact exactly as the "gentleman" said they would. People hear them, and whether believed or not, the words leave a mark. A mental mark on the trail, if you will. And later, after the world turns, our little "stacks of rocks" will be easier to understand next time you are passing this way. In fact, your ability to find your own way will forever be enhanced for having seen this path in a different light."

It occurs to me that there are two concrete predictions that have played out, one of which is QE and the diversification into Euro denominated debt.



The interview is concluded. I'll be receiving a link in due course. The Q&A touched on a variety of issues related to freegold but it was not, by any means, an in depth interview. You can decide for yourself how I did.

See the e-mail below regarding what we covered. Bob wants to do another interview, perhaps two more. The more one learns about the subject the more questions arise. I didn't really get anything like as in depth into, for example, the paper gold market as I would have liked. And, though I tried to get in some important soundbites, I didn't always manage to. For example, the last question (I think it was the last question) that I was asked was "why should people buy gold?" I said they should buy gold because it is the asset that is going to recapitalize the system, which as an answer leaves out the critical information that as part of the recapping process, gold will be reevaluated-which he never asked me about. I didn't get to see him, but he saw me. I was responding, in fact, to a disembodied voice. I've had experience as an actor dealing with acting against a camera, so it was not as awkward as it might have been. He also said something about sending the interview to unspecified persons for their response.

I have to tell you, your email to XXX, somehow, the central idea in that response penetrated in a way that it had not before. I still have some questions, but I feel that I understand something that very few, except for a select number on the blog, fully comprehend. Perhaps I am kidding myself, but basically the idea is simple yet profound. I'd like to discuss it with you further at some point.


Checkmate 2 - Slow History

"Building a coherent and cohesive narrative around events of the past is a natural part of our process of understanding. And every good story has a beginning, middle and an end. But what if the end of a particular narrative is still in the future?.."

From Checkmate 2 - Slow History, here's Levon (the Gold Trail):

"Over time, one could never compare the returns of investing in stocks and bonds to owning gold. This is simply because when gold is entangled in currency schemes, its fiat value is falsely presented while the currency system ages. Only the commodity use of gold is reflected, not its much higher wealth "reserve asset" function.

However, this present era has become one of those unique periods in paper money history when gold will take a great leap in value during the relative short term."

Glimpsing the Hereafter 2

"Think of them as relative constants when compared to the wild-ass variable of savers, the elephant in the room, or more like the bull in the china shop, as long as they don't have a good focal point to herd them out of the busy economic highway. The best thing the savers can do for the economy is to get out of the price signal transmission business and settle their accounts. Simple as that. We don't need anyone to "help" the Superorganism in identifying and enabling credibility. That's a natural process. The savers, which most of us are, should simply get out of the way, settle their accounts and let the organism work. It is only the lack of such settlement that messes it all up. And that's the main point."

From Glimpsing the Hereafter 2 and Superorganism Open Forum, here's Let It Be:


Anonymous said...

Oh no, only 1 more "my candid view" to go...

JR said...

I have lived two lives:
pre- and post-The FOFOA Blog.
Post-FOFOA is better.

tcelfer said...

Nice work Edwardo & FOFOA -- that should spark interest for anyone that looks towards the future!

Alex in Montana said...


Yesterday you mentioned "if Rickards and all the others are correct in that gold will simply rise along with everything else that is real...." and then spoke about $5,000 an ounce as price.

On page 243 of "Currency Wars" by James Rickards, published in 20111 he has 7 prices based upon what money supply gold will be backing. His money supply figures were as of early 2011.

Here's Number 7:

US, China, ECB M2 Money Supply with 100% gold backing:

$44,552 an ounce

Given the new Money supply in late 2013 is much larger his $44,552 figure is now even closer to your $55,000.

Rickards just after this $44,000 figure on the same page:

" In order to impose discipline on whatever regime is chosen, a free market in gold could be allowed to exist side by side with the official price. The central bank could then be required to conduct open market operations to maintain the market price at or near the official price".

Rickards has picked a price way above anyone else out there except you and then realizes there may well be a free market in gold with CB's having to revalue near the market price.

Give him credit for at least being in the same ballpark as you. Maybe he hasn't embraced Freegold, but he's getting there.

Sam said...

I fully expect Richards will call Freegold a type of gold standard in the end and proclaim he knew it all along.. Like saying a republic is a type of democracy. I think time will prove FOFOA accurately predicted our new monetary system and everyone else just made vague open ended guesses.

Grumps LaBastard said...

"Over time, one could never compare the returns of investing in stocks and bonds to owning gold. This is simply because when gold is entangled in currency schemes, its fiat value is falsely presented while the currency system ages. Only the commodity use of gold is reflected, not its much higher wealth "reserve asset" function.

However, this present era has become one of those unique periods in paper money history when gold will take a great leap in value during the relative short term."

But the wealth reserve function is not constantly on. Gold takes a great leap in value when it's time to square the financial system's books. It's the nonexpiring account receivable that is undervalued until the time comes to extinguish otherwise inextinguishable systemic debt.

Aaron said...

"Then there is an alternative site the FOFOA blog. I don't recommend it anymore. The thesis there is that gold will stay external to the system at a price of 55,000/oz. There will be no mining of gold, no gold lending, easy credit creation in a currency will be punished by a higher gold price in that currency. It is bizarre. I post there under GrumpsLabastard telling the cultists there they're full of crap. My name is mud over there."

Funny how some quotes are timeless. ;D

farmersteveg said...

SAM - this what you are thinking ?


Alpha Hunter James Rickards on Gold and the U.S. Dollar

"Rickards: It is important if, with me, you expect that the world will in time have to adopt some sort of gold standard. The phrase ‘the gold standard’ is misleading, there are many different ways in which one can structure a gold standard, or simply use gold as a reference of value, as suggested for example by Robert Zoellick in 2010."

Sam said...

@farmersteve...Yeah wow you are like JR now.

The world has always been on a standard in a way. Just because the US broke the direct link to gold doesn't mean the dollar doesn't have something that gives it value. And no it's not our full faith and The dollar has value because oil states except it as payment for oil. So we have an oil standard....without the does that work? I wonder why they do that? They have openly said they would rather keep the oil in the ground than take our paper promises. Must be that they have a way to get gold. So at least as far as the oil states are concerned they are still on a virtual gold standard while everyone else holds dollars in reserve in a defacto oil standard

Biju said...

Usually for many years - a INR dive against the dollar coincided with a Gold dive in dollar. Will it be different this time or are we going to get a other Gold smackdown ?

Naughty Slumdog said...

Well done Edwardo ! Thanks FOFOA !

Post a Comment