Thursday, September 12, 2013

What about Sprott's 4,500 tonne export 'gap'?

Someone emailed me yesterday:

I was reading Turd Ferguson's blog the other day and he brought up a pretty interesting point about Western CB's not having any more gold left (based on Erik Sprott's research regarding the gold exports from the US) and it's impact on Freegold.

Would you be so kind as to share your thoughts on this topic?

I've included the link to his post below for your reference.


I read the article and followed the comments below it, Motley Fool's in particular. I see that he is very popular over there! ;D I also got a kick out of this comment by Nickelsaver:

One of the primary hypotheses of the gold bug/GATA camp that stands in stark contrast to A/FOA says that the Western central banks have surreptitiously emptied their vaults supplying physical gold to the market. The TFMetals article highlights this contrast in particular, pointing to the latest "smoking gun" which has been circulating for about six months since Eric Sprott wrote Do Western Central Banks Have Any Gold Left??? Part II last March.

The "smoking gun" is the net U.S. gold exports spanning 1991 through 2012 as reported by the U.S. Census Bureau which Eric Sprott says exceeded what the U.S. should have been capable of exporting based on supply estimates which excluded private sales as "unknown." The amount of gold exported in excess of what should have been possible (not counting private sales) was 4,500 tonnes over the 22-year period:

"We used this framework to analyze supply and demand in the US going all the way back to 1991, which is as far back as the FT900 documents go. Over the span of 22 years, the total amount of gold that the US has exported – above and beyond its supply capability – is almost 4,500 tonnes! A truly stunning figure. (See Table 3)."

Sprott discounts the possibility that the extra 4,500 tonnes could have come from private sales by claiming that Western gold investors have been net buyers over the last 22 years:

"Admittedly there is an unknown in our analysis, that being gold bullion acquisition and disposition by private investors. However, strong demand in ETPs such as GLD and PHYS and demand for gold coins provide strong evidence that the private investor has been a net buyer over the years. The inclusion of the private investor on the demand side would in fact skew the ‘gap’ of 4,500 tonnes higher to a figure that would lie somewhere between 4,500 tonnes and 11,200 tonnes, which represents the gross exports out of the US. The only US seller that would be capable of supplying such an astonishing amount of gold is the US Government, with a reported gold holding of 8,300 tonnes. The US Government gold holdings have not been audited or verified in more than four decades. The US trade data defines the export of nonmonetary gold as a sale of gold from a private seller within the US to an official agency. In September 2012, we espoused that the Western Central Banks have been surreptitiously selling/ leasing their gold through private channels in an effort to increase the available supply and in turn suppress prices. This new analysis using official US agency numbers seems to provide the strongest validation of our hypothesis to date. It is worth noting that our data only covers two decades and that the export ‘gap’ could in fact be significantly larger if earlier numbers were included or the real private investor demand for gold was known."

Note that this contradicts what Another said about Western gold investors trading their physical for paper gold.

Motley Fool did a good job addressing this weakness in Sprott's analysis in the comments over there:

Submitted by Motley Fool on September 10, 2013 - 7:36am.

I went ahead and read the only 'proof' you offered, being the two part paper by Sprott et al.

Sufficed to say the analysis is very weak, and has huge gaps.

Their figure for the 2012 disparity was 50 tonnes. The average for the period was just over 200 tonnes. The timeframe as 1991-2012.

They do not link the exact data, but this implies that most of the disparity came from the earlier period, rather than the later one.

Now think about gold and sentiment regarding it in the general public sphere from say 1991-2000. Horrid would be a good word. Hell, even today, despite a bull run the general public sentiment is an abhorrence for the barbarous relic.

Their weakest point in analysis is private supply/demand. I think it very feasible that that amount could have been supplied from private hoards, over the period, especially the first part ( where I am guessing most of the discrepancy arises).

Furthermore no differentiation is made between physical bullion, and say unallocated spot. On the demand side many 'sophisticated' investors over this period would have opted for the latter, which is in effect no demand at all. This lack of differentiation also skews the analysis.

Did the US public have the wealth to supply this differential? Yes.

I think this is the more likely explanation for the remainder in difference, once one makes a distinction between paper gold and real gold.

The author of the article, "Pining 4 the Fjords", then defended Sprott's claim that 4,500 tonnes is too much to have come from the American public alone:

Submitted by Pining 4 the Fjords on September 10, 2013 - 8:49am.

…Third, you correctly mention the possibility that this could have come from private sources. Indeed, Sprott et al noted that this was a possibility in their second article. However, they are positing that this much gold is too large to have come from private sources. So the question is, how likely is it that 4,500 tons would have come from private owners of gold in the US? Here is the list of gold reserves

Rank Country/Organization Gold (tonnes)

1 United States 8,133.5

2 Germany 3,390.6

3 IMF 2,814.0.

4 Italy 2,451.8

5 France 2,435.4

6 China 1,054.1

7 Switzerland 1,040.1

8 Russia 1,002.8

9 Japan 765.2

10 Netherlands 612.5

Now here is a list of the top ten largest holdings of physical gold in private hands worldwide:

Privately held gold Rank Name Type Gold (Tonnes)

1 SPDR Gold Shares ETF 1,239

2 ETF Securities Gold Funds ETF 259.79

3 ZKB Physical Gold ETF 195.53

4 COMEX Gold Trust ETF 137.61

5 Julius Baer Gold Fund ETF 93.50

6 Central Fund of Canada CEF 52.71[14]

7 NewGold ETF ETF 47.75

8 Sprott Physical Gold CEF 32.27

9 ETFS Physical Swiss ETF 27.97

10 Bullionvault Bailment 37.1[15]

Please note that 4,500 tons would be more than 2x larger than all of the 10 largest worldwide private holdings of gold combined! How likely is it that from 1991-2012 private owners of gold in the US sold the equivalent of what would be the second largest gold hoard in the entire world? Is it likely that they would sell (or even own) more than the top ten worldwide privately held gold hoards combined? I think not. That is why Sprott was saying they only reasonable source for this much gold was the US treasury. I still believe this is a reasonable conclusion…

MF then countered:

Submitted by Motley Fool on September 10, 2013 - 11:49am.

As to the first, yes I appreciate it.

As to the second and third.

No. This is their assumption.

"However, strong demand in ETPs such as GLD and PHYS and demand for gold coins provide strong evidence that the private investor has been a net buyer over the years."

I call BS.

"Please note that 4,500 tons would be more than 2x larger than all of the 10 largest worldwide private holdings of gold combined! How likely is it that from 1991-2012 private owners of gold in the US sold the equivalent of what would be the second largest gold hoard in the entire world?"

Yes. Over a period of 22 years. I think it is fairly likely. If he would, I would appreciate some input from 'Nick Elway' who I know comments on these forums as to the possibility US citizens held and were able to sell that much gold privately. He has some of the best data in the business, and I think his input would be valuable.

In their study they simply say that private supply/demand are unknowns, and proceed to ignore them. Since they provide no breakdown of the import/export data, it isn't possible to check, but are we then to deduce that they conclude that over the period from 1991-2012, no private holder of gold sold any of it to someone else outside US borders? Seriously? Not even an ounce? All of it 'must have' come from CB stockpiles?

And you wonder why I call their analysis flawed and weak. :P

…Much of this lies in the realm of speculation, as very few hard facts are available. Unfortunately we may not known the truth, till the chips are down. That said, the 'western banks have wasted all their gold' idea does make some assumptions which I consider insane, such as central banker stupidity.


I documented this discussion here because I want to present another possible explanation for this 4,500 tonne "export gap," or at least part of it, that I haven't seen anyone acknowledge in the six months that Sprott's analysis has been circulating. As it is framed by Eric Sprott and Shree Kargutkar, his co-author, there are only two possible explanations (or a combination of the two). It was either public sales (unlikely says Sprott) or it was physical transfers (sales or leases) from the central banks into the physical market, with the implication that at least some of it would have come from the U.S. stockpile since we're talking about U.S. exports reported by the U.S. Census Bureau.

The Federal Reserve Bank of New York (FRBNY) holds mostly foreign gold and only a small portion (about 5% or 418 tonnes) of the U.S. stockpile. The rest of the U.S. gold (7,715 tonnes) is at Fort Knox, West Point and the Denver Mint. The FRBNY also reports how much foreign gold it is holding as "Earmarked gold". In his post on Central Bank Gold Leasing last November, Victor The Cleaner made a chart of foreign official gold held at the FRBNY from 1982 through 2012. This is Exhibit 1 in my alternative explanation:

As you can see from the chart, close to 4,000 tonnes of foreign official gold left the FRBNY between 1991 and 2012. Could that gold have shown up as exports in the Census Bureau data? Exhibit 2 is a conversation found in the minutes of a Federal Open Market Committee (FOMC) meeting on December 22, 1992. The Fed releases these minutes 5 years after the meeting:

CHAIRMAN GREENSPAN. Did I hear you correctly when you said that the gold exports in October appear to have come from the coffers of the Federal Reserve Bank of New York? Has anyone looked lately?

MR. TRUMAN. Well, I didn't want to tell too many secrets in this temple!

VICE CHAIRMAN CORRIGAN. Obviously, we knew what happened to the gold, but I don't think we knew what it did to exports.

MR. TRUMAN. What happens in the Census data is that the Federal Reserve Bank of New York is treated as a foreign country. [Laughter] And when a real foreign country takes some of the gold out of New York and ships it abroad, it counts first as imports and then as exports. However, the import side is not picked up in the Census data. So there you get the export side of it.

MR. LAWARE. Great accounting!

MR. BOEHNE. Great confidence building!

MR. TRUMAN. That's because you haven't been filling out your import documents!

MR. ANGELL. Let me run this by again. You mean a country owns gold and has it stored in the Federal Reserve Bank of New York and if they ship it out, that's an export?

MR. TRUMAN. And in the balance of payments accounts it also counts as an import, so it washes out.

CHAIRMAN GREENSPAN. The Federal Reserve Bank's basement is a foreign country. When they move it out of the basement into the United States, it's an import. Then, when they ship it out again, it's an export.

MR. ANGELL. That makes sense!

MR. TRUMAN. And sometimes when they sell the gold, it might be sold into the United States, so it should count as an import. It doesn't necessarily always show up as an export.

MR. BOEHNE. That really clarifies it!

MR. KELLEY. Does it have to get out of your vault at all in order to be considered an import and an export?

VICE CHAIRMAN CORRIGAN. Well, I'm not even going to try to answer that. In this particular case I know what happened, so I think the description you have is correct.

[Credit for dredging this out of the old FOMC minutes goes to Adrian Douglas of GATA who passed away this year.]

I want you to notice a couple of very interesting things in that exchange. First of all, Truman says that in the BOP accounts it counts as both an import and an export so it "washes out," but in the Census data it shows up as a net export. And then he also says that if it is sold into the market in New York, like say to the bullion banks like JPMorgan, it would actually show up as an import. Extending that logically, if it was CB gold coming out of the FRBNY being sold into the market and then exported (which is Eric Sprott's theory), it would show up as an import first and then an export and it should be a wash rather than a net export. So the only way it should be a net export is if the foreign CB is taking it home and there was no transfer of ownership or sale into the market.

And finally, in the last two lines, it almost sounds like there may be cases where gold could show up in Census data as an import or export without ever leaving the FRBNY. So there's certainly plenty of room to question the Census data, especially as it relates to central bank gold. Yet Eric Sprott doesn't seem to have even considered this issue in his articles. Was he not aware of these FOMC minutes published by GATA three years earlier?

The approximately 4,000 tonnes of gold that left the FRBNY during those 22 years was not American gold because it came out of the "earmarked gold" which is simply custodial gold held on behalf of foreign governments and central banks. So there's no reason its movement should show up as "monetary gold" on any U.S. national account for any purpose. The only thing that makes sense in light of the FOMC minutes above is that physical transfers of foreign gold (as opposed to transfers of ownership) are being treated as nonmonetary gold movements for the purpose of import and export reporting. And if that gold was sold into the market, then it should have shown up as either a net import or a wash rather than a net export. But I can easily imagine how a CB gold repatriation (which is most likely what the 4,000 tonnes leaving the FRBNY was), especially if it was done in secret, might show up as a nonmonetary gold export in the Census data.

Thanks to releases by the Bundesbank over the past year, we now know that Germany moved 930 tonnes from London to Frankfurt in secret and only revealed the move ten years later. From a Q&A posted on the Bundesbank website on October 25, 2012:

"At the beginning of the last decade, we brought 930 tonnes of gold to Frankfurt from London and subjected it to a painstaking inspection. Part of the gold was melted down in order to create new bars which conform with the “Good Delivery Standard” which is customary nowadays in gold trading. Of the 930 tonnes of gold, not one gram was missing. We do not have the slightest doubt that our holdings in New York and Paris are also made up of the purest fine gold. We have at our disposal fully documented lists of the bars, and our partner central banks send us every year confirmation not only of the bars’ existence but also of their quality. We receive confirmation of our gold reserves, measured in troy ounces. The Bundesbank has been drawing up its accounts on this basis since it came into existence. All external auditors have confirmed our accounting practices outright since then."

Moving hundreds of tonnes overseas is serious business. You can imagine why it would normally be conducted in secret. Whenever physical gold is in transit, it is subject to loss by theft or even accident. Remember the story about the Indian van that broke down on the freeway while transporting official gold to the airport? And this isn't the old Bretton Woods era where national treasuries and central banks were the most adept at moving gold. Today is the era of the LBMA, when bullion banks like JP Morgan and private transports like Brinks and VIA MAT are the experts at transporting gold bullion.

So I can imagine that a CB who was repatriating some of its gold from the FRBNY might contract with these private firms to have its gold fully insured through the private sector while in transit, rather than pulling an Indian van stunt. And this would mean the technical "demonetization" of the gold during transit such that it would show up as nonmonetary gold the moment the FRBNY handed it over to Brinks or JP Morgan. And as Edwin M. Truman said above, that would technically be a gold "import" as it left the FRBNY but it wouldn't show up on the Census data; it would only show up as an "export" when it left the country.

It's actually quite interesting to think that the Fed treats these CB repatriation transfers as nonmonetary gold movements. It certainly makes sense from the $IMFS perspective! And it also tells me that they are likely transporting via the private sector, like through JP Morgan who has direct tunnel access to the FRBNY. That would be the "import" when it is moved off of Fed property into the tunnel, and then when it leaves the U.S. via JFK airport would be the "export" which should theoretically "wash out," but as Truman, a Fed economist, told the Fed bureaucrats in 1992, it shows up only as a net export "because you haven't been filling out your import documents!"

So the Fed bureaucrats don't bother with the "import" documents but JP Morgan or Brinks or whoever is flying it to Europe does fill out the export documents and it shows up in the Census data rather than washing out!

MR. ANGELL. That makes sense!

MR. BOEHNE. That really clarifies it!

MR. LAWARE. Great accounting!

Eric Sprott's research found that gross gold exports from 1991 through 2012 were 11,223 tonnes. Some of that must have been movements out of the FRBNY, else why would Edwin Truman have been explaining to Alan Greenspan how gold exports in October of 1992, appearing as part of the U.S. balance of trade, appeared to have come from the coffers of the FRBNY?

We certainly have a mystery here, but we also most-definitely have a potentially significant source of gold "exports" that was not even considered in Sprott's analysis. And by potentially significant I mean potentially accounting for up to 88% of Sprott's "export gap" which means, given an expanded statistical margin of error, potentially accounting for all of it.

By expanded statistical margin of error, I'm referring to two things. The first is that Sprott's analysis of the Census data had to convert currency terms into weight terms. The Census Bureau reports exports monthly in currency terms, so his analysis had to assume a monthly average for the volatile price of gold in its conversion delivering a considerable margin of error. The second is that, apparently, the Census Bureau receives some lower purity nonmonetary gold export data from the exporters in weight terms and then bureaucrats systematically convert it into questionable currency terms, and then when the gold bugs convert it back to weight it could be off by an even more considerable margin.

Yet while Eric Sprott's 4,500 has a considerable margin of error, the ~4,000 tonnes that left the FRBNY does not. It is also reported in currency terms, but no averaging is needed because the price of gold reported here was frozen at $42.22 per ounce for the entire period!

Sprott acknowledges one unknown in his analysis, that of the private investor, but doesn't even consider alternative explanations for the "stunning figure" of his "export gap" because it fits so nicely with the gold bug/GATA hypothesis. And again, we do know that at least some of the 4,000 tonnes of gold that came out of the FRBNY during those 22 years showed up as exports in the Census data because Truman said so in 1992, in the privacy of the "temple", and long before it was even an issue with GATA and the gold bugs.

So to answer Paul's question, I'd say that it looks like Eric Sprott spent a lot of time and words blowing smoke in those two articles and then tried to imply it was a smoking gun that you were smelling. So what do you think? Smoking gun or blowing smoke?


Sunday, September 1, 2013

Glimpsing 3 – Gold Mining in Freegold

The governments will revalue gold and "demand" that the public carry it and use it! It will be the source of all gold, the mines, that will be controlled!
That's Controlled, with a capital "C", not confiscated!

When the dust does clear for mining to continue, gold will be recognized worldwide as real money, and the mining of money will, no doubt, carry Extreme taxation.

This is the third in my "Glimpsing the Hereafter" series in which I peer into my crystal ball and explore the future on the other side of the Freegold revaluation. Unfortunately I do not have an actual crystal ball. All I have is logic and reason, and a little help from Another and FOA. So to quote FOA, "If you came with a notion that I am someone who sees the future, grab the children and run far away." But if you came bearing your own logic and reason, then perhaps you will find this post useful. :D

Gold mining is an extremely contentious subject around here, partly because a lot of gold bugs are invested in gold mining shares. But that's not what this post is about. If you would like to read about how Another, FOA and I think the shares will fare as an investment, you can find it in Part 2. And, for completeness, here's the link to Part 1.

In this post I'll explore how we can understand and visualize the practice of gold mining in Freegold, and how it will be a most-natural fit. In fact, after finally putting in the effort to think this topic through, I have come to the conclusion that it fits much better in this "hereafter" context than in the present and past contexts with which we are all very familiar. For a visual tour of present and past "for profit" gold mining efforts that channeled talent and manpower away from other more socially desirable pursuits, check out this awesome video from Freegold tube. It includes footage and images from the mid-1800s Gold Rush as well as some amazing footage of modern mining techniques, with a couple of fantastic montages at the very end.

Don't get me wrong. I have nothing against gold mining, or any for-profit activity for that matter, socially desirable or not. It's just that once you open your mind and consider the natural implications of gold valued by the free market at, perhaps, 40 times the cost of pulling it out of the ground, it all comes together and makes perfect sense! Even the old Warren Buffet quote will take on a whole new meaning: "Gold gets dug out of the ground... we melt it down, dig another hole, bury it again and pay people to stand around guarding it." At least I hope it will, for you, after this post. ;D

What I'm going to walk you through in this post may not have made sense before the Gold Rush days. But today, with the low-hanging fruit long since picked and the billions of ounces already obtained through modern mining techniques over the past several decades, I think you'll be amazed by the view. I know I am!

Let's start with this "crazy" idea, first proposed in 1998 by Another and FOA, that gold in the ground will be controlled, taxed or otherwise "confiscated" by the government. Sounds pretty tyrannical, doesn't it? Not to me. Not at all! Let's put on our "logic and reason hats" and think about it in the case that gold in the ground is worth 40 times the cost to pull it out of the ground. This would be a different situation from "the past and present context" of gold mining, wouldn't it?

In a recent and heated (at least on one side) discussion in the comments on the previous thread, this crazy idea of government controlling the mining of gold in Freegold, one way or another, was referred to as "anti-capitalist", "anti-freemarket" and "authoritarian". But to me it's none of these. It's exactly as it should be in the context of 40x-cost-of-mining gold, and it makes perfect sense!

Laws are changed and rewritten all the time, but the law that governs gold mining claims on public lands in the U.S. to this day (and other minerals as well, subject to mining regulations) was written way back in 1872 as a result of the California Gold Rush. Even in 1865, the federal government thought about taking the mines for the good of the tribe:

At the end of the American Civil War, some eastern congressmen regarded western miners as squatters who were robbing the public patrimony, and proposed seizure of the western mines to pay the huge war debt. In June 1865, Representative George Washington Julian of Indiana introduced a bill for the government to take the western mines from their discoverers, and sell them at public auction. Representative Fernando Wood proposed that the government send an army to California, Colorado, and Arizona to expel the miners "by armed force if necessary to protect the rights of the Government in the mineral lands." He advocated that the federal government itself work the mines for the benefit of the treasury.

Western representatives successfully argued that western miners and prospectors were performing valuable services by promoting commerce and settling new territory. In 1865, Congress passed a law that instructed courts deciding questions of contested mining rights to ignore federal ownership, and defer to the miners in actual possession of the ground. The following year, Congressional supporters of western miners tacked legislation legalizing lode (hardrock) mining on public land onto a law regarding ditch and canal rights in California, Oregon, and Nevada. The legislation, known as the "Chaffee laws" after Colorado Territorial representative Jerome B. Chaffee, passed and was signed on July 26, 1866.

Congress extended similar rules to placer mining claims in the "placer law" signed into law on July 9, 1870.

The Chaffee law of 1866 and the placer law of 1870 were combined into the General Mining Act of 1872. The mining law of 1866 had given discoverers rights to stake mining claims to extract gold, silver, cinnabar (the principal ore of mercury) and copper. When Congress passed the General Mining Act of 1872, the wording was changed to "or other valuable deposits," giving greater scope to the law. The 1872 law was codified as 30 U.S.C. §§ 22-42

The 1872 act also granted extralateral rights to lode claims, and fixed the maximum size of lode claims as 1500 feet (457m) long and 600 feet (183m) wide.

The Act of 1872 also set the price for land assumed under the mining act… It set the price of the land claim to range $2.50 to $5.00 per acre. This price set by law has remained the same since 1872. -

The United States is special in this regard, and that is due to the California Gold Rush beginning in 1848 and the General Mining Act of 1872 which followed. That's public property, but the United States is also special with regard to private property mineral rights, and that goes all the way back to 1776! In Europe, the governing principles date back to the Middle Ages and give the sovereign or the commonwealth the rights, especially to "monetary metals."

Mining law in Europe originated from medieval common law. From at least the 12th century, German kings claimed mining rights to silver and other metals, taking precedence over the local lords. But by the late Middle Ages, mining rights, known as the Bergregal were transferred from the king to territorial rulers.

Unlike German mining law, in Great Britain and the Commonwealth the principle of mining by landowners prevails. The crown only lays claim to gold and silver reserves.

But even in the U.S., the state has reclaimed the right to important minerals:

Even in the United States, mining law is based on English common law. Here the landowner is likewise the owner of all raw materials to unlimited depth. However, the state retains rights over phosphate, nitrate, potassium salts, asphalt, coal, oil shale and sulphur, and a right of appropriation (not ownership) by the state for oil and gas. Sand and gravel come under the Department of the Interior. -Wikipedia

The take-home point here is that property rights are a matter of tribal law. And the right to profit from digging up underground minerals is an issue separate from the ownership of above-ground private property, and even separate from land surface ownership. As you can see, even though you own surface property in the U.S., you don't necessarily own the phosphate, nitrate, potassium salts, asphalt, coal, oil shale, sulphur, oil, gas, sand and gravel under the ground. Gold is notably absent from that list, and that's because of the "American specialness" of the California Gold Rush back in 1848. You think that classic, sentimental American favoritism toward the adventurous gold prospector will stick in the face of suddenly-revalued 40x-cost-of-mining gold? I don't think I'd bet even a wooden nickel on it! ;D

And that's just America, land of the free, where you still technically own the rights to (some of) the minerals under your private property (until your state and/or federal government changes its mind, and as long as you pay for a permit to dig them up and also pay taxes on your profits from the sale of said minerals). Elsewhere, the sovereign or the collective still retains the ultimate right to the gold in the ground and in some cases has laws still on the books that need only be enforced.

The point is, no matter where you are in the world, your local "tribe" owns the gold in the ground in extremis. More precisely, it will have first dibs on the windfall from a gold revaluation. Let's take a quick look at what I'm talking about. The "windfall" I'm talking about will be the equivalent of about $53,000 per ounce of gold in the ground. Each "tribe" can choose to keep that windfall for the good of the tribe, or to give it away to those adventurous gold prospectors of yesteryear. Here's where the gold is:

Let's see. The windfall from South Africa's proven deposits/in-ground public reserves will be about $12 trillion. Give away or keep? Australia, $7.5 trillion (and that's in constant dollars). Give away or keep? Canada, $22.8 trillion. Give away or keep?

So WTF am I talking about? Did you notice that I just called the "proven deposits still in the ground" public reserves? Hmm…

I was having a discussion with Aquilus the other day by email. We were discussing how gold will perpetually rise in consumer purchasing power in Freegold much like the traditional stores of value used for centuries by the super wealthy such that it will satisfy the modest but risk-free "yield" needs of the entire saver class but not attract the risk-taking investor class that is always investing wherever it foresees the most economic potential in search of an even higher - yet risky - yield.

I explained that "consumer purchasing power" was actually a declining standard of value when compared to these "high end" stores of value used by - and due to their extremely high prices, only available to - the Giants. And that the whole point of Freegold was that infinitely-divisible physical gold would finally put the average saver on equal footing with the Giants in this one particular regard. As human progress and innovation makes necessities and other consumer goods "cheaper" in real terms over time, the relative scarcity and preference of savers for traditional stores of value, what I call "durable collectables" (now to include physical gold in Freegold), will cause them as a group (as they always do, but now with gold ounces as the standard of value for "stores of value" as they relate only to the saver class), to perpetually rise relative to consumer purchasing power which represents the standard of value used for economic growth and fiat currency.

At one point in this discussion Aquilus asked:

Now one quick clarification: technically the percent growth in the economy does not have to be necessarily correlated to the stock, but rather the flow of gold, right? Because even if the economy grows at 15%, there will still be many that will not even consider touching their stock of gold this generation or the next. If that's true, it supports the rise in real terms vs a basket of commodities even more.

I said, "Great question! Let's discuss it!"

First of all, the size of the stock doesn't really matter, except insofar as it relates to the "stock" of savers. ;D All that matters is the flow, as you say, because no matter how big the stock is, we know that any amount above and beyond the flow is being hoarded by someone. In fact, the bigger the stock with any given flow, the larger the stock to flow ratio which means more is being hoarded at current prices.

But here's the thing about Freegold. Gold's price will "right" in terms of an equilibrium struck between the stock and the flow. In other words, we can assume that there's not an inordinate amount of gold being hoarded because the price is too low. The "right" amount will flow. By definition it will be the "right" amount simply by the fact that it will be a physical-only market equilibrium, so whatever amount is flowing is right and whatever the price is will be right.

Now imagine a perfectly stable stock (no new gold from mining) in Freegold. New net-producers are buying from old dishoarding ex-net-producers. That equilibrium will be reflected in the flow and the price. It is what I called a "closed loop" or "closed circuit" in that it is only transactions between savers past and present. Present savers are giving their money to someone who has already earned that purchasing power by producing in the physical plane and underconsuming in the past. Those ex-savers will now spend that money on consumption. So the surplus production represented by the gold flow is being consumed solely by ex-savers. This leaves habitual net-consumers to their own devices.

Yet there's still some value that can be "stolen" by the net-consumers as they print their way into net-consumption (either through government printing or consumer credit expansion). And that value comes from anyone and everyone who holds currency for more than a nanosecond. And that includes the savers both past and present as well. They hold some currency too! They don’t just hold gold, so some portion of their holdings is still vulnerable to the debtors. But that's fine, because at least their savings are no longer vulnerable. And it was the savings portion that made the savers pay inordinately in the past. On top of that, the savings will be rising in purchasing power to offset any losses to the debtors in the normal currency portion of their holdings.

Now, we have a pretty good idea of the stock of gold. Around 170,000 tonnes. We also know the production rate. Around 2,600 tonnes per year currently. And we have a pretty good idea that the economy tends to grow at a rate faster than the production rate of gold over the long run, so we can safely assume that in a more meritocratic world that trend will continue. And economic growth means some portion of new savings that would not have existed in a static world with no economic growth (an expansion of the "stock" of savers). So growth equals more new savers in the static equilibrium equation above, which would put demand pressure on the flow and drive the real price of gold higher.

So, in the hypothetical static world above we have an equilibrium price of gold achieved. In an economically expanding world, we have a rising price of gold, which can only be offset by new production from the mines being sold to the public as opposed to it simply being transferred from in-ground reserves to in-vault reserves by the government. We already have a pretty good idea that the current stock to new-flow ratio is tight enough to allow for gold to perpetually but modestly appreciate in Freegold. We can also assume that mine production will not increase, and will likely decrease in Freegold, leading to even higher rates of real appreciation.

But the higher rates of appreciation will likely be offset by governments selling some of their reserves. It makes no difference whether it comes from the vault or from the ground. So, in fact, "official gold" (currently 30,000 tonnes plus all in-ground reserves) acts as that "new" supply in Freegold. In fact, taking this thought further, mining flow or the flow of "new" gold into the global stock actually becomes irrelevant, because there's no difference between a government selling some of its above-ground reserves versus it letting the mines sell to the public while taking in the difference between the cost of mining and the sales price as a tax. Both essentially become monetary operations.

Let's make this even more clear. In Freegold, as long as there's such a thing as "official gold" held by CBs or governments (which should be forever), the addition of new "stock" will be nothing more than a monetary (or currency management) operation. The "stock" as it pertains to the savers becomes 170,000 – 30,000 = 140,000 tonnes, and the growth rate of that "stock" will be determined by governments and CBs as a currency management tool. Nothing more, nothing less.

Now let's look back at what I wrote:

"As long as the economy is expanding faster than the stock of gold, why wouldn't it have a consistent and real positive gain?"

In this new view, we find that the expansion rate of the stock of gold is actually a decision made by all of the CBs and governments in aggregate. Also, we find that, curiously, it becomes possible for the "stock of gold" as it relates to the savers to actually contract if/when the CBs are buying gold in aggregate, removing it from the flow available to present net-producers. Again, this would be a currency management operation intended to weaken the currency, but the net-effect to the savers, regardless of whatever is happening with the currency, would be that the real purchasing power of gold would rise even more than it otherwise would have.

By buying gold, a CB weakens its currency in two ways. It puts more currency into circulation, and it also lowers its currency's exchange rate with gold by raising the price of gold in its currency. And since gold is the benchmark for all freely-traded currencies, this means that a CB buying gold would lower its currency's exchange rate with other currencies. Traditionally this is done to gain economic advantage over other currency zones. By lowering your currency's exchange rate with a foreign currency, you make your zone's prices of goods and services more competitive. This is a currency effect, not a real effect, but it does work in the short run to counter or enhance ongoing real effects. And what it tends to do (in the short run) is to increase exports and decrease imports.

What this means is that mercantilist policies in a floating exchange rate regime in Freegold will tend to increase the purchasing power of gold for the savers by contracting the "stock of gold" as it relates to the savers. So when might we see a majority of zones engaged in this kind of behavior such that the global aggregate "stock of gold" is contracting? We might see this in the case that the global economy is contracting, as might be seen after a natural or manmade disaster.

Now isn't that interesting? If the global economy is contracting, the stock of gold might even "contract" protecting the savers' savings from ever declining in real terms. Is that possible? And then what's the reverse of this situation? If the global economy is expanding so fast that the real price of gold is rising faster than normal? What then?

Well, then we might see governments and CBs selling gold in order to strengthen their currency relative to other zones in an effort to "cool down" their "overheated economy" which they view as expanding too fast. Again, this is just a currency management operation and it only really has a short term effect because it's a currency effect and not a real effect, but it does have a real effect on the purchasing power of the savers' gold by changing the stock of gold relative to the "stock" of savers. It keeps it from rising too fast even if the economy is overheating which might create a bubble of sorts in the price of gold and lead to an eventual decline. But that won't happen, because the CBs will sell gold if the economy is growing too fast.

Viewing gold as a currency management tool at the state level, we find that any irresponsible government like, say, the USG, who tries to sell gold during a recession in order to spend above and beyond what it can take in from taxes and borrowing, will simply strengthen its currency against other currencies and further weaken its taxable economy making it a self-defeating exercise. Or it could just print and spend, but that would cause inflation and also be self-defeating. Either way, the savers are insulated from the currency effects of irresponsible governments because if the government is selling gold, making it cheaper in US dollars, the dollar is also strengthening in its exchange rate with other currencies keeping the purchasing power of gold stable in real terms.

So what we find is that, even though changes in the stock of gold as it relates to the savers is essentially in the hands of CBs and governments worldwide, the natural inclination will be a consistent and real positive gain, even if the economy contracts, and even if the government is irresponsible with its money. This is what I mean by the savers being isolated from whatever's happening in the currency. Of course in a real disaster (Mad Max-type scenario), where necessities become scarce for everyone, the purchasing power of gold will decline no matter how much the CBs buy in order to gain a currency-derived short term advantage for their zone.

Can you see how sales from the mines to the public will be no different than the sale of above-ground official reserves? Can you see how it's simply a monetary operation at the state level? If a mine sells an ounce of gold for $55,000 and gets to keep $2,000 while the government takes in $53,000, that's virtually the same as if the government or the CB sold some of its reserves for $55,000. The "stock of gold" (as I'm viewing it in this exercise) increased the same in both cases, and virtually the same amount of money was taken in at the state level. The only difference is whether the government spends that money or the CB destroys it, but either of those possibilities are the same whether the gold came from the ground or the vault.

I think this is the proper way to view the "stock of gold" in Freegold, as only the gold that's not in the ground nor in the government vaults because both are essentially public monetary reserves. And in a static economy, we will likely see a "currency war" of sorts where the CBs may be competitively buying up the gold. So if we view the Freegold price as an equilibrium of sorts between past and present savers, and then any economic growth rate as adding new savers and new demand to the equilibrium driving up the price, I think the statement still makes sense:

"As long as the economy is expanding faster than the stock of gold, why wouldn't it have a consistent and real positive gain?"

But the best part is that it's really just a way to explain why gold would naturally rise, because when you really think it through, changes in the stock of gold will naturally lag changes in the economy no matter what's happening (aside from Mad Max) because of the elegance of the Freegold dynamics. And even in the case of a Mad Max-style disaster, natural or manmade, gold will still be the best way to shuttle your wealth through the crisis to the other side.

Can you punch any holes in my logic? ;D



Hahaha, yes, bravo! You took my flow vs stock little observation and ran about 30 miles up-field with it (in a good way)…

So let me summarize the main ideas so I’m sure I know what you’re saying:

1. The stock we’re talking about is the “stock of the savers” (call it the “saver’s stock”, not the general stock)

2. Yes, the flow is what matters, but the flow to and from the “saver’s stock”

3. Economic growth is an expansion of savings that will be looking to become part of the “saver’s stock”

4. The flow necessary for those savings to become part of the “saver’s stock” can be fulfilled by either flow from a combination of “public stock sales (CBs and mines which I agree behave as the same thing) or from existing savers dis-hoarding from the “saver’s stock”. The size of this combined flow is what drives the price of gold (in your local currency) at any given time.

5. The flow from the “public stock” (CB and mines) is nothing else than a currency management tool as gold is the reserve. As such, when the economy grows “too fast” it is logical that the CBs would increase the flow because it’s in their interest. Conversely, they would buy gold or decrease the flow in a recession, again, in their interest as a currency management tool.

6. Both of these operations still organically benefit the savers in the “saver’s stock”:

a. In the case of a CB intervention to cool down an “overheating” economy, selling gold increases the flow, reduces the speed of price increase of gold in the local currency, but also strengthens the local currency against others, therefore increasing the purchasing power for imported goods, while not decreasing the purchasing power (but not necessarily increasing it) for local goods.

b. In the case of a CB intervention to “prop-up” a slowing economy, reducing the flow by buying gold in the local currency increases the purchasing power of the “saver’s stock” in real terms, but weakens the local currency compared to the rest. But still, in gold terms, that purchasing power is not reduced.

7. The only thing that reduces the purchasing power of the “saver’s stock” of gold is an economic downfall of such a magnitude that economic output shrinks and stays under what needed for society (Mad Max).

Have I captured the essence of the logic I’m supposed to punch holes in? Because if I have, it will be very hard to play devil’s advocate to it.


I believe you have! :D

Ok! great then (did not expect that on the first try)

I tried to think of ways in which to play devil's advocate here and did my best to take Aristotle's (the original) "it is the mark of an educated mind to be able to entertain an idea even when you don't agree with it" to heart.

Everything I came up with in the short time I had to think about it would be a temporary disruption that would fall apart by itself after a while. The only thing that would keep them going would be the "World Police State" and I don't consider that likely in the least. Here are the major paths I had:

1. Suckering back into debt: To break the virtuous cycle, I have to figure out a structure by which I can lure saver's money out of gold (in freegold) and plop them back into debt for a while. Repeated suckering has happened over and over in history (that's why ponzi schemes work, isn't it?) so I was going to play post-Freegold Goldman-Sachs for a while ;) But because of the gold alternative, these schemes would implode way before they became systemic again...

2. Coersion through laws in order to "save the poor and the children": Play politician and come up with variations of controls of prices, forbidding gold purchases/sales/import/export, etc and see if I can disrupt the cycle for a while (years/decades) before the scheme collapses. A variation would be the "needs" of the collective and a wealth tax for a nation.

3. Manufacture your own SoV: Replace gold with a world SoV (IMF's SDR construct for lack of a better term, or BitSoV instead of BitCoin). Fails the network effect test miserably (no wide holding credibility).

So, I give up, because none of the above stands without some major conspiratorial/coercive apparatus omnipresent. The only scenario that might work is a One World Centrally Controlled World Government with only one Central Bank, no international settlement any longer and draconian/coersive laws everywhere? Which would make people escape to the Moon colonies ;D??? As you can see, it's getting ridiculous...

I pass the devil's advocate baton to someone more worth-while


Hello Aquilus,

Here were my initial reactions as I read your three points. I wrote them as I was reading, so they were written before I got to "So, I give up…"

Re. #1, false comparison. You compare "suckering back into debt" with Ponzi schemes that have happened over and over in history. Who ever said Freegold would eliminate Ponzi schemes? Not I! But Ponzi schemes are for investors, traders and speculators. If, in the past, they included the savers too, that was because the savers didn't have a good alternative, and that's what's different in Freegold. The only way you're going to sucker the savers back into debt is to make gold riskier than debt with the same or greater real return. That should be impossible under the framework I outlined.

Re. #2, I think this comes from "old paradigm" thinking. If I put my perspective into the new paradigm, I don't even see the impetus that would lead to such coercion. First of all, to "save the children" they go to where the money is. There's no money in gold. It is an inert metal. Money simply flows through gold. And in Freegold, gold will have a lower appreciation than any successful investments. So on one side of gold, you have the massive pool of the entire money supply, there's a good target. And on the other side of gold, you have all of the successful investments. There's another good target. I think that in Freegold the target will be off of gold for good. There won't be any "windfall profits" from gold post-reval!

Re. #3, you'll have to beat gold on both appreciation and risk. The only way I see that happening is if gold declines abruptly creating risk and erasing appreciation. And that's kind of the definition of "Freefiat". A manufactured SoV, so it needs wildly declining gold at times, and the way it gets there is hot money flows (fickle investment money) shifting from gold into other investments and back again. Gold would be in a constant cycle of bubble, then pop, then bubble then pop in Freefiat, so the savers all run in fear to the magical manufactured SoV. How's that different from today? ;D

That's what I wrote about in the third section of Glimpsing 2 called "Gold's True Function". The function is to segregate and isolate the savers from the hot money flow and its transmission of price signals which keeps the economy efficient. Once we're finally there, I think it will be virtually impossible to go back.


Hello FOFOA,

Yes, they were obvious strawmen and you gave them a good beating before getting to the "I give up" part ;D

It's kind of funny to see you spelling out all the reasons why they are all logical failures though. Why? Because I actually knew the answers to them almost as soon as I thought about them (and that means all that reading sank in apparently ;D) That's why I gave up.

Just as an example for the "debt Ponzi schemes", yes, you may convince SOME savers to become speculators for a while, but if gold is there with a real appreciation as a risk-free alternative, that scheme will fail to convert enough savers into speculators because there's no need for the saver to take any risk to get a real return. Normal human nature, I'd say... That's why all those schemes never get big in freegold, I understand ;)

Same idea applies to free-fiat #3. At that point, to get wild fluctuation in gold, you would need some serious change in human behavior to make people dishoard their current real returns without risk in gold in mass. As you said once, maybe if Gold is proven to be toxic and reduce our lifespan to only one century....

As for #2, again, yes it's always money, not assets. There are some "asset" taxes: think of house tax, or car tax, but doing that on gold is both impractical (need to find it declared someplace - good luck in freegold) and it would also be idiotic to tax the premier reserve asset that needs to flow. But even if they did, in freegold it is my feeling that it would just increase rate of appreciation in the local currency to make up for the tax percentage...

Here's another (idiotic) challenge that came to mind: Some government will try to re-create the paper market after freegold has been in effect a few years! Alas, you already addressed this a few times... Sigh..

So, in summary, sorry I could not give you good challenges. The original would still make a good post.


To conclude on the subject of gold mining in Freegold, what I see in my "crystal ball" is that gold mining will no longer be driven by profit. Yes, the miners will provide that service for a profit which will be determined by the state, but the rate of mining output and where it ends up will be a monetary matter at the state level and not a decision by the miner himself. Can you see the contrast between this view and the free-for-all of the Gold Rush and modern gold mining?

In effect, any country with above-ground gold reserves will have little incentive to remove its in-ground reserves from their secure location, except perhaps a minimal amount just to keep the mining equipment from rusting. And even with that, whether it goes straight into the government vault or is sold into the public market will be merely a currency management decision. Can you see the elegance of this view?

It may seem "anti-capitalist", "anti-freemarket" or "authoritarian" from the perspective of someone invested in gold mining today. But it's really not! It's only gold we're talking about, and in a more meritocratic world I'm sure those poor gold miners will find some other great for-profit activity to do if they choose not to work for the state. Once you realize that the local tribe has always had the ultimate claim to the gold in the ground in extremis, it is no more "anti-freemarket" than anti-counterfeiting laws. You just have to shift your perspective into the new paradigm to see why.

As for wildcat or illegal mining, no one ever said that Freegold would eliminate crime. Even today, some western states have clamped down on placer mining techniques on public land because of environmental concerns. Here's a recent article:

Colorado county considers banning panning for gold after 'uptick' in prospecting

Prospectors during widespread Gold Rushes in the 1800s are credited with settling land and developing commerce in several Western states, including Colorado.

However 200 years later, officials in one Colorado county say amateur prospectors panning for gold on county land have become such a nuisance they are considering banning the practice…

The vote would lead "minerals" to be added to a list of things that already can't be removed from county land...

If that's the tribe's thinking after a 5X increase in the gold price over 10 years, how do you think it will respond after an overnight 40X revaluation? ;D

Let's look at that Warren Buffet quote once more:

"Gold gets dug out of the ground... we melt it down, dig another hole, bury it again and pay people to stand around guarding it."

If the gold in the ground is worth 40 times the cost of digging it up, then it becomes a tribal monetary reserve belonging to the collective or the sovereign. Can you see how this may change the dynamics that have always driven gold mining in the past?