Friday, October 18, 2013

Gold as a FOREX Currency

Another gold writer emailed me the other day with a few questions about my take on the apparent disconnect between the gold price action this year and "physical gold's obvious fundamentals." I explained to him how the POG (price of gold) is thoroughly and utterly disconnected from the physical segment of the gold market today. I said that any increase in physical demand (due to physical gold's obvious fundamentals) does not, cannot, drive the price higher today. It does one thing and one thing only, it stresses the current gold market structure.

The reason, I said, is that physical gold's fundamentals have nothing to do with "today's gold market." Today's gold market is "majority-owned" by gold trading as an electronic FOREX currency, which has almost nothing to do with the physical side of the market. That exchange by itself would probably make a good post, but this one is all about his primary follow-up question, which was:

"The area where I’m still hazy is the gold as a FOREX currency."

The following was my reply to his question, which I wrote in great detail with the intention of turning it into a post because it's something I haven't seen any other gold writers even acknowledge, let alone factor into their POG analysis:

As you well know, the POG rose in the 70s, but then in the 80s and 90s it fell from about $500 down to $250. During the 80s and 90s is when the CBs started leasing gold, or at least lending in gold-ounce-denominated units (lending their good name as Another put it: "Understand, they only lend their good name on paper, not the gold itself"), so that the bullion banks could help the mines hedge against the declining POG and not only keep producing, but actually increase production. From 1985 to 2000, global gold mine production increased from 50 million ounces to 82 million ounces per year, even as the POG was halved.

Checkmate is a good post for this wide view, or just watch this video by Freegoldtube, from the bottom of Checkmate, which has some relevant quotes from FOA:

This gold leasing/forward hedging started around the same time as Barrick switched focus from oil and gas to gold, around 1983, but by the mid- to late-90s it was more than mines taking these gold-ounce-denominated loans. Hedge funds wanted in on the gold carry trade too.

Meanwhile, following the closing of the gold window in 1971, gold received its official ISO 4217 currency code: XAU. This happened in either 1973 or 1981 (I'll explain the uncertainty in a moment, but I assume it was 1973 although I don't have the 1973 list). Silver received its own currency code, XAG, in 1983, platinum (XPT) in 1989 and palladium (XPD) in 1993. I mention these dates to show you how new all of this is. Mine forward hedging, CB gold lending, gold carry trade and metals trading alongside currencies on the FOREX. All very new.

Last year I emailed the currency ISO office in Switzerland to obtain this information. Here was my email and the reply I received:

Dear Sir,

I have a question about XAU (and the other commodity codes XAG, XPD, XPT). I understand that ISO 4217 was developed in 1973 and adopted a few years later. I also understand that SIX periodically publishes updates to the list, the latest being in 2008.

My question is: Was XAU on the list from the beginning in the 1970s, or was it added in one of the later published updates? And if so, what year was XAU added as a currency code for gold (as well as the other commodity codes)?

Lastly, if you could direct me to a copy of that historic publication in which XAU was added, that would be much appreciated!


Dear Mr. FOFOA,

Thank you for your mail. Unfortunately we do not have a copy of the 1st edition of ISO 4217:1973. XAU was added either from the beginning in 1973 or later to the 2nd version in 1981. I attach the 2nd version for your information. [Click here to download the 2nd edition of ISO 4217:1981]

For the other commodities please see the following amendments:

XPD (Palladium): Amendment number 65: issued: October 1993
XPT (Platinum): Amendment number 25 and 36: issued: 8 March 1989 and issued: 29 January 1991
XAG (Silver): Amendment number 8: issued: 21 October 1983

I try to get the first edition of ISO 4217:1973 from ISO and if successful I will forward it to you.

Yours faithfully,

Marianne Nikles
Secretariat of the Maintenance Agency
for ISO 4217
c/o SIX Interbank Clearing Ltd
P.O. Box
Hardturmstrasse 201
CH-8021 Zurich

Everyone knows about the mine and hedge fund involvement in the gold carry trade in the 90s, but much less attention has been paid to gold's use as a currency in the foreign exchange market (the FOREX), which continues to this day. I'm sure you are aware of the massive size of the FOREX market compared to other markets, but here's what Wikipedia says about its size:

According to the Bank for International Settlements,[4] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.

"Daily volume" and "daily turnover" are confusing terms, because there are different ways they are estimated in different markets. Double counting, for example, is one potentially confusing factor. But I think that the sheer size of this market is what is most amazing, whether it is $2T, $4T or $8T per day changing hands, it still dwarfs other markets.

In January of 1997, the LBMA released its "daily clearing volume" for the gold market which was an astounding 30 million ounces or 930 tonnes per day. At the price of that time, that was about $10B per day. Today, thanks to the 2011 LBMA survey, we know that "total daily turnover" is about ten times "daily clearing volume", and that "spot" (as opposed to forwards, swaps, options and other derivatives) makes up 90% of that volume. That's the "gold spot market" today! About $100B daily turnover in January 1997, and $240B per day in 2011, the equivalent of 5,400 tonnes total, or 2,700 tonnes changing hands every day! And that's from 64% of the LBMA members reporting, so it's likely higher, especially once you add in non-LBMA (retail) FOREX trading.

For comparison, the annual flow from mining and scrap recycling is about 4,000 tonnes. That's annual. So the physical flow from mines and recycling compares to the LBMA spot market like this. About 16 tonnes per day in physical versus 2,700 tonnes per day in the "spot market". Now what could possibly constitute such an enormous "spot market"? FOREX trading.

The FOREX market is a $4T per day market including all currencies, and it looks like the "gold trading as a FOREX currency" portion of that market could be $240B at a minimum, possibly higher. That would make "paper gold" a full 6% of all currency trading in the world, including dollars, pounds, yen, euro and the rest of the 178 "currencies" with their own ISO 4217 codes. Think about that.

Amazingly, this was clear to some even in 1997. That's what spawned the Red Baron series, and I think the LBMA revelation was at least partly responsible for A/FOA showing up on the scene. Who knows, maybe Another was the one who leaked it to the London Financial Times! Here's a bit from My Candid View – Part 4:

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."

Now, currencies trade in pairs, like USDJPY or XAUEUR. The first in the pair is the "commodity" you are trading, and the second one is the "money" it is priced in—the denominator. So if you are long USDJPY, you are essentially long dollars and short yen. Earlier, you mentioned how it's easier to play the market from the short side when the price is falling, and I mentioned a conversation I had with FOREX Trader back in early June, which you hadn't seen.

Here is that conversation. It was about the implicit carry (interest rate differential) built into currency pairs and cleared overnight, possibly giving institutional money (like pension funds) a built-in "yield" as an additional incentive to short FOREX "gold" around May of this year. It was unusual enough that it caught his attention and he sent me an email:

Nothing new on the wire to report from my end. But I did have an interesting note for you which I've been meaning to email about, unfortunately been very busy.

The note is that carry is kind of screwed up in the FX market. As a simple example, EURUSD shorts are paying carry. Also, XAUUSD and XAUEUR shorts are as well, at least for the last couple of weeks since we noticed here in the office. Relative to the other G10 carries available, especially if you don't include the comdolls (NZD/AUD/CAD), the rate available is pretty good ($16/$1,000,000/night) on a relative basis. About a quarter of what you get for an AUDUSD long and about 4 times what you'd get on a USDCHF long.

I am very certain that this carry (combined with the technical position of the charts) is incentive for a lot of traders to short the FX pairs on leverage, carry can be a major consideration when trading a levered position. For example, we pretty much never hold overnight positions in AUDUSD or AUDJPY.

FOFOA: Can you explain this a little more? Are you saying you earn a small "interest rate" when you short the euro or gold?

FT: Surely you have heard of the "carry trade" before? Let me explain it. Basically, the original investment thesis was essentially: given two "risk free" instruments, yielding differing interest rates, a trader purchases the instrument with the higher rate on leverage, and funds that position by shorting the instrument with the lower rate, at the same amount of leverage. This allows the trader to collect the "carry" or "swap", which is the overnight interest rate differential between the two instruments.

This concept is the cornerstone of almost all financial activity which occurs, as long as there is margin to borrow. Obviously a simple example would be the "bank spread", i.e. short 1-3Y Treasuries and long 10-30Y Treasuries.

Same applies, implicitly, in spot FX. If I am long $1,000,000 AUD and short $1,000,000 USD (i.e. long 1 AUDUSD contract) then each night as the banks roll over their intraday positions (squaring the books), I earn the interest rate differential (e.g. AUD LIBOR minus USD LIBOR divided by the number of trading days in that year) from whoever is on the short side of my long (through the broker). If I am short 1 AUDUSD contract then I must pay the differential to whoever is on the long side of my short.

Currently, both XAUUSD and XAUEUR shorts are paying carry. During a technical uptrend in an instrument like AUDUSD, this is a strong disincentive to short the instrument, as the trader must pay the differential to hold the position. A technical downtrend which pays carry on the other hand, gives incentive to the trader to short, the more leverage applied the higher the multiple applied to differential earned.

FOFOA: Thanks. Yes, I understand the basic carry trade (borrow one currency and sell it short to invest in a different, higher-yielding currency). Like the yen carry trade – borrow yen, sell them for dollars, use the dollars to buy Treasuries. Or the gold carry trade. Borrow in gold units, sell them for dollars, invest the dollars. You not only earn the interest differential but you also profit even more if the borrowed unit falls in value relative to the invested unit. And if enough people are doing this, the very act of doing it pushes down the borrowed unit. It's all great until it's not and everyone rushes to unwind the trade first. Sound right?

I just need to wrap my head around it in FOREX terms since I've never traded currency pairs.

FT: Yep that is exactly right, the only difference is that in spot FX, all of it is implicit, i.e. you don't need to go out and borrow to short, or invest the dollars in Treasuries, your short is part of the pair and you can earn the overnight rate directly.

FOFOA: One thing that was confusing me was your trader lingo: "the shorts are paying carry." To a non-trader who doesn't know the lingo, that could be taken both ways. As in "the short traders are having to pay the interest rate differential," or "short positions are now being paid the interest rate differential."

FT: Sorry about that! Never even occurred to me :P

I'm not sure I remember the last time trading XAUUSD paid carry in either direction, so I thought it was quite interesting. Obviously interest rates have had a jump over the last month, but I doubt if that's enough to account for this. It seems possible that the "interbank/overnight rate" for XAU has gone down significantly, driving up the rate differential?

The way I like to think of it is, if the US 10Y yield goes from 5% to 2.5%, then this indicates there has been strong demand from the market to lend 10Y money to the US Government.

So if the XAU "interbank/overnight rate" goes down, this indicates there is strong demand from the market to lend overnight money to ...???

FOFOA: Just to be clear on this "the shorts are paying carry", if I hold a $1M short position in XAUUSD overnight (I'm shorting gold because I think the $POG is going down), do I get paid $16? Or do I have to pay $16?

FT: Haha sorry, yes, to be clear, if you short XAUUSD then you get paid $16.

FOFOA: Thanks! And now who is paying me? Is it someone who holds a $1M long position in XAUUSD overnight? Does it now cost $16/night to bet on gold in the FOREX market?

FT: The person paying you is nominally your broker, but what's happening is everyone that has a long on XAUUSD is paying the broker and the broker is disbursing that accordingly to the shorts.

The differential is not nominally symmetrical because FX contracts are denominated in the "right hand" currency in the pair (in this case USD). So it actually costs $21 to bet on XAUUSD longs. Although I believe the differential expressed in percent should be symmetrical.

FOFOA: So it sounds like this is a big incentive to be short gold on the FOREX. How do you read this?

FT: I think it could potentially be a big incentive in the same way as I've been using AUDUSD as an example. Following a trend is nice because of the potential for capital gains. Following a trend which pays cashflow is obviously nicer. Leveraging a trend which pays cashflow, nicest of all, back up the truck.

MY SUMMARY: There is an unusual incentive right now to short gold on the FOREX. You get paid to do so, and it's the longs that are paying the shorts. This is separate from the capital gains made when gold actually goes down. So if/when gold goes down, the longs are not only taking capital losses, but they are paying the shorts an interest rate differential for the "privilege" of being long paper gold (overnight).
[Note: The above exchange was back in June, and it related roughly to the April-June timeframe. FOREX Trader brought this to my attention because he thought it was an unusual situation. He couldn't recall seeing the XAU shorts getting paid the carry before, although it's not something he normally pays attention to. Another FOREX trader also brought it to my attention that this would not necessarily be available to retail traders because fees, spreads and rates are often less-friendly to the traders at retail brokerages. That's why I specified institutional money at the top.]

Also in my last email, I mentioned that with "only" 3X leverage institutional money could turn that carry into a reasonable yield in a no-yield environment, to which you raised an eyebrow. Apparently, leverage is quite common in FOREX trading. Here is my comment about leverage back in June under my "Black Gold" post:

Hello MdV,

I mentioned your comment to FOREX Trader because he doesn't really follow the comments.

Regarding 50:1 leverage, he said that retail brokers usually offer up to as high as 400:1 leverage to would-be currency traders. But he said that you'll rarely see professional FX traders using more than 20:1 leverage, and even then it's usually only the day-traders using that much leverage. He said at his office it's generally more like 3:1 or 2:1.

When you increase the leverage, there is a massive increase in the "cash flow" of the invested capital, but it also increases the potential for a margin call, which he says is obviously why retail brokers offer such high margin. For example, at 50:1, you'd only have to deposit $20,000 to hold that $1M XAUUSD short overnight and earn the $16. That equates to an annual interest rate of 21% which is HUGE. But the downside is that a 2% adverse move in the underlying is going to mean a margin call, which means you could lose the whole $20K if gold goes up 28 bucks and you don't have more cash to wire to your broker.

At 400:1 leverage (just for fun), you'd be earning a "carry" (interest rate differential) of 170% annualized. But the bad news is that gold would only have to move up $3.47 before you would either lose your whole wad or have to deposit more. Imagine having to deposit another $20K each time gold moved up $3.50 and you've only got $100K. If gold goes up $18 you'll lose the whole $100K, even if it then goes into free fall right after you went broke.

My point is, the high leverage offered by retail FOREX brokers is probably a cash cow for them (not you). But the real pros (like FT) are only using 2:1 or 3:1 leverage.

With lower leverage, he says: "This is where the technical trend comes in, allowing you to run your carry position with a tight "stoploss" that should stick unless the trend reverses. If you're a large investor with cashflow requirements (think pension funds and whatnot) then positions like this can be a moderately attractive way of earning a 5% "yield" in an otherwise yieldless market."


How many other gold writers have you seen that have even mentioned this $240B+ per day segment of the gold market, let alone analyzed its impact on the price of gold? In my last email, I told you how I answered someone who asked, "Can you point me somewhere (or perhaps you have written about it - and it has escaped me) what determines the daily (paper) Spot price. Does anyone know the factors involved?" Think about the relative weight of this $240B+ paper gold market as you read the bolded part at the end:

Have you ever noticed that the spot price is often slightly different depending on where you look? I just opened Kitco and APMEX simultaneously and the ask is $1,295.70 on Kitco and $1,296.20 on APMEX. The answer is that there is no official spot price. Everywhere you look for it the price you see quoted will either be from a live trading platform and, therefore, the opinion of thousands of traders who are looking elsewhere for reference, or else, as with Kitco and APMEX, it will simply be reporting the going price on some active trading platform. So there is no official spot price. There is only the opinion of thousands of traders who are all cross-referencing thousands of different correlated items, charts and other active trading platforms in search of an opportunity at any given point in time.

Which segment of the gold market do you think carries the most weight when it comes to determining the spot price of gold at any moment in time? GLD daily volume is around $2B. What is COMEX daily volume? Isn't it somewhere around $20B? And the LBMA reports a daily volume of $240B, 90% of which is "spot gold" or about $216B per day. So COMEX is about 10 times the volume of GLD, and LBMA "spot" is around 10 times COMEX and 100 times GLD. Does that sound about right, or am I getting something wrong here? I realize that I'm comparing "daily volume" to "daily volume" and there may be a margin of error due to differing methods of reporting "daily volume", but with an order of magnitude difference between LBMA "spot" and anything else, it's pretty safe to say that LBMA "spot" carries the most weight when it comes to determining the POG.

Here's a screen shot of a FOREX trading platform that "a big physical dealer out of the mid-east" provided to another gold writer. He said he uses this platform to purchase gold, and that he also takes delivery from the platform provider (FOREX Trader said that would be called a "physical ECN" if true). As this particular story went, he was able to buy and sell as much as he wanted, but was, on occasion, limited as to how much he could take immediate delivery on. Here's a quote from the story as it was told: "…physical orders were getting partially filled. If they ordered say 10 Kilo's they would get 5 or 4 as confirmation, and would have to wait for delivery of the balance."

I asked FOREX Trader if this screenshot looked like a physical ECN to him and here's what he said:

"There is no way I can verify based on the screenshot whether or not his access is to any physical ECN. But from my personal experience, it doesn't look like it. To me it looks more like any regular bucketshop CFD brokerage account. First of all, the spread (60c) is 10c higher than most CFD brokers offer, and definitely way higher than what you get on the interbank at 3:30PM London, 30 mins after the fix! Secondly, all you can see is the spread, you can't see the market depth even 1 level down. For example, I link a screenshot of MB Trading (which is an ECN -not interbank- broker that I do have an account with), thirdly it only seems to show the ability to buy/sell at market (as opposed to limit orders), which is another very big red flag that it's a CFD account.

However, while all three of these points trigger my skeptical side, like I said I have no real way to confirm or deny whether he is trading a physical ECN, there are a million software packages out there, each broker often provided support for at least two and there is no standard on how they should look."

I mention this FOREX Trader email for a couple of reasons. First, notice the term "interbank". Here's what Wikipedia says about the interbank:

The interbank market is the top-level foreign exchange market where banks exchange different currencies.[1] The banks can either deal with one another directly, or through electronic brokering platforms. The Electronic Broking Services (EBS) and Thomson Reuters Dealing are the two competitors in the electronic brokering platform business and together connect over 1000 banks.

The point I want to make here is that there seems to be a kind of pyramid structure to the FOREX market, with the interbank at the top tier of the pyramid. Down at the bottom of the pyramid you have the retail FOREX trading platforms available to you and me. You have to be a bank or a pretty big player, a wholesaler or a middleman to deal directly with the LBMA bullion banks as evidenced by the number of trades reported in the LBMA survey. The daily average reported was 6,125 trades totaling $240B. That breaks down to about $39M per trade, or 9/10ths of a tonne.

And that's why I think that this segment of the "gold" market could be larger than $240B per day. So what's the dog, and what's the tail? Remember that Another said, way back in 1997, "And Comex is nothing, if "only a silly game". Worldwide trading in gold could be cut in half and still equal all the metal in existence!" He also said, "Comex is a side show!"

It would be interesting to see how the LBMA would explain those 6,125 trades averaging $39M per trade, which over 36 reporting members averages out to 170 trades per LBMA member per day, each at almost 1 tonne. It's a stretch to imagine even a top tier FOREX ECN (electronic communications network) in which the average trade is $39M. So I imagine the LBMA would simply say they were OTC spot unallocated transfers between clients. But then who are those clients? I imagine they could include FOREX trading brokerages, some of which are owned by the bullion banks themselves, and each of which would carry a gold-ounce-denominated balance, directly or indirectly, with a real bullion bank that also deals in physical. A kind of FOREX brokers' gold-ounce-denominated liability clearing system for the various ECNs.

I suppose you could say that gold trading as a currency is, to an extent, "backed" by the much smaller physical segment of the market. In other words, "gold trading as a currency" requires, needs, depends upon a functioning physical market which trades at parity to paper gold. But the physical portion of the market does not require, need or depend upon the paper side. It's not a symbiotic or mutually beneficial relationship. It's more like a parasitic relationship, where the parasite cannot survive without the host, but the host will be just fine, even better, without the parasite.

How does this tie back into everything else I write about? Well, I think it should help you understand how the price of gold is not driven by the physical segment of the market, and therefore parity between the two is not as solid as it seems.

Of course there is no ironclad proof that the majority of LBMA volume in that survey is FOREX trading, but I have yet to see a better explanation, or any other explanation for that matter. As far as I'm concerned, that is the explanation until I see another contender. Can you think of any other activity the bullion banks are involved in that could account for $240B daily volume in gold trading?

I'm sure that some of that volume is straight-up unallocated gold savings (as opposed to trading) accounts, and some is probably physical changing hands, but the vast majority must be gold trading as a FOREX currency. And tell me, what would be the difference between a plain-vanilla unallocated gold account at a BB and an XAUUSD trading account balance at that same bank? The answer is absolutely nothing! Those gold-ounce-denominated credits are essentially the same thing. You can even ask for physical delivery from a FOREX trading account if it is with a bullion bank that deals in physical, which is why I mentioned that screen shot and the story from the large Mid-East gold dealer.

This astounding volume has been known since 1997, but have you seen anyone talk about it relative to COMEX or GLD? Today the LBMA "daily clearing volume" is $29.9B, and from that survey we know that total volume is roughly ten times clearing volume, so that means total volume could be up to $300B per day now. Here is the average daily clearing volume from Oct. 1996 through present, in ounces, $ value and number of transfers. The 2011 survey is the only thing concrete that we have to show how "total volume" relates to "clearing volume", but even with a margin of error, how else can you possibly explain these volumes?

We know the FOREX market is huge. We know that gold (XAU---) is part of that market. And we know the LBMA released its astounding volume data for the purpose of demonstrating that gold is a deep and liquid market. 2+2=4. I think it's really that simple, even if no other gold writer mentions it. But if anyone has a better explanation for that volume, I'm all ears! ;D

Today, any paper gold is just as good as real physical gold for the purpose for which people buy gold, which is to buy it today and sell it later, or as a hedge. Any paper is just as good as physical as long as they trade at parity!

You brought up the argument that "the people playing this game don't want gold, they just want to trade its volatility." True, and also some want it as a hedge or insurance for other investments. But what they all want is provided by paper gold as long as paper and physical trade at parity. They don't want physical because, today, there's no functional difference between paper and physical except that physical costs more to store. But when paper gold fails to perform that function for which everyone buys "gold", they'll want what the physical holders got. So it doesn't matter that they don't want delivery today. They still do want the same thing from "gold" that everybody else does, which is exposure to the price action in physical gold. But today they are only getting exposure to the price action in their massive paper gold market, which has a tenuous parity relationship with the much smaller physical market.

Here is FOA talking about how the paper gold holders think they are betting on what's happening in the physical segment of the market when, in reality, the physical segment is struggling to trade at prices determined in the oversized paper segment of the market:

FOA (7/4/99; 11:01:14MDT - Msg ID:8384)
Gold: Saving Real Money In A Time Of Transition

Clearly, the intent of this paper market, is to bet on the price of gold as it is determined by the buying and selling of other physical traders. The western public should take these trades for the concept they truly represent. ""I (the long side) bet on the "price" of gold not because we need or want the physical metal. Rather, my wager is that others will need real gold to protect themselves from bad monetary systems. In fulfilling that "need to own", these others will drive up the dollar price and I will make money while working within the confines of our good monetary system.""" The shorts make the opposite bet, in that they think the world monetary system will work itself out and induce "the others" to sell all their gold. That is, gold they bought in the first place, because they did not know that our money managers could repair the world financial system.

Yes, today Western longs and shorts are playing out these two views of the gold market. Yet, both sides are using paper gold bets to represent their beliefs. Truly, the major majority of this market does not buy or sell physical gold to represent their investment concepts. There are a few that buy coins and bullion, but, even in their large amounts, it is only a drop in the paper gold bucket.

This, my friends, is the very nature of western trading of gold. The mindset is to treat it as a concept for making currency, not protecting existing wealth. […]

There are many mental angles and philosophical side steps one can take when understanding the above. But, in this concept lies the very basis of the flaw in the current gold market. A paper market, built upon world misconceptions of currency values and the historical reasons for owning gold. The present deployment of world assets into a paper system of valuations is likened to traveling a trail of no return. History has shown that the assets accumulated in this way will never be transformed into "the things of life"! The paper wealth you currently own is nowhere near the real value your currency says it is. With the above introduction, we have begun close to the end of this journey. In the upcoming chapter one, we return several miles to walk ground already well traveled. We will observe concepts on the right and the left, not discussed by other guides. The very sights that make such a trip, "worth wile".

"You will see this trail thru the eyes of history and feel old ways as new Thoughts!" Another

I dug out a few more quotes from FOA for you, to hopefully encourage you (and others) to dig into the archives yourself. Here FOA mentions how the paper price of gold can fall even in the face of high physical demand:

FOA (8/10/99; 19:56:56MDT - Msg ID:10858)

"Another" counseled later that the gold market, as we know it was in danger of failing. In this case, failing means less and less major players are offering bids for future paper in the top tier markets because the gold can't be supplied. This loss of bids allows the paper price to fall further as present paper holders also attempt to sell. This is the "EXACT" reason that gold does not respond to the major financial events of today! Believe it! Local downstream physical dealers, because they use the Comex and LBMA paper market as a price creator, continue to sell gold at lower prices even as buyers come in droves.

FOA (8/23/99; 21:10:00MDT - Msg ID:11896)

The large funds don't want the trouble of real gold so they continue to play this game of "let's bet on the gold price and see who is right"! Today, they are learning a painful lesson that the stated price for gold is established by the same derivatives that they don't want to exercise. In their world, they are convinced that massive physical gold is but a phone call away for shipment into certified warehouses, so the derivatives price must truly reflect the real market.

FOA (9/1/99; 21:12:43MDT - Msg ID:12639)

The end work of this process has found the 3,000 or 5,000 ton per year real bullion market, is little more that a sea shell on a fifty mile beach. Everyone on the "gold net" already knows how much LBMA trades and that is small stuff compared to the other unseen world markets. The debth and liquidity of the paper market moved the bullion trade into the "pink sheets". Needless to say, today, the famed "closing bullion price" is set by the cash commitments that bid for derivatives, not the cash that bids for bullion. In the old days, really big traders would arbitrage any such paper overhang against bullion by calling for delivery. Today, with the paper market so large, any such power play would find most traders taking delivery of gold as the market is sold out from under him. Besides, this new market perspective works against any long traders because none of the present "derivative gold demand" wants delivery! They only want to settle in cash, because taking delivery would require selling their other "better performing" investments. The mindset today is that gold is only an insurance hedge, as such "an increase in its price will settle up in a cash delivery to me, to offset my other risk of cash impairment to my portfolio"! To further develop: "I don't need physical gold, I only need to participate in its price movements"!

In complete satisfaction of the current trend, derivatives fill the bill for this current gold market. Clearly, we can see that this new market is not "fraudulent". There is nothing wrong with players pouring margin money into the short side to create a demanded product! It's has evolved into a cash game. This is where GATA is fighting a war they cannot win. Gold bugs (of the last few years) were viewing the present market using 70s eyes. Indeed, they were investing in an industry that was losing primary demand for its product, even as "the need" for that product was exploding. This new gold market found a way to channel the "modern need" for gold's attributes away from physical demand and into paper supply. You simply can't create a short covering run if none of the current (insurance) longs want to take delivery. Even worse, as this trend was further developed, more and more old private physical holders were selling their gold and holding paper instead. Add to that Western dollar supporters wanting their currency to look good, and we have paper gold supply that's also used as a form of positive currency intervention. Anyone investing in the gold industry, expecting bullion to explode from all the new demand was truly disappointed. For every new Western gold bug that wanted gold for insurance, there were five paper sellers to supply him with all the gold insurance he needed, at a fraction of the cash commitment. Peter, (if you are still with me) this is only the end of this act, not the end of the play. We have been standing on the trail and looking at where we have just travelled. Now, let's turn around and look forward.


Once again, the needs of investors will redirect the method of using gold. As the wealth effect of the Dollar/IMF system goes into reverse, the process of receiving your gold hedge insurance in dollars will be perceived as a risk. At this stage, all of the past demand for gold that was channeled into cash settled paper derivatives will suddenly reverse its trend. Slowly, more and more of a percentage of settlement will be asked for in real gold. As delivery fails from increased demand, existing derivatives will be dumped upon the market place in an attempt to cash out. This very process will: First dry up all gold supply and lock down any existing private stocks. Second, cash biding on the dealer market will become convoluted and reflect only gold's currency value. It's economic / industrial use will be priced totally out of the market. Third, what was once the world price making market for gold, will become useless for delivery as its contracts are defaulted on and discounted in price. What price could the world gold price be set at, using these defaulted, bond like securities? How low does russian debt trade?

I pulled these quotes by searching the term "paper market" and, yes, there were lots of hits. Here's one quote I'm including because it could almost explain what we saw over the next 14 years up until today in the gold market:

FOA (09/06/99; 20:56:39MDT - Msg ID:12946)

Remember, the present financial system has a need for new mined gold to flow into derivatives at a low price to support the paper market. The same paper market that keeps oil behind the dollar also holds the dollar together. As of today; To further pull existing "old gold" from portfolios by forcing the street price down now invites a run from the dollar. A high physical "street price" will at least keep the dollar in play when price inflation begins. If the paper gold price rises from its present level, will gold stocks follow? Probably! But what if that rise ends quickly as the gold market begins its next "official" failure run?

Is that where we are in 2013, in the gold market's next official failure run?

Here's a little bit of the "wide view" I mentioned above:

FOA (10/31/99; 18:56:22MDT - Msg ID:17990)

Slowly, everyone is coming around to understanding how our gold markets got so far off track. The official determination of what constitutes "buying and selling gold" never started this way. In the beginning gold was wealth and people traded it as money. Jump ahead to the US timeline and we see currency a gold loan that didn't pay interest as it was the US dollar. You loaned your gold to the treasury and they gave you a contract stating that your metal was held until asked for. Your contract stated that 1/35 ounce of gold was owed you, on demand. Because no one asked for their loan to be repaid, the treasury just kept creating more loan contracts even though there was not enough gold to repay with.

After this "gold loan scam" went bust around 1971, they went back to using real gold again. The government allowed trading in physical in the US just as it was done in the rest of the world prior to this event. Then someone used the gold fabrication industry as evidence of a "need" to create a US futures market so suppliers could paper hedge risk. No need to make the point that this paper market was of little need as the gold industry had worked well for thousands of years without it. Indeed, another form of gold derivatives was just born. The gold market was destine to evolve again as the distinction between trading real bullion and betting against someone on the direction of the metal's price movements became one and the same. People accepted that a gold derivative was just as good as gold as the pre-1971 dollar was. We came full circle.

Pulling these quotes is actually fun for me, so I could keep doing this all day, but then this email/post would be 40 pages long. So I'll leave it at this for now. But there's much more in the archives. I only scanned less than 25% of FOA's posts to pull these quotes.

The point is that the paper gold portion of the gold market is where the price of gold is discovered, and it appears that gold trading as a FOREX currency is the largest portion of the paper gold market, by an order of magnitude even. The daily physical flow from mining and recycling is around 16 tonnes while the LBMA tells us that their spot unallocated flow is in excess of 2,400 tonnes per day. Here's one last quote from FOA:

5/3/98 Friend of ANOTHER

Gold is valued by the number of outstanding claims against it. Kind of like a house for sale with ten bidders. Each bidder thinks the house is in the bag because they have a valid bid ticket. Each one thinks he can have the house at any time, even though nine others want it too, because all I have to do is bid a little higher and take it! Insane, but that's what is going on! Somehow, the BIS and the major private gold holders know the total claims, as does Another.

Total loco London gold turnover in the first quarter of 2011, as reported by 36 LBMA members, was $15 TRILLION. Total turnover as reported in ounces was 10.9 BILLION ounces, or 340,402 tonnes over 63 trading days. That's a lot of trading! I wonder which market that includes "gold" has the depth and liquidity to entertain such volume, since it's obviously not the physical market, GLD or even the futures markets.

"The area where I’m still hazy is the gold as a FOREX currency."

Is it still hazy? ;D


And the light bulb goes on!

Awesome, thanks for this. I’ll re-read again and get back to you in a few days… got a bit going on right now.

Thanks again FOFOA.


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Michael dV said...

you don't suppose the great one got that number from 'our friend and guru' do you?
I also recall Sinclair warning about paper gold....but he still loves his miners.

Indenture said...

"Freegold is the planned transition from an old and flawed monetary system into a young and superior one."

Phat Repat said...

You had me up until: "Even Grumps is a better investor then this." Knife catching ain't investing, but I digress... ;-)

Good points Sam and the picture becomes clearer with time; assuming we can trust the information (propaganda) being released. However, all Nations are in a constant state of competition and as a result I take any information released to the GP as propaganda. My point isn't that FG won't happen, or even 'who' benefits from such, that has been well defined by FO/FO/A (et al). I just don't believe the 'they' is as clear as many would like to believe. Maybe it is as simple as you postulate but are things really that cut-and-dry? History will be written at the point of the victor's pen. Hmmm...

Phat Repat said...

And, since my fallback plan is faltering: Those Comics in Your Basement? Probably Worthless Well, I'm all for FG, sooner than later. :-)

Sam said...

You don't have to be the victor Phat, just follow in their footsteps ;-)

Phat Repat said...

Win-Win is nice; but rare. Been on the path a long time Sam so no worries there. Until then, I enjoy picking up gold crumbs. ;-)

MatrixSentry said...


I do not understand when people say USA is now in a "depression". No way am I seeing this around. Economy is looking up and humming along, as far as where I am looking.

1 in 8 in the US are on food assistance, an all time high. Over half of those are children. 50% in the US pay no federal income tax. Labor participation rate is at a 40 year high. Real wages have been declining since 2008 and are flat since since the 70s.

All this with QE1, 2, 3, and now QE to infinity. Interest rates nailed to the floor.

Yes, I say it is a depression. What would it look like without all of the extraordinary measures?

MatrixSentry said...

Sorry, labor participation rate at a 40 year low.

Roacheforque said...

Agreed. Here again, the great success has been the gradualizationof the collapse over the years, due to these exceptional measures, otherwise yes it would indeed look (and therefore "feel") more like 1930.

The Roacheforques of the world have gained much more easy wealth this time around, and the little people do seem quite content for the most part.


Roacheforque said...

Agreed. Here again, the great success has been the gradualizationof the collapse over the years, due to these exceptional measures, otherwise yes it would indeed look (and therefore "feel") more like 1930.

The Roacheforques of the world have gained much more easy wealth this time around, and the little people do seem quite content for the most part.


Dante_Eu said...

It's all about POV - Point of view.

If you are unemployed, for you the unemployment rate is 100%.

Someone once said, Statistics is like bikini: It shows a lot but hides the most important things. :-)

Biju said...

MatrixSentry said...

1 in 8 in the US are on food assistance, an all time high. Over half of those are children. 50% in the US pay no federal income tax. Labor participation rate is at a 40 year high. Real wages have been declining since 2008 and are flat since since the 70s.

- I am not much concerned about food assitance, because I think the shame in applying for assistance when eligible due to static income is gone. ZH usually makes a fuss about this.

- 50% in the US pay no federal income tax. That is good right ? since USA has exorbitant previlage, they can tax their lower income citizens less ?

- Labor participation at a 40 year low . I will not believe this because I think the major factor could be a lot of illegal immigrants are not counted in this properly. US citizens retiring and compensated by illegal immigrants.

I will concede one thing - Real wages have been declining since 2008 and are flat since since the 70s. True, this is not a good trend even though corporates are making record profit due to improved IT efficiency and outsourcing.
I think this trend will reverse.

But look at the bright side - when we look at the US economy,
- corporate profits are record high,
- people who pay tax see their assets increased, debt to wealth ratio falling since 2007,
- housing starts are excellent tagging along the house hold formation,
- unemployment is dipping since 2009,

- US budget deficit shrinking (due to Govt actions, no one believed a Democrat Obama - "The Year-over-Year change in Net Federal Outlays was negative in 2012 for the first time since 1955."). US Budget deficit will probably decline to around 3% in fiscal 2015.

- US trade deficit slowing rapidly from approx 60B/month to present $40B/month. US has a lot of strengths people forget, because grass is always greener on other side.

Actually US trade deficit excluding Oil is a very low number

- Another big metric- Now even though income is static, the percentage of income used to service debt is at historic 30 year low. The % for both renters and owners is at 12.95% during Q2 2013, whereas it was 13.68% during Q1 1980. The homeowner's financial obligation ratio for consumer debt increased slightly in Q2, and is back to levels last seen in early 1995.

- Household debt peaked in Q2 2008 and has been declining for over four years. This includes mortgage, credit card, auto loan, student loan, revolving etc..

Ref :

Just based on anecdotal evidence, economy is doing super here in northern California. So I am not at all pessimistic, unless an financial earthquake like a Bond market rout, Gold market collapse or a major war breaks out.

Biju said...

One thing I really want to stay the same is - house prices should not increase and interest rates burden should not increase, because an increase in house price puts burden on households. Even if home price increases 100%, there is no benefit for a single homeowner, because if he/she is going to move, they have to pay the same unless they downsize.

Regarding interest rates, I am highly pessimistic.

byiamBYoung said...


There are about 2 million fewer jobs in the US today than there were in 2008, and many of the jobs that have been created since the GFC hit are part-time and lower paying jobs.

The unemployment rate is only dipping because so many are being dropped from the labor force. Job creation remains anemic.

This is a shaky economy, at best.


tEON said...

...economy is doing super here in northern California.

Which doesn't suggest that the rest of the country is in a similar position. In fact it may be more the 'exception proving the rule'. Every statistic that I can find indicates the US is in, or near, depression levels. I am sure there are pockets where this is not the case, but one shouldn't judge those aberrations as representative of the overwhelming stats available to anyone who investigates with some depth. Things have been steadily getting worse for the lower and middle class despite MSM ignoring or, masquerading, the economic truth.

Polly Metallic said...

GLD drops 5.7 tonnes to a new low of 866.32. I wonder if this is cumulative from unreported days this week or it really was soley from today.

Roacheforque said...

Things have been gradually getting worse in the US since 1971. Microsoft and Apple and companies like Qualcomm and few others did help move debt along with growth, but the outsourcing which gives the Roacheforques of the world their robust debt recycling rate of flow has derailed middle class earning power for this once powerful engine of consumption.

The American Consumer is all but gone, and frankly gentlemen, from the standpoint of the ROW, that was mostly what it was "good for".

That and a drone strike if you fuck with her masters.

michael3c2000 said...
Huge Cracks in US Financial Fortress - Jim Willie CB - November 1, 2013

Reality Show said...

Yeah, would like to second Edwardo, great writing Sam.
Although, from an earlier post, Hope is the strongest emotion, not Fear. :)

byiamBYoung said...

@Polly Metallic,

GLD certainly has dropped that much, and quite a bit more, in a single session. So, it could be either.

I think it is so clear by now that GLD is not naturally fluctuating, but is on some kind of managed glidepath downward. I can't think of it as anything but supporting evidence that a transition is approaching.

I wonder what that transition might be? ;)


michael3c2000 said...

FOFOA- My antivirus software blocks the following malware virus it identifies on your site, and each time the page is reloaded:
My anti-virus blocked it this morning and again now when I returned.

Grinners said...

Hey guys, I wrote this question out for VtC's site but it has been awaiting moderation for about a week. It is in relation to his post "How Credit Suppresses the Gold Market". If anyone could help me with my understanding that would be great:

In relation to FreeGold and the concepts within this article I have a question:

One of the basic premises of the article, I take it, is that by loaning in the same medium that you save in, you are in fact diminishing the value of your savings. Hence, FreeGold would suggest to store value in one medium and spend (which eventually becomes ‘lend’) in another.

My question is, if one was (instead of combining the SOV and MOE) to save in gold and transact/lend in cash, would this actually have any difference on the value of the lenders savings as compared to the examples in your article?

We can see clearly from your example that by lending the gold out, the saver’s gold value is diminished. If, however, the saver had gold saved, then wanted to loan someone cash for a car they would either need to sell some of their gold and provide the borrower the cash, or provide the gold to the borrower, who would sell the gold for the cash for the vehicle.

In either scenario, the amount of gold circulating is increased by the lender selling (directly or indirectly) part of his gold reserves. Does this not reduce the value of his savings in the same way that it would by simply loaning the gold?

Thanks for your time.

Sam said...


Although a saver (gold holder) could make a loan directly to a debtor I think it is more likely that a bank will make a loan to a debtor. They are in the business and have the expertise needed to value the collateral, evaluate income and references, in short, establish the credit worthiness or "credibility" of the borrower. The bank could then make the loan in currency and gold would not be a director factor at all. I'm not sure how much time you have spent on this blog but this issue can be confusing (at least it was for me) at first and there are several good posts on the matter. In short banks do not lend savings/deposits. Banks create money (credit) out of thin air by determining someone's credit worthiness. The amount of loans they can make are only restricted by their ability to make good loans and avoid bad ones (profitability).

Aquilus said...


I'll only have one minute to write so I hope other comments can help more if needed.

What you're describing (one person taking savings and giving to another as a loan) is not rally lending, it's investing or speculating. The threshold for it is that the return of the investment must be greater than the appreciation of the original principal in the medium of savings.

True lending is credit from a financial institution in which credit is created based on the ability of the borrower to pay and the financial institution gets the promise to pay as an asset. That is the normal way fiat works and as you can see it does not involve selling gold for credit.

Please read the Moneyness 1 and 2, and I think Peak Exhorbitant Priviledge posts for good explanation of this.


Aquilus said...

I see Sam beat me to the answer. That's great.

Sam said...

@ Reality show

I guess I should have been more specific when talking about human emotions. It's just my opinion and I specifically meant when dealing with money/investing. My point was perfectly smart people generally buy high and sell low. Though one could say they buy high because they "hope" prices will go higher and sell low because they have lost all "hope" I would argue that it is really fear that causes this phenomenon. It's the same reason people get into the office lotto pool if everyone else is already in. Sure you might have a bit of hope that you will win but the overwhelming emotion is the fear of missing out.

Sam said...


That because you took the time to write the actual posts that would help Grinners and any one else with a similar question. =) My cliff notes style answer is no replacement for those great posts. They are must read if anyone hasn't already.

FoNoah said...

Anyone notice that the reval came early for Brazil's supposedly richest man. All his paper suddenly burned...

Anonymous said...

So nobody found it peculiar, I think apart from Biju so far, that the nascent Dubai's DGCX spot contract will start at meager 25oz.? That's clearly "pocket change" money in the Gulf area and many affluent western cities at pre RPG levels too, just look out of the window on similarly priced toys and trinkets everywhere.. However, at even JGRickards-lowerMM estimate reval levels it surely can separate the average street retail from the bigger boys.

BaronSilverBaron said...

Jim Willie's latest:-
"The agreements have already been made on the new Gold Trade Settlement system with its newly imposed Gold Trade Standard. They have agreed on a $7000/oz gold price, with a similarly exalted silver price of at least $250/oz. Decisions have been made final. "

Could this be true or is it just Willie hyperbole?

Motley Fool said...


Lmao. What do you think?

Woland said...

It appears that the "White Dragon Family" and their "Triad
Escorts" are moving gold from West to East at a prodigious
rate. Imagine: 5000 tons in only 3 months ( April-July 2012)

What a logistics nightmare to do all that in secret in such
a short time. Those "escorts" must have been really busy.

tEON said...

Also from Dr. WIllie's new article,
The last three US Presidents have refused to submit to the USCongress their medical records, as required by law. The details of their narcotics addiction would not sit well with the American public... so taking him with a 'grain of salt' might be considered an understatement.

Indenture said...

Those are great numbers Baron. I like how gold is only revalued up by a multiple of say '6' while silver is revalued up by a multiple of '11'.

Looks like silver is the clear winner in Jim Willie's scenario.

Motley Fool said...

Obviously we need to start stacking moar silver now!

tEON said...

Spot drops and bug's vision gets blurred
Listening to guys with the first name of 'Turd'
Silver in extreme
'Undervalued' they scream
Dr. Willie has given the 'word'

Michael dV said...

silver will jump 'to da moon' as all these players who have NO SILVER suddenly start buying the physical!!!!
I think we will know this story is BS as we watch silver languish over the next week.
Gold might not react violently but they have to start silver hoarding from scratch!!

tEON said...

Sinclair viewed as hero to most
'Mr. Gold' - the moniker he'd boast
He'd ramble-on sitting with Rover
Toupee or a desperate comb-over?
Silverbugs feel his reputation is toast.

Edwardo said...

The Jackass is terribly silly
You may know him as Dr. Jim Willie
His source is just crap
Playing Jim for a sap
Like a mark on the streets of South Philly

Reality Show said...

Why do people still take The Willy seriously? Didn't he say there was an underground city or somesuch lunacy? Smart, but nuts.

@Sam. Ah yes, I understand your financial context, just making the more general observation that when all is lost, the last thing to die is hope, and as such it must be the most powerful of human emotions.

Michael dV said...

The Willy is top notch doomer porn. The unique qualities of his squeaky voice and his wandering baseline of global efforts to bring down the evil banksters is better than the shit that passes for our current 'action thrillers' now playing in theaters every where.
Jim's imagination, his secret contacts, his lovable huge head and his ability to respond for 30 minutes to the interviewers 'hello' make him one of the most sought after speakers of the genre.
My Fantasy Global Monetary Collapse Team has Willie as starting QB.

Michael dV said...

My reading of the Brazilian 'billion to broke' story is just another $IMF case of over leveraged combined with market movements leading to sudden illiquidity.
THIS is why we must have a lender of last resort!!!!
We can't have our most beloved billionaires worry that expanding the monetary balloon might be harmful to their giant paper stash.

Reality Show said...

If accurate, this chart is quite revealing.

Edwardo said...

Where those two pillars in the graph cross, imports versus mining output, is where things should get very interesting.

Michael dV said...

I still have not found another source to confirm Marc Faber's claim of over 2000 tons imported into China for the year....anyone else heard a similar figure?

Michael dV said...

After all these years of paying close attention to the monetary system and the metals market it has occurred to me that I really do not understand what drives the silver folks.
I am aware of silver's historical role as a monetary metal here in the states and the issues raised by Bryant in the late 1800s but what motivates them now?
I do not think they are a group devotees who have held on to the concept of silver as a monetary metal since that era.
I understand the desire to have what you hold become more valuable, we do that too. But why then religious fervor? Why do they not shout for silver and gold? Is it the fact that it is mentioned in the Constitution?
Why isn't there a "Silver and gold bullet and silver and gold shield'?
Does anyone understand this attraction to a specific metal? Most people interested in the metals markets are pretty serious as they are betting their fortunes on an outcome.
Why do some of these same serious people think that silver has some sort of magical ability to preserve wealth?

ampmfix said...

Silver kills vampires and werewolves Michael!

Polly Metallic said...

Michael dV,

I think the draw of silver is that it is perceived as a store of wealth that every person can afford whereas many people say gold is unaffordable. So silver is for the "little guy." It's the champion of the downtrodden.

tEON said...

Many of these Silver sites export the theme of "Silver for the People" as if Silver is for the common man (who will rise up against the evil banskters!). It's a feeling of economic revolution - that they can overthrow the bonds of their paper currency. Gold, on the other hand, held by CBs, is seen as for a representation of the wealthy.
Silver also has the perception of more bang-for-the-buck. For the same price of one Gold ounce you can get 60 Silver ounces. Hey, it's heavier - it must be worth more.
The Silver-ites are persuaded by the expressions of SGR... being told of historic ratios and the uses of Silver as a monetary metal. Most Silver sites expound that AG will outperform AU as the ratio tumbles. The SilverBugs eyes roll like a slot machine as they hear tales of 15:1.... or even 1:1.
Silver is used (Industry) while Gold is not - and this adds to their supply/demand thinking limitations.
Their common focus is the hatred of the system, hatred of bankers and certainty of PM price manipulation.
The limitations in logic of Gold used as MoE (not enough of it!) so Silver seems more likely to buy their groceries or gas... when paper fails.

Motley Fool said...


Good summation. I may just have to poach it at some point to expand upon, with attribution of course. Were you perhaps a silverbug at one point? ;)


tEON said...

Uhhh yeah MF... past tense. LOL
I suspect that many PM advocates start out with Silver although I am pleased to state my first purchase was Gold.
You go through stages but wonder why some stop... or maybe their just aren't FG'ers yet. Time appears to be running out... maybe on all of us. I can be fatalistic when it suits me. Why did I get so lucky?
When I was dumping my Silver for Gold the one thing I recall was why I wanted the AG in the first place... it was like having a steel girder lying on my basement floor... just sitting there... hard to move... what a silly way to store your wealth.

Aquilus said...


It's just "Teh Evil Elitz" keeping track of all suspicious blogs and commenters on them, and there's nothing FOFOA can do about it: they enslave everyone equally..

LOL sorry, I couldn't help it! Seriously now:

No virus, false positive.

Here's a quick site scanner (one of many) for your own peace of mind.

That fragment you link to is a piece of JavaScript (the programming language behind all HTML websites ) that controls the flash animation for your world map at the bottom of the page. As part of that, it asks for all sorts of network permissions so that the map object can communicate data back and forth. It's the presence of those permissions that probably freak out whatever antivirus software you're using.


FOFOA said...

Hello Grinners,

"Hey guys, I wrote this question out for VtC's site but it has been awaiting moderation for about a week. It is in relation to his post "How Credit Suppresses the Gold Market"…"

Yes, Victor has been noticeably quiet lately, hasn't he? I wonder why. Perhaps I can shed some light on his absence from the Freegold discussion in addition to helping you with your question.

Long before Victor's "How Credit Suppresses the Gold Market", there was this post by Aristotle which was the inspiration for Victor's post:

"In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. …

…I wanted the commentary to have a decidedly real world brutality to it to establish its credibility among those (not here) who don't understand Gold. Had I written it for the pure pleasure of those gathered here, I would have written it from back to front. In short, it would have looked like this:

**Gold is the only real money there is--fiat currency is not money--so only Gold should be used as currency.

**Fractional reserve lending destroys a currency's value in trade, and therefore must not be allowed.

[time for concessions to the real world]

**People will always want to borrow for the things they want to have beyond their current financial means.

**Spending Gold into the marketplace, whether by the owner or by a borrower, would tend to result in prices for goods that weigh more--costs more Gold.

**As ever more Gold is borrowed out of other people's savings to be spent into the economy, the Gold's purchasing power is lessened from what it otherwise would be...hurting those who have elected to hold their Gold instead of risking it by lending it out as a source of income.

[notice in the above that we have all the bad devaluation effects without a single bank entering the equation!]

**For Gold to find its truest value, all savers must retain their Gold for their own use. Its properly retained value will more than make up for the foregone interest income. Gold must not be lent!

**With Gold as the only money, people will not be able to get loans. [In the real world, this is hard to imagine!] As an alternative, they will work up complicated contracts for the item they desire (new home or car?) in which they promise to deliver a certain level of their future productivity against a pledge of real wealth collateral.

**These contracts for the delivery of future man-hours would eventually be organized into their own market, and quantified into standardized units (called something like "manos") functioning as a currency. Everyone would know what the price for a loaf of bread would be in "manos," and they would all revel at the high price of Gold as quoted in "manos".


FOFOA said...


**As more future productivity is brought forward into today's market, we would see this "manos" currency-supply inflate, and each pledge of future manhours would be seen as less and less valuable when compared to real goods.

**Someone holding Gold in savings who needed to get some work done or to buy goods could purchase it directly with Gold. They could also sell a quantity of their Gold on the free market to buy the Man-hours they needed to get the job done. There will always be people with an excess of "manos" that will want to move them into this supreme monetary asset--Gold.

**Such a system is not prone to shocks (bank runs and currency crises, etc. are like earthquakes where pressure builds and then is suddenly released) because at all points the assets may freely come into balance against each other in the free markets of the world.

There is little difference between a manos in Bangladesh and a manos in Canada where one manos is taken at a moment in time as the work equivalent to a healthy man shoveling sand with a spoon into a soda bottle. Who cares if one manos is actually called one, ten, or 27.34 rupees in one dialect while in another language it is called one, two, or 6.45 dollars? It's really just a mathematical exercise. Who's to stop the real world from pursuing such a system? It's basically what we have now, except the evolution took another route!

The key is that Gold must be assisted in towards its own final and perfect destiny through the straightforward mandate (whether social, governmental or religious) that Gold shall not be lent as it has been, or otherwise attached to various financial derivatives. You can work for it, mine it, buy it, and sell it. You can't borrow it. Monetary perfection for an imperfect planet.

Gold. Get you some. We are moving in this direction faster than you imagine. ---Aristotle


That post was a brief summary of Ari's much longer five part series on banking, credit and money. Here's a quick preview:

*** Gold must be set free to float, seeking its proper value among the world of circulating currencies/monies; preserved as a unique "international currency of wealth" that may NOT be lent (because lending effectively causes a perceived increase in its supply and corresponding decrease in its purchasing power, as outlined above.) Gold must only be bought and sold outright, and must remain free of the attachments of any and all financial derivatives. […]

How will this work, you ask?

*** An extention of Gresham's law predicts that the world's supreme currency, Gold, will not actually circulate in the conventional sense. Gold will be saved (and will appreciate in value absent the lending/leasing of it for interest,) while national fiat currencies will circulate under the needs of the economy. It is these national fiat currencies that will continue to satisfy the demand of borrowers for loans. National fiat currencies will also serve as the means to satisfy the various governments' unrestrainable inclinations to "manage" their economies to the extent that they are able. They, too, will hold Gold in savings (reserves) for the same reason we do.

The supporting chapters are to follow in this commentary -- "Building the Perfect System by Capitalizing on Gresham's Law"



FOFOA said...


If you haven't read it, then I recommend it. FOA liked it too: "Aristotle, your five part series is trenchantly written and offers readers a glimpse into a future that must be. Will be!"

Also related is this post from FOA a year and a half later, which touches on the subject of lending the value of a real wealth item versus lending its actual use. Here's a snip:

"If we lend an item of real wealth, say a tractor or chair, its future value is unimportant to the lender as long as the real item is returned. It is the "use" that is lent, not the money concept in the form of a trading value. In this process we recognize that, because the value of things change, the debt to be repaid is the item of wealth, regardless of its higher or lower value. Only its "use" changed hands during the lending and repayment of debt. All is well."

This concept (which I can tell you are exploring from your last two comments), that the lending of something lowers its value, is necessarily interrelated with the many other concepts introduced by FOA. It is more of a useful thought experiment to help one understand the deeper issues, like how the entanglement of physical wealth with the pure concept of money inevitably leads to a conflict of interests between people who use money at the margin for different primary purposes (debtors and savers), rather than being a stand-alone fundamental principle as Victor's post may have made it seem.

Thinking about the difference between lending something to someone to use versus lending the value of that thing, such that it must then be sold by either the lender or the borrower in order for that value to be spent, can help one understand how having money (credit) denominated in the physical focal point store of value naturally suppresses its value relative to what it would otherwise be in only its main use. This doesn't work for everything, though, only that one thing which happens to be the physical focal point wealth item throughout most of history.

People don't borrow money to hoard it. They borrow it to spend it. They borrow money because they want something other than money. People also produce (work) to earn money to spend it at a rate of more than 9 to 1 compared to money that is earned for the purpose of hoarding money. And it is here, in the hoarding of money at the margin, where the conflict arises.

I even noted back in 2011 that this issue of 'no gold lending in Freegold' was a very minor part of the Freegold discussion:

"… it is not a prerequisite of Freegold [that there will be no more gold-denominated credit], but more like a natural consequence… That's because it is not a primary concern and not a big deal."

Yes, it is an A-HA moment when it finally clicks that any form of credit denominated in a weight of gold naturally suppresses gold's value relative to what it would be in only its primary role, but in the big picture it is small step forward on a long trail. The much more rewarding A-HA moment comes when it finally sinks in that it's self-defeating to hoard the base unit that denominates credit, rather than the intermediate a-ha realization that it's self-defeating to lend wealth for its monetary exchange value. Can you see the difference? One is practical while the other is conceptual.


FOFOA said...


Today's system is painted into a corner, and that's the big picture you'll get from this trail of thought. The US dollar has been a remarkably stable fiat currency for a very long period of time now, 30+ years, and it has to be because the primary medium of exchange and the primary store of value (the most popular secondary medium of exchange in Mises' terms) have the same denominator. And this really highlights a fundamental difference between Freegold and Victor the Cleaner's new "Freefiat AG" which argues that a perfectly stable currency is the goal of the euro so that euros can become both the SOV and MOE. You see, VtC no longer subscribes to the separation premise mentioned in your comment.

Here's a quote from the FOA post linked above [bolded emphasis and bracketed comments are mine]:

"This is the trend that is killing the dollar today.

It's not that price inflation may erupt; it hasn't done much in 30 years compared to the money printing volume. Our demand for more fiat [as a store of value] has absorbed most of what we issue. […]

The risk is; that our money system requires dollar and debt stability… Further, the money system is backed by this debt being stable; so without said stability the currency system fails.

The contrast here is that modern fiat use trends are advancing towards flexible fiat money. Not so much flexible against other currencies; flexible against all other wealth, including gold. The more a currency can adjust to commodity and industrial use demands, the more in demand that currency reserve system will be. The immovable past structure the dollar is built upon demands its values be defended with complete hyperinflation if necessary. Prior to EMU, there was no other reserve currency that the world could run to. Now, the dollar cannot deflate and take the rest of the world into deflation with it. The tables are turned; deflationary policy will not defend the dollar. Only inflationary policy will. Make no mistake, we are not calling for price inflation to end the dollar's reserve rein! We are calling for "inflationary policy" to dethrone it while said hyperinflation follows. [Little or no price inflation-check; inflationary policy-check; hyperinflation-coming]

So begins and ends our long march that attempted to steady the value of modern money..."


Victor's "Freefiat AG" is very instructive here as its differences from Freegold highlight some of the most important changes that are coming. In short, Victor thinks that the intention of the euro's design is for the ECB to buy and sell gold "AG" (which means not now, but after Freefiat is functioning as steady-state—i.e., hard—money) as a means to steady the value of modern money (the euro) by offsetting the deflationary/inflationary pressures of currency hoarding/dishoarding as an SOV, a currency use which Freefiat promotes, while simultaneously eliminating the inflationary effects of consumer credit expansion.

Freegold, on the other hand, explains how the euro's design is elegantly aligned with the natural flow of the river of time. "Freefiat AG" is more of the same as we have today (money/currency as a stable store of value), with a centrally-planned/CB-controlled way to eliminate imaginary problems rather than the real ones that FOA explained.


FOFOA said...


The imaginary problems that "Freefiat AG" pretends to solve are wildly-fluctuating money values by making them stable, and too-stable gold prices by making them fluctuate wildly, thereby finally stabilizing purely symbolic money so that it can be the true store of value it was always meant to be (note that, as FOA said, the dollar is not only the SOV today, but it has been remarkably stable for more than 30 years).

Another imaginary problem solved by "Freefiat AG" is this crazy price inflation that our consumption-based credit expansion creates. Well, to keep it short, what price inflation?.. and there's nothing inherently wrong with consumption-based credit expansion anyway. If you have a good job, you should be able to upgrade your refrigerator or even buy a Jet Ski based solely on your credible earning potential. It's an important part of the economy. Where consumer credit goes awry is with the addition of the real problem, which is the MOE also being used as the SOV, which "Freefiat AG" promises to restore (as if OMG, it's been so long since anyone could hoard currency without worrying about price inflation).

What is perfectly normal, which "Freefiat AG" ignores, is that, within the normal timeline of credit repayment, sometimes social preferences change, new inventions/innovations emerge, natural disasters happen, and many other factors all occasionally lead to systemic or sectoral losses which are always papered over to preserve everyone's monetary system. Change is the only constant in human systems, yet "Freefiat AG" promises to change that part of the human condition. There's much more, but hopefully you are starting to see how VtC's new Freefiat is precisely the opposite of Freegold.

Right about now, Grinners, you are probably wondering wtf "Freefiat AG" has to do with your original question. Well, not much, other than that Victor abandoned Freegold and the fundamental concepts taught by FOA which informed his "How Credit Suppresses the Gold Price" post about 8 months after he wrote that post, which could explain why your question has gone unpublished and unanswered on his blog.

But let's look at the bright side. Hopefully I at least gave you a few things to read from Ari and FOA that should answer your original question. And at the same time, I hopefully informed you and a few others as to why Victor has been markedly absent from my blog as well as his own. He hasn't even written a real post for his own blog (other than a compilation of tweets) since Nov. 2012, which was when he abandoned Freegold. In fact, Twitter is his new home. So if you want your question answered by him, try tweeting him. It's where he's been busy tweeting the hashtag #FFFTW which means "Freefiat for the Win!" ;D


michael3c2000 said...
ECB Establishes Standing Swap Arrangements With Other Central Banks

Unknown said...

An excellent contribution as always, and a much broader answer to Grinners, yet indeed relevant. I cannot recount the ways in which I agree with every nuance you so elegantly (re)state.
And I cannot see the reasoning behind VtCs departure from the essential separation of credit from wealth. One does, along the way, see where lending must stop if FIAT is not wholly accepted and promoted into the equity based system.

And this will NOT work for humanity at any level.

You do peer briefly into the abyss of just HOW this failure will transpire.

It is a pleasant fiction to imagine which domino will topple first as we struggle with the concept that they cannot possibly all fall together ...

Sam said...


Interestingly, Ari said way back in 2010 that the EU plans "to make private bond holders shoulder some of the pain from any sovereign debt restructuring after mid-2013"


bondholder haircuts in the EU are a fundamental part of the steady march forward towards Freegold. Whether it's bank bondholders or sovereign debt bondholders.  In the US the bondholders will get wiped out when the currency hyperinflates, but in Europe the bondholders will get nominal haircuts

One Bad Adder said...

@Michael dV: - (Ah that Infidel Silver again!) - You said -
After all these years of paying close attention to the monetary system and the metals market it has occurred to me that I really do not understand what drives the silver folks.

"Fundamentals" my good man ...FUNDAMENTALS!

FOFOA's post above (the headline one) demonstrates that under this current regime, both Gold and Silver have become Paperised Commodities ...
...and even Blind Freedie can appreciate Silvers better fundamentals "within the current regime"

The thing with Paradigm Shifts is that it's nigh on impossible to determine where we're at (pre-mid-post PS) until well after the fact don't be too keen to write off Silver ...just yet, my friend.
Jumping-the-Gun (on a PS) gives the impression of a FOFOA - led FreeGold Jihad ....almost ;-)


The idea of "lending something decreases it's value" appears to me to only be focusing on one side of the equation. As X is lent out to be spent, it's value would decrease, but as X is repaid, it's value would increase. In a market not not influenced by things such as the fed, an equilibrium would be met and value should remain constant(outside of factors such as productivity gains).



Regarding the silver craze. I believe there are several factors which draw and keep the silver stackers going.

Having "a lot" is more attractive to shrimp. You can buy a roll of 20oz for $500. This allows them to "stack". It is much more fun to pull our your stack and talk about it on youtube, than to pull our your 1 or 2 gold coins.

They are convinced the GSR must come down. Silver is on the same money plane as gold in their eyes. So as one goes, so goes the other and gold is just too expensive compared to gold based on the past.

Silver is for the people. Gold is for the corrupt bankers.

And what is maybe most often heard is silver usefulness as a commodity. Ironically it is what weakens their argument the most.

Edwardo said...

The funnymentals for silver, OBA, may not be as wonderful as they appear. While it is true that they aren't making any more of it, there is still a whole lot of above ground stock such that silver at prices that were last seen in early '11 are likely to bring out massive quantities of silver for sale. Every owner of a silver service, silver candlesticks, silver paper weights, silver tumbler set, etc. etc. that was either wholly constructed from silver, or plated in it, will be dumping it on the market. Silver owners, of which I am one, didn't have a lot of time to dump their silver when it was hovering near fifty bucks an ounce two and a half years ago, but next time is likely to be different.

Folks spend a lot of time pondering gold confiscation, but they might be better served focusing on the case for federal silver "interference" since it's an industrial metal of enough importance that should its supply demand dynamics adversely effect economic activity, well, let's just say we can probably count on the authorities taking steps that will ensure windfall profits will not be reaped by owners of physical and/or paper silver.

Michael dV said...

I buy into the 'focal point' argument...there can be but one ring that binds them all...and it is of gold....
so for me silver is a curiosity...I did buy gobs of it in early 2011 though....I thought it was a sign of a weakening US dollar. I now think it will be purely an industrial metal...

M said...

@ Edwardo

Are you planning on exchanging your silver for gold ? I haven't been paying any attention to the ratio. I have some to sell but Im not sure if its a good time to.

Tommy2Tone said...

Not only Victor has been quiet, I don't recall a peep from Bron from several posts back where FOFOA basically called him out and's oh so quiet.

VtC pops in too, in guerrilla fashion, and tosses a FFFTW post once in a while but silence ensues when questions arise.'s oh so quiet

No disrespect intended. I long for the counter arguments and discussion.

Phat Repat said...

"Every owner of a silver service, silver candlesticks, silver paper weights, silver tumbler set, etc. etc. that was either wholly constructed from silver, or plated in it, will be dumping it on the market."

That game has already been played out. Though I do see some more downside at the moment, I'm expecting the ratio to at least become favorable for conversion operations. But I would not be a buyer of Silver anymore, irrespective.

Lisa said...

Nice song JoJo

Edwardo said...


Let's just say that while I may sell some more silver-I've already sold the majority of my position-I am playing with house money and, therefore, feel no compunction to do so.

Phat, do you really think all the silver objet d'art and not so objet d'art has all been sold? I don't think it's even close to all being dumped.

michael3c2000 said...
The few tables/charts here could steal the show., like any of 100+ fundamentals.

Zebedee said...

Ah yes JoJo. My favourite female singer!

Anonymous said...

Hm, the latest revelations that the EMU core, "hard currency" countries like Netherlands, Finland, Germany and Austria are in control of just a fraction of their stash sheds somewhat different light on the FG/RPG proceedings to follow. Namely, they won't be in primary control seat as dreamed about in the late 90s - early 2000s, moreover their propensity to influence the outcome on the newly organized international scene will be pretty much marginalized. In specific terms, I now tend to subscribe to the view, that both North America and Europe have been terminaly abandoned for the greater Asian centric playground on purpose, simply there was nothing left to harvest from the sheeple anymore. The assets have been moved, the living standards of the former powers did and will continue to drop by a few notches more pretty soon. And with that goes away any sort of nominal appearance of democratic process. So, capital controls, authoritarian rule post FG/RPG. Likely, some regional pockets of the old world will maintain the edge, but it certainly won't be shared with the impoverished ones, not only the obvious PIIGS but many of the former core as well.

Unfortunately, the closed-loop debate on base case FG/RPG scenario here went so off the charts towards the outlier "rosy BAU in the west for ever" it will be very hard to internally process for many of the regulars in timely manner.

Anonymous said...

So, the Europeans are scared stone white, another tangetial clue, just look at the push for inviting Snowden to Germany, while establishment sais "no way risking vital transatlantic relations" for that. Chinese are scared to make bolder moves as well, they now acknowledge the dollar trap and being taken for a ride by the debtor.

Clearly we are looking at massive prolonging of the deleveraging process (5-10yrs more), which will be ripe only after, not before the next crude shock as hoped. Therefore the combined effect will be complete unhinge of any soft landing imaginable. So finally, I'm at peace with the world now, the outcome for humanity has been set, resistance is futile.

FG/RPG delay confirmed from "highest" chinese sources:

michael3c2000 said...

michael3c2000 said...

tcelfer said...

Do the giants only live at the top of the beanstalk? What makes someone a 'big'?

I have come to ask that question of myself and so I thought I would ask if of you all as well.

A couple of weeks ago I went into my coin shop to do my usual browsing and was talking with one of the workers. He was telling me about a woman that had come in earlier in the day and purchased 25 Kilos of gold, with intention of coming back to purchase another 125 Kilos.

I realize that to some of you, I would imagine not most, but some, that's not all that much. But to ULTRA-SHRIMPS like myself, that's almost a majestic amount. A seemingly dreamlike quantity that I'll never come close to possessing.

At what point does an investor go from being a shrimp to a player of any significant size?

I figured I'd pose the question to see what kind of answers I'd get. I imagine it's a much larger number until one can be considered truly a 'big', or a giant.



KnallGold said...

How's the state of the oil for euro trading? I thought the float is sufficient to bear the weight, Iran seems to be doing it already. Not much heard of it anymore.

@OBA: "FOFOA led FreeGold Jihad" OMG you just wrote an invitation to the paranoids@NSA (National Socialism Association if you google...)

Anonymous said...

tcelfer> it's all about the "burn rate" of your particular lifestyle in times to come.. should that "125+25kg" lady be impaired on other parts of her portfolio during economic turbolences, that stash might keep her somewhat afloat: driver and gardener, housemaid, modest estate/villa upkeep, restaurants, jetset vacations twice per year, admission to top cliniques if necessary. Simply, get yourself 150kg and secure your former comfy upper upper middle class life while it lasts.

The traditional middle class of the near future: bicycles, somewhat restrained nutrient intake, limited "veterinary" healthcare, several part time jobs, ..

And the lower strata of society, lets rather not go there.

Franco said...


If I may ask, who the fuck is "Professor Yu Yongding", and what makes him a "highest" source? The person writing the article (koosjansen?) says at the beginning "I don't know exactly when he made this document, but my estimate is 2009". So some blogger is reproducing a document that he/she doesn't even know when it was published. OK, great. And the fog from your world view has been dissipated by that? But regardless, where in the presentation does he explain that we are "clearly" looking at another 5-10 years? And assuming that the Chinese dude is actually an insider who knows his shit, why would I trust what he says? I mean, are you compelled to trust what the governors of the Federal Reserve (or any other central bank) say?

byiamBYoung said...


I believe I read somewhere in this blog/comments that Warren Buffet would not qualify as a giant. He's one hell of a jumbo shrimp, but that might help size it up for you.

Anonymous said...

Franco> rage and profanities of a groupie aside, I can only recommend you to calm down and read it again, it's an assamblage of several papers and apperances of that chinese guy. If I read Koos correctly the first was not dated, but aprox time stamp has been derived by that line numerating the stage of U.S. gov printfest at that time, so perhaps around 2009. The latter two instances of that same guy are clearly dated as of 2012.

On a broader point, it's all coming as multiple little creeks into one river stream called FG delayed.. it's not only that guy "today".

Motley Fool said...


Explain the actor behind such a delay. Who will be buying US debt? And remember the Fed doesn't count, as it doing so is ineffectual.


Sam said...

Though FO/FO/A have occasionally placed soft definitions on exactly what makes a Giant I think what is more important is for us shrimps to understand how someone with extreme wealth thinks. After you learn to think like a Giant you will be able to follow in their footsteps without faltering along the way.
I personally just think of someone with so much currency that they don’t want or need anymore yet more is coming in everyday. They certainly aren’t in debt or leveraged to maximize profits and growth. They have reached a point where their only goal is to keep a low profile and maintain most of their wealth for future generations. I think people at this level understand that there is a lot more credit (currency) in this world than physical stuff to buy with it. Try to buy the whole world and the pitchforks will come out. Some of them may have even tried to buy too much of something and were given a little education. What they really need is a physical wealth asset to store their future purchasing power without hurting the rest of society by driving up the prices of useful things.

gull_mann said...

@ tcelfer,
I have never seen or heard anyone purchase that much. None of my local coin shops could fill that order:

25kg * 32.15 toz= 803.75 toz
803.75 toz * $1315/toz= $1,056,931.25

Does any local coin shop have that, much less 125kg? Maybe Tulving could do it, but he is having delivery issues and unhappy customers. Not someone I would want to deal with.

tcelfer said...

@mcmagicfly --> Re: The lower strata of society. NEW! Try McDonald's new Rat Burger, on the extra extra value menu! Now with more rat! (Just reminds me of Demolition Man.... This is Rat?! Not bad...)

@byiamBYoung --> I seem to recall that tidbit somewhere along the line, good call. Couldn't for the life of me tell you where it was though.

@Sam --> I've read, and said the phrase 'think like a giant' before, but the way you put it in a different light for me. Realizing that you have more 'wealth' than you could possibly need to spend in a lifetime, it makes sense to try to seek a venue for it's safekeeping.

@gull_mann --> The man I spoke with implied that they were able to fulfill the order on hand. It sounded like maybe they would need to get some more in to fill the later order. It's a pretty large and well known coin shop in Chicago that I go to. Never have had any problems getting inventory there save one a year or so ago when I was trying to get some junk silver and they were out as someone had bought it all up.

They must do pretty large business regularly as the worker mentioned it as it was not too uncommon of an occurrence.


Anonymous said...

MF> "And remember the Fed doesn't count, as it doing so is ineffectual."

Oh really my dear? Well, that's your answer right there in your statement, they can continue to do so next 3-5-7yrs no problemo (even for some time post next crude crash and NO FLOW of spice), since most of the rest of the world is just a pathetic bunch scared of reset. They will rather continue to keep the consumption of delusional junkie uncle sam above water till the last second then explain on their home front that the diagnosis screams terminal for living standards of yesterday.

Other actors? The dancing club and its members has been depicted here numerous times, the EMUs+Russia, the Chinese, the Gulfies, not mentioning the Japanese.

Sorry, it's the end of roughly 70-100yrs cycle, that's several generations of continuous burreaucratic memory, they are just scared of "the unknown" to come. And that's likely tied with that deeper 400yrs super cycle of modernity ending. These two are coming to crash in on single crossroad. That's your "FG delayed 101" in short version..

Michael dV said...

Sam very nice restatement of important thoughts. It is hard to get into that mindset with bills coming in every month. China and it's citizen have already done some of the things you hint at: like buying gobs of copper or iron ore. Both of those markets (and the economy of Australia) would be more stable if gold could hold some of that excess wealth.

Michael dV said...

you echo my thoughts...I just didn't feel like saying it.

Archer said...


While it is possible that freegold is going to be delayed for some unspecified period of time, there is no question that your development is absolutely arrested. Thanks for imparting, for the umpteenth time, your boiler plate doomer perspective, one part K-wave, one part peak resources, with a dash of other disparate end of putative end of epoch ingredients. You can piss off now, because your semi-literate Johnny one note concerto is, like you, too tired to be countenanced.

Michael dV said...

BSB I actually watched the Jim Willie 3 part piece in which he concludes (pronounces) that a deal has been made.
This is not
Willie at his best. First it is voiced by some actor and it is a 'Nightmare Before Christmas' claymation type visual of bizarre body parts assembling them selves and ultimately destroying themselves (I think, I skipped "LSD for leisure and profit' in college)
The whole production lacks Jim's usual hyperventilation and allusion to dark sources. He outlines the problem as a good hard money socialist would (evil bankers in league with Satanic forces) but my wild guess is that he is pulling most of this out of his ass or at least out of the mind meld of the same team that gave us that horrible piece on ZH last weekend...23 experts including Max Keiser...).
I suspect that 'those who talk don't know and those who know don't talk.
I really think our evil overlords want to keep this mum until they are absolutely ready. I don't think Jim is really in the loop.

KnallGold said...

Is your pressing the alarm button a call to really speed things up now, before the chance is lost forever? I sense an urgency in your cynicism and disillusion.

On some level I'd agree for better not postponing FG anymore here. There are other accidents waiting to happen somewhere down the road, black swans, Tsunami predictions (crazy stuff, not sure if its valid to post) making it harder again.

Motley Fool said...


"Well, that's your answer right there in your statement, they can continue to do so next 3-5-7yrs no problemo"

Lmao. Thanks for the laughs, and demonstrating your ignorance.


Anonymous said...

The non USD denom swap agreements are still in their infancy, it's not ripe for global reset yet, as it enters the 40-60% range, we are most likely getting closer, and that threshold is at least 3yrs away. And if at the same time another shock factor intervenes (crude/energy crisis), no rush, they will arrange for some temporary fix to calm the waters, pushing JGRickardian SDR and such provisional joke. So that's why I wrote several scenarios 3-5-7yrs.

If you pretend to be the "smart one" here, be my guest.
So lets compare the notes in due time, I'm betting you won't be laughing out lout anymore or posting here anyways by that time, lol.

Anonymous said...

Archer> Ad Hominem & No substance Ltd.

Edwardo said...

Jim Willie is not in the loop
More likely the fellow's a dupe
Of a practical joker
Some two bit dope smoker
Who laughs as he serves up more poop

One Bad Adder said...

@Michael3c2000: - A very comprehensive look at the west-to-east migration of Physical Bullion.
Your correspondent said - Well, I've been watching this situation unfold through most of this past year with an increasingly bemused look on my face, because the numbers just don't add up. But so far, despite clear evidence of massive demand for physical gold, "The Gold Price" has continued to trade poorly. However, the longer this situation persists, the more definitely it will resolve itself; and it's very hard to see how that resolution ends in anything but higher prices.

...and there's the rub! This well-documented Physical "demand" will ultimately lead to LOWER prices the current Price-discovery Mechanism collapses under the weight of Fail-to-Deliver IMHO.

michael3c2000 said...
Popular post at Zerohedge today, pivotting around the pending pandaland Plenum...

Sam said...


Were you able to acquire some non oil based farm equipment yet with your investment dollars? I recall this was your investment vehicle of choice and that you have chosen to own no gold. You remember don't you? It was right after you posted a 3 year old article that you mistook for current....not exactly the actions of someone well read on global politics. Anyway, for those of you that find mcfly's point of view compelling, please note his investment strategy so can follow in his footsteps.

Archer said...


What a wonder you are having nothing to say and yet continuing to say it.

Your latest sampling reveals your arrogance and your idiocy simultaneously.

The non USD denom swap agreements are still in their infancy, it's not ripe for global reset yet, as it enters the 40-60% range, we are most likely getting closer

Infancy? They've been going on for years now which doesn't, except by you, of course, define infancy. in the meantime, posturing as if you have some bead on how things are progressing is laughable where it's not pitiful.

We are most likely getting closer? You think? My, you must be the pride of whatever marginal educational outfit saw fit to award you a high school diploma. I suspect that as far as the school administration in question was concerned you fell into the category of "we need to get him out of here now."

If you pretend to be the "smart one" here, be my guest.

Oh, no, when someone of such a very special (needs) ilk does a bang up job pretending to be smart, no one with a grain of sense would begin to take it upon themselves to try and usurp a master of the art.


If that didn't meet your exacting standards of substance, I can only applaud.

michael3c2000 said...

If beauty is in the eye of the beholder
And gold weight sinks and sinks lower
The shine would be like dark water
Flushed away with the devils daughter
The minds that didn't know her

Indenture said...

McFly's first post "Therefore I'm perhaps the case of selfdiagnosed pre-weak hands, I simply can't gamble my family safety on the FG/RPG concept and some insane Giants. In fact, I deferred several times "large" phyz. purchase (possibly dozens of % networth) by firstly studying all the available discussions, concepts and data. Conclusion: I'm not going to proceed with it. I'll rather plunk the meager/shrimpy "savings" into productive farm equipment (non oil based). Sincerely, I wish you all strong hands the best of luck, but you better needed it. Sorry, I just see that phyz. won't be for the shrimps, it's not about the goldbuggy government gunpoint confiscations, nor hard deflationista hell freezing over for decades. No, it's about the most likely outcome as ever at such elevated point, i.e. very messy and brutal societal hard reset, tupsy turvy mingle, we have had couple of times in past say 6000yrs. "

Thank you, I understand. I'm sure there is another blog that might suit your interests more than this meager gold blog.

FOFOA said...

Hello tcelfer,

You asked: "What makes someone a 'big'?

A couple of weeks ago I went into my coin shop to do my usual browsing and was talking with one of the workers. He was telling me about a woman that had come in earlier in the day and purchased 25 Kilos of gold, with intention of coming back to purchase another 125 Kilos.

I realize that to some of you, I would imagine not most, but some, that's not all that much. But to ULTRA-SHRIMPS like myself, that's almost a majestic amount. A seemingly dreamlike quantity that I'll never come close to possessing.

At what point does an investor go from being a shrimp to a player of any significant size?"

Back in 2001, Mr. Gresham asked ANOTHER a similar question:

Mr. Gresham: "We who read here generally buy the coins, one ounce and less. The "Giants" you speak of are usually buying the large bars (100 ounce?), yes?"

ANOTHER: "I ask you, how many of your bars in tonne? This is the small purchase size."

And then from my Freegold Foundations post:

"Good question. How many 100 ounce bars are in a tonne? The answer is 321 and a half. Or 32,150 ounces."

So while we buy gold by the coin and/or bar, giants buy by the pallet. A pallet is usually one tonne, or about 80 400oz. bars. A tonne is 1,000 kilograms. Of course, back in 2001 a tonne cost less than $9M. Today it costs about $42M, which probably explains the growing popularity of kilo-sized bars. Today, $9M would buy you about 213 kilos. So your 150 kilo purchase is approximately 70% of what Another said was the small purchase size for a giant. Just below a small giant is a jumbo shrimp! So I'd say you had a close encounter with a jumbo shrimp. ;D


Bron Suchecki said...

jojo" I don't recall a peep from Bron from several posts back where FOFOA basically called him out"

They are bookmarked in my RSS feed reader, just busy with work and dealing with Maguire and TF

Sam said...


Just today in the comment section of your own blog you said commenting on other sites is part or your work. So my question is how is it you are too busy with work to do your work?

Dealing with TF is little league. You could have had your secretary respond to him on his/her lunch break.

Later in the comment section you said you don't write about things you don't know. I guess that explains why you have been permanently busy. I can only hope that when you do Finally find the time to ultimately lose your debate with our host, you are not too busy to admit it.

Roacheforque said...

A wealth Giant understands that HE himself has a limited life span in which to grow and protect generational wealth, But he is connected to something larger, in the span of time, that came before him, and will outlive him. This is why they are called 'continuation holdings".

Countries at one time thought this way, but now most people within think of the next millisecond algo trade, this quarter's numbers or a 140 character sound byte.

We are ALL cells of the human organism, eons older than ourselves and cells of the organism today will shed and die tomorrow while the organism lives on.

Giants do think beyond their time on earth, whereas the little people seldom think past their next meal. The so called "generational wealth dynasty" of the little people was a concept civically entrusted to their governments, a lie which died in fascism.
Our wealth is what we leave behind, not spent upon living like "currency" but able to "stand time" like gold.

One Bad Adder said...

@Roacheforque: - BIG Tick ;-)

Anonymous said...

Another "FG delay leg" ready to be deployed> ever heard of the Transatlantic Trade and Investment Partnership?

Another tool that will keep the western finances afloat for a while at the expense of larger spike-crash later with even more subjected population. And the EMUs are braindead to support it, well actualy it's just revealing who is the ultimate boss here, the MNCs. While in the Asia a similar deal is perhaps less likely as of now.

Archer (& Sam)> again and again not a single argument for civil discussion presented by you, just attacking the messanger, what a pitiful posturing to avoid reality at all costs..

One Bad Adder said...

@MMF: - The "FreeGold-by-Decree" opportunity came and went c 2001 (IMHO) and what we are left with is a currency regime that is now well and truly past it's use-by date.
How this will be resolved is any-ones' guess ...but rest assured, it won't be pretty.
FYI All: - this weeks 3 Mo T-bill Auction is indicative of a ramping-up of DX ...and consequently a softer $PoG / oS going forward methinks.

KnallGold said...

Today the IMF wealth tax came up again in the media, a coerced tax as it was called today - everyone shall pay 10% of his wealth to pay off public debt, problem solved.

As always good advice from the IMF. Wondering if they'd include Gold in the definition...

Can you tax yourself rich? Baron von Münchhausen reloaded...

On a different note, just read that The Hobbit 2 will come into the movie theaters on 13. December and Peter Jackson said the shooting for Hobbit 3 is now completed.

That would be along Ari's script :-)

Motley Fool said...


Just an observation.

Your biggest character flaw is your arrogance. You do not even have the sense or humility to give due consideration to other viewpoints, rather you dismiss or contradict such without even asking for or contemplating 'why'. This makes you beyond help; and civil discourse.

As such, I do not know if there is even any purpose in responses beyond character attacks, not that I condone such.

Your chosen actions are all well and fine, but you cannot expect respect if you give none in return.

I for one am nor beyond caring. Do what you like, think what you like, invest as you like. I would now however personally prefer you do so elsewhere.


Bron Suchecki said...

Gee Sam, that is a bit harsh. It isn't my entire job blogging and commenting. TF has a wide readership and his was a clear factual error so I prioritised it. FOFOA + I have debated this stuff before so it is going over old ground so I thought it could wait.

Archer said...
This comment has been removed by the author.
DASK said...

Agreed it was a tad on the harsh side Sam.. Bron is one of the few with some inside insight that goes out of his way to keep gold discussions 'on earth' and does the community a service. I personally welcome his contributions, and learn much from both his demolishing of certain memes and 'higher level' discussions such as the one with our host. Sharing knowledge and perspective is always valuable!

Woland said...

a minor irritant;

When one asks, who is Professor Yu Yongding, it only takes
a moment these days to find out. What value do his opinions
carry? You might ask the same question about another
"unknown" Chinese citizen, Zhou Xiaochuan. While all of
their views are not identical, they are in general in distinct
harmony. This is not a secret to anyone who follows China.

On the other hand, tomorrow I (and perhaps you) will be
celebrating a second anniversary - the first appearance
of "Moneyness" on the FOFOA blog. To commemorate
the event, I'd like to offer y'all a quiz (because when I
asked myself the question the other day, I needed to
think a bit in order to get it right)

Presume that I am lucky enough to hold 1 $trillion in Treasury
debt. In a moment of generosity, I decide to forgive it. How
does that differ in effect from when the Fed, holding the
same 1 $trillion, also cancels the debt? (there is a BIG
difference. what is it?)

Archer said...
This comment has been removed by the author.
michael3c2000 said...
L.Williams is all over the place, trying to pin down his sense of Sinclair's calls, scurrying around looking to cover their editorial arse, after all it's a web of mines...

michael3c2000 said...
Julian Phillips - Nov 5
Includes supply and demand opinion and two postulated Chinese alternatives to LBMA price referencing.

Indenture said...


Biju said...


When you forgive the $1T treasury debt, it destroys the currency supply represented by that bond, ie you have forgone the currency which you would have received when the bond matures. This is not inflationary.

But when FED forgives, it has already credited the equivalent reserves(currency) to the seller of the $1TB. This is inflationary. Unless FED sells the bond and shrinks the balancesheet(instead of forgiving), it is inflationary.

Franco said...


Have you ever seen that quote by Ernest Hemingway that goes like this: "how did you go bankrupt? Two ways: gradually, then suddenly". Academics can design the flight path all they want, but reality often has a way of asserting itself. Japan seems to be holding on with extensive use of duct tape. If I had to place a bet, I would say that Japan is where the wheels will come of first, then elsewhere.

MatrixSentry said...

Biju speaks for me.

Woland purchased the 1T in Treasury debt with existing money. That money was simply passed to whomever he bought the treasuries from. That money was due to return plus some extra in the form of interest. The interest portion needed to either be generated by the system or it needed to come from the existing money supply (deflationary). By forgiving the debt, the money no longer must return to him and he forgoes the the interest accrued to maturity. Certainly not inflationary, and reduces the demand for new money creation.

The Fed bought the treasuries with new base money conjured from nothing, in and of itself a purely inflationary act. The only way that base money can be removed is for the Fed to sell back to the market, thereby removing the base money in exchange.

MatrixSentry said...

The Massive Drawdown of Gold From the West Continues - Silver Comparison - the Abyss

Love the analogy. People watch water flowing up and over the hill and say there is nothing to see here.

Gold, better hurry and get you some.

MatrixSentry said...


You are boring. Like the members of a small and exclusive club here, you insist on making a silly spectacle of yourself. We have seen it all before. Contrary to your opinion of yourself, you are not seen as brilliant. You are not seen as original. You are a seen as a cartoon.

My words either register in your mind as disappointment or they register as satisfaction. Which is it? Perhaps we can resolve your status as a potential member of the "club" now instead of drawing it any longer?

Unknown said...


If I forgive the debt, it is erased on both parties' ledgers. It is cleared.

If the Fed cancels the debt, he is just cancelling his intent to pay, not the debt itself, as I would still consider the debt as still existing - until I can collect (in some way, shape or form). So, the debt itself does not go away, in this instance.

As for the irritating mcfly, the best option is IGNORE. He just wants to irritate people and get responses to his post. Ignoring him would be the best way to irritate him.

Sam said...


I admit a bit of harshness was my motive. A small price to pay in the hopes that it would spring you into action. For the most part I respect you quite a bit Bron and I think FOFOA does to. That being said its not "old ground" that is on your list to be debunked is it? You and FOFOA debated months ago at which point you couldn't prove anything he said inaccurate or misinformed. Rather than admit It you acted like it was a simple chore you just hadn't gotten to because you were too busy. I don't think that insinuation is fair. You did make time for a hit and run comment though months after your debate again with an insinuation that you knew how things worked and he didn't. Sorry but I don't like it. If you don't have any "new ground" to cover take FOFOA off your list because I've read the "old ground" and found your point of view wanting.

Victory said...

Sam +1

Anonymous said...

1 of 2
I sympathize with mcfly's efforts to grok the changing gestalt that could delay FG until too late in the day, with resulting far less purchasing power in gold than hypothesized under FG theory. While I see that he doesn’t present neat, coherent arguments like our host, and I see that he has an “attitude” against what he perceives as the kool-aid drinking aspects of blog participants here, I believe many of the things he mentions are seriously worth thinking about and factoring into an analysis and decision about One’s Own Future.

While some on this blog view FG as “inevitable,” a result of collapse in the T bond due to the USGov deficit exceeding the US’s trade imbalance and inability of the USGov to crash its own lifestyle or other factors, I believe FG depends on political will, or Giant will, and the thrust of mcfly’s observations is that there are precious little signs of political or Giant will and the balls it takes to rollout FG, but there are many, many signs of patchwork efforts to keep the fiat reserve ponzi system going. Some of these, like the Transatlantic Trade and Investment Partnership, have been cited by mcfly. The fact that Euroland desires to fuse itself to the US hip in this treaty does not exactly send the kind of signal of independence from the dollar that an imminent FG rollout by the Euro PTB would seem to require. Europe’s participation in the TTIP belies an imminent FG rollout, and bespeaks a can kicking exercise, if not an effort to forge an alternative solution altogether.

Simultaneously, the US is pursuing a Trans Pacific Partnership treaty with Australia, Japan, Mexico and various Latin America and Asian countries. The result of the two treaties together will be to create two huge trading blocks (with the US and its dollar as a hub) that isolate the Mideast, China, India and Russia. See “The Global Corporatocracy is Almost Fully Operational,” which discusses these two treaties.

Just as Walmart uses its oligopolistic control of a massive consumer base to drive down the profit margins of producers and keep labor costs in developing countries at slave labor rates, the massive size of these two trading blocks will keep China, Russia and oil producers in the Mideast “in their place,” subordinate to Western economic hegemony, colonial suppliers of cheap labor and resources to prolong the lifestyle of the developed West and developed East. That seems to be the plan, at any rate. Whether it will succeed is another question.

Even if gold becomes a means of settlement of international imbalances, the existence of these huge trading blocks, in which trade imbalances among the members could be offset in ways different than imbalances with countries outside of the blocks, implies it may be possible to suppress the purchasing power of gold (PPOG), or stated otherwise, that the PPOG will be less than under a pure FG system.

Anonymous said...

2 of 2
Another aspect, not mentioned by mcfly, which seems serious to me is the fact that FG was designed in and for an era in which the assumption was that sovereign currencies were the only money around, before the explosion of privatized money substitutes in the form of MBS and other money-substitute derivatives. Andy Perry over at the UnitedStatesofEverywhere blog, author of “Crackernomics”, points out that we are in the midst of a revolution designed to substitute what he calls “democratized money” for sovereign money, where private financial products replace and usurp the functions of sovereign money in order to capture the value of this function for private hands. ZIRP already implies that the dollar and treasury bonds have no store of value function and have only an exchange value, and the goal of ZIRP is to facilitate driving people to use stocks and financially- engineered products as stores of value. The bailouts are not efforts to save the banks, so much as the efforts to preserve privatized money and further its goal of replacing sovereign money. Here is a simple primer of his view:

Perry doesn’t argue that this is what should happen, he points out it is the PLAN for Anglo –Saxon west to preserve its hegemony. I mention this not because I necessarily believe Perry is 100% right, although he makes many very pertinent observations. The points are (1) since FG was conceived, we have new privatized money substitutes competing for supremacy with the sovereign currencies for which FG was designed, and (2) to the extent that our private financial institutions have co-opted the political system to continue their attempts at preserving their money substitutes as a new medium of exchange and store of value, to capture a seigniorage value for creating the currency and the value from manipulating it for themselves, to the extent that these private interests continue to play the human game of pursuing accumulation and domination as the be-all, end-all of human existence, FG is not Plan A, B or C but Plan Z when no other options are available. FG has too much accountability and balance built into it to appeal to the smash-and-grab crop of financiers who appear to be running politics these days, who can’t and won’t give up gaming the system to make themselves richer until no system is possible anymore, at which point their richness won’t save them. These are not the days of politicians like Chs de Gaulle, who certainly would have pulled the FG trigger and delivered a massive smackdown to the US if he had the opportunity.

I agree with mcfly on this: I don’t see the balls on the current crop of politicians or the Giants in the Mideast for an imminent rollout of FG. His estimate of another 5-10 years of can-kicking seems reasonable to me, if not optimistic. While I believe that FG is a brilliant and an equitable solution to IMFS problems, that alone disqualifies it from the sociopathic smash and grab mentality of our current crop of business and political “leaders,” and I don’t buy the Heglian- or Marxian-like assertions that it will be the “inevitable” result of “historical processes” and that it is “overdue” or will burst upon the scene any moment now.

IMO, people who have the resources to do so should hedge their bets with more than just gold. This includes acquiring skills like being able to grow your own food. People who don’t have the resources and place all their chips on gold are still making a dangerous bet, and I don’t think it is good to delude yourself otherwise with talk of inevitability and “sure things.”

MatrixSentry said...

Sir Tagio,

Hey, I admit it. I drink the Koolaid. Then again I have read this entire blog, beginning to the present, at least 4 times. I have found all competitive theories to Freegold lacking. What would you have me do? Pretend mcmagicfly is expanding the concept of Freegold and has something material to add?

Perhaps you would do well to consider the purpose of this blog. Hint: it's at the top of the page.

Good on you if you find MMF's musings useful. I think it is merely a stale re-hash of arguments discussed and settled many times over the last 5 years.

Our mission here is not to recruit people or be all inclusive. Quite frankly I can tell who has and has not read the blog. The ones that cannot bring themselves to read the blog have no place here. They are wasting their own time and of others here when we have to swim through the bullshit.

I disagree with Victor the Cleaner and Blondie's view. However, they had the decency and the class to move on when they concluded that Freegold was flawed. They moved on and decided to post on their own blogs. They didn't hang out here to populate the comments section with their new and improved understanding of Freegold. Why don't we take a look 5 years from now and see what kind of following they generate. Let's see how far they will go to advance their vision of Freefiat.

Clearly MMF hasn't read or comprehended this blog. Yet he has great ideas? Why should I give him any credibility? Why doesn't he start his own blog to advance his ideas? I will consider his views on their merits. So far it is an epic fail to raise questions in my mind.

Robert said...

I agree with Tagio. There is no excuse not to diversify. Follow Marc Faber's rule of 25% gold, 25% real estate, 25% stocks and 25% bonds and you cannot go wrong. Freegold comes to pass -- great. Freegold does not come to pass -- great. If Freegold comes to pass, you do not need a lot of physical gold to protect yourself. Those who go "all in" are gambling. It may pay off big and you may die rich beyond your wildest dreams. Or you may die waiting, waiting, waiting . . .

I think a healthy dose of skepticism is always welcome.

Tommy2Tone said...

Hence the disclaimer:

Buy only as much Gold as you understand.

Jeff said...

Sir T,

You start from a different premise than A/FOA when you use words like oligopolistic control, hegemony, etc. That is the hard money conspiratorial view espoused by mcfly, ZH, the silverites, so it's not surprising you come to different conclusions. The idea that some trade treaty is evidence that FG can't happen when compared to the long, well documented history of the evolution of freegold through official channels seems overblown. Links to websites advocating bitcoin or some other plan to overcome 'the elites control' don't get much traction here, for a reason.

Regarding democratized money, that won't affect freegold.

FOFOA: The point is, once "Freegold" (nature's wrath) inflicts itself upon us all, it won't really matter what is chosen/used as the super-sovereign or supra-national currency to lubricate international trade. It could be the euro, the yuan, the SDR, Facebook Credits or even the dollar! Triffin's dilemma will be gone. And you shouldn't worry so much over the transactional currency question, because that will be chosen through the market forces of regression, the network effect and game theory's focal point discovery at the international level.

Finally, Sir T, there's nothing wrong with hedging your bets. Buy farmland, bitcoins, copper, or whatever you like. People should buy as much of anything as they understand; just know that this isn't a site dedicated to overcoming the power elites plan to turn us all into human batteries.

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

Sir Tagio> very eloquent summary, seldomly I have to print out from the internet and your post deserved it, thanks for the new perspectives in part2.

Simply, I honestly helped draw attention to new developments such as the latest JGRickards speech, that deVillepin story, IMF taxing scheme, numerous exclusive chinese insider stuff in first (public) english translations ever from Koos, and many more. Not all comments, but mostly were invitation to first rate material for rational discourse.

And isn't it interesting that as a result what I mostly got was a stinky t-shirt from lazy groupies and self appointed armchair psychologists, that I'm the one supposedly arrogant villain here: " it's all old stuff and it doesn't matter anyway - we don't want to hear it, settled re-hashed arguments, leave our private club, epic fail to raise questions, FG can't happen (strawman - I speak of delays)" etc. And few profanities and/or rage-hate reactions served on top of it.

That's rich.

Edwardo said...

I agree with the comments in your last post, Matrix.

Sir Tagio wrote:

Freegold doesn’t, as you contend, depend on political will. In fact, there may be no such thing as political will, except in political science textbooks, and in those very rare instances where nature provides a vacuum. Otherwise, political will amounts to a persistent and unerring tendency to engage in reactive behavior. The list that testifies to this assertion is extensive. The New Deal is a case in point. Long thought by many to be a cutting edge response to the economic crisis of that time, there was absolutely nothing new, but much that was old, about it.

There are very good reasons why politics is not the initial or even secondary instrument of bold action, A.) By definition, inherent conflict pervades government functioning where disparate groups with (sometimes) wildly divergent agendas have at it. This condition, by itself, mitigates, where it does not entirely stifle, proactive and/or imaginative responses to societal problems. B.) Thrown into the bargain, the very particular, and particularly strange, nature of government (as we know it) attracts individuals who have, in the main, the kind of character that thrives in and fosters such an environment. At best, what one gets in government are folks who instinctively run away from any hint of pushing the proverbial envelope, to folks who are quite adept, depending on election schedules, at posturing as staunch traditionalists or daring innovators.

Fom where I sit, the TTIP, and other such similar agreements are just constructs by a political class that will have zero to say about the direction of global monetary affairs except to, when called upon, do the super organism's bidding. In short, expect the political classes on all continents to continue playing the same old songs the same way right up to the last moment before the great ship goes down.

As for the will of The Giants, well, I suppose it all depends on what data one is looking at, but it appears to me that there is enough going on to suggest that calm is not the best term to describe the world of the super producers right about now.

In the meantime, I see little to no risk in owning physical if one understands that the world, in the main, shrimp and giant alike, save their surplus in physical. When the paper price falls a mere few hundred dollars below present valuations, global mining production will all but cease.

Given the stock to flow profile of above ground gold supply, something dramatic will have to occur to cause the very thick golden ice damn to break up. The other avenue is that somehow, someway, the world of "investing" falls in love with paper gold. Either way, it's higher prices, or dramatically higher prices (after a swoon of course).

Edwardo said...

Make that ice dam.

Anonymous said...

Jeff and Edwardo,
Thank you for the thoughtful responses.

FWIW, I do not view FG or any other proposal as a way of overturning the power elites plan to turn us into human batteries (good one), nor am I looking for one. So far as I know, the only thing that really can eliminate the power of the power elites is for people to stop farming, which creates the surplus upon which the entire edifice of the class system hieracrhy - and "civilization" - rests. Basically, until we all go back to living in smallish tribes on a pure sustainability basis, both the power elites and the poor will be with us.

Dante_Eu said...


FED is giving, PBC (China) is receiving.

If you give there is nothing to forgive, if you receive there is a lot to forgive.

BIG difference! :-)

ein anderer said...


Buy only as much Gold as you understand.

That’s one of the very few sentences of our dear host I would disagree with. How to judge ourselves?

May be we should be more precise:

»Ensure (via cash and posession of goods) that you are able to keep your choosen economic status as long as you need to, independently from (free)gold. Whatever is left you can/should change into physical gold.«

The variable is »as long as you need to«. Here we can go with FOFOA: Not even he can garantuee when FG will be realised. Those »windows of opportunity« are windows of probabilities—not windows of securities.

Sure, we can change more of our money for gold, more than we need to keep our defined economic status. But the risk is a strong decline of the price of gold in a moment we have to change it back into currency.

A stock of gold is a privilege of those who can afford.

But may be also the poor can afford to take at least 10’000 (5’000) US$ aside—»forever«. With these 8oz they have the chance to become a 50% (25%) millionaire: may be good enough at least for a future kind of relief.

Tommy2Tone said...


"That’s one of the very few sentences of our dear host I would disagree with. How to judge ourselves?"

I would say that if you ask how to judge for yourself, you should RRTFB.

If one's understanding is such that they feel 25% here, 25%there, etc etc, then fine, they have done as much as they understand.
If one's understanding says no gold, but instead non oil farm equipment, then fine, so be it.

My understanding tells me very differently from your understanding.

I think the statement is very precise as is.

Just my $.02

Michael dV said...

on the topic of diversification...I see gold as the only rational way to hold wealth even now. Every other investment depends upon the Fed. Gold has not moved much and I believe fofoa is correct can'tmove up or down much from here. So gold is stable.
Gold is also at production cost, it could go lower but not for long. Gold is universally loved. The wishes of the Fed cannot overcome the tide of world opinion.
Finally gold will pay off big in transition....I drank the kool-aid too.
When we look back on 2013 it will seem like a freight train was rushing down the tracks and future readers will wonder with astonishment at the fact that most people did not even hear the train. We see it as slowly moving because we here are pot watchers. If GLD goes up it seems like a set back of eons. But it is not it is a tiny blip. GLD has lost 35% of holdings in 10 months. We are in fact screaming along...what else has decreased 35%? By year end we may or may not have answers as to timing. My guess is that it will still be moving in the same direction. Possibly we are looking at a good chunk of 2014 before it pops but then the lingering question of 'how low can it go' looms.
I know diversification seems wise. Money is often made by not diversifying however. As I cannot bring myself to buy stocks and certainly not bonds and as I see gold as stable...what other choice is ther really?

Robert said...

jojo, I don't think its a question of understanding gold or understanding the FG theory. It's predicting the timing. And timing is everything. If you see physical gold as part of your disaster preparation plans, you can stack a little and get on with your life. If you see physical gold as the lottery ticket to untold riches, you need to recognize you are making a bet against a future that has yet to unfold. Instead of "Buy as much gold as you understand" I will quote another hallowed scripture for you (which will already be well known to those who follow Matrix's advice to RTFB): "The debate is about determining the best stance someone should take who has plenty of net worth. And I do mean PLENTY." (emphasis in original)

Roacheforque said...

It was once said that "all debt is paid" even if ultimately by the lender.

But that "truth" was lost 42 years ago. Today, the great majority of debt is merely recycled. To repay debt with debt assumes that one debt is asset, the other liability.

Yes, today debt functions this way by virtue of class structure. The little people's debts are "liabilities" to be paid with the debt they earn through labor. So they recycle debt at one level, while their compliance and performance gives debt its value as an "asset" at another level (to the lender).

Today, as debt earners who back the present global reserve asset fail to churn this debt through the engine of consumption, the printer of the asset repays itself, through a series of convoluted channels, thus relieving temporarily the burden of a front lawn dump too heavy for the little people to bear.

If the bankruptcy of the system was displayed outright, the players who matter would not abandon their holdings any more dramatically, as they already know that the lender of last resort is the also the last buyer of its own debt.

All paper wealth is based upon the performance of debt, and today it's performance is guaranteed by it's issuer through QE, not the taxation of labor. When lender and borrower become one and the same debt fails.

It has already failed, and is in the process of gradual abandonment all around us.

But until an equity based system can replace the wealth engine of labor denominated in this failing debt, resistance will be gradual, not futile.

When debt (FIAT) is governed by true reserve wealth (monetary GOLD) it can begin performing again, and restore credibility to debt as a means of exchange.

How will debt fail in its performance as a means of exchange to transfer "thoughts of value" into the wealth of physical plane goods and services (non-paper assets)?

THAT is the 55K question. But I assure you, no "group retreat to avoid paying up" including the Trans Pacific or any other alliance can forestall the inevitable.

Some say that Giants will refuse to accept the paper, as the China has promised in its explicit statement to repuduate certain derivative claims on certain monetary "grounds".

Some say that it will not be accepted as a form of payment for oil (but of course that has been in "partial" effect for years).

Others claim that world war will create the destruction of the system along with our way of life globally to rebalance priorities through the horror of its consequences.

But in the end, regardless, debt will fail. It always does.

Michael dV said...

good point, not having enough fiat to pay the daily bills is risky. My point was investing with the funds that are appropriate for saving, not the needed cushion for monthly bills. 6 months of cash is probably about right...more if you like...

Anonymous said...

Sir Tagio +1
Robert +1
mcmagicfly +1

I only come here for (hopeful) discussion about recent developments and news which confirm/conflict with FG. Posters who only parrot "RRTFB, everything is discussed and settled, FG is inevitable etc.." are the boring ones who bring nothing to the table IMHO...

tcelfer said...

I had a response to the recent back<->forth but then I realized that I have to eat dinner later tonight and didn't want to soil my hands.

Here's hoping we can find an intelligent way to benefit from the recent fissure.

While we wait, feet weary from the journey, anxious over tomorrow's trek -- can't we all just enjoy a cold one? ;)

Michael dV said...

There are 5 years worth of good arguments here.
I agree that all things are possible simply declare that that statement means we should ignore the well thought out considerations expressed here in the past is wrong.
If there is valid concern that we have over looked a major or even minor point, that is usually welcomed. To come up with '5 to 10 year delays' is silly.
We all have some anxieties and frustrations with timing. We all realize that things can go wrong. I doubt anyone here operates at 100% confidence. One should recognize that these feeling might be clouding judgement however before proclaiming that our thoughts are just plain wrong.
Fofoa hasn't done the timing thing. He has only suggested a window. So far the events pertaining to that period seem to me to be happening and happening relatively fast.
It wasn't just mcf's statement of a specific delay but also the source of his claim and the fact that we do not even know the general time period in which the source made the statement. That is not constructive doubt, that is just panic.
We here are mostly serious folks who are making big bets with goodly parts of the wealth accumulated over a lifetime.
I am certainly open to changes in thinking that might make the difference between poverty and luxury, give me good info or logic and I'll be grateful. But to holler in fear just because your are wound a tad tight is not why I read here.

Anonymous said...

Michael dV,

I think five years of arguments could be nullified overnight by a single contradictory news development in the present time -- what do you think?

If you've already read, understood, and acted on the F.G. concept that isn't the end of the path. Once you are sure something is true, you should spend your time attacking your own logic and constantly weighing it against new information (recent news) to see if it is your premise is still valid.

As far as I can see, there is a handful (majority?) of posters here who, after years of understanding, are now just waiting around for the "inevitable." That is, they have stopped evaluating their ideas vs. the present, and for some reason seem to mock/chase off others who show up here trying to do so.

Michael dV said...

Popular Science is discontinuing comments. Here is their rationale:
They point to studies that show trolls and inflamatory comments can alter the opinions of unexposed readers.
Obviously this forum depends upon comments. We larne from each other and use each other as eyes and ears on the world of gold and money that individually we can't cover.
But the message I take away is that certain types of comment detract from the learning experience.
I personally think I'm immune and can skip over what I think will be wasted reading. Fofoa may want to consider the opinions in the piece however as he decides where to set the bar for excluding certain commentators.

Michael dV said...

I agree that it is possible a single news item could alter my ideas about freegold.
I disagree that contrary ideas are not welcome. It is rash, shoot from the hip, 'anything is possible ideas that get belittled.
If someone were to question a concept, ask for guidance to where the idea wash hashed out and then come back with comments in problem.
That just does not seem to happen. It seems it is always a brash, poorly read commentator who just insists their thoughts are better who catches hell. This is especially true if they have had a few hints at where they can find a better way of looking at things.
I cannot recall a single well read person here who was criticized for a contrary idea. It is usually (aside from obvious trolls) someone who won't respond to a criticism of their comments but insists everyone respond to their outlook no matter how wacky or shop worn the thought.

Sam said...

@the FG recent developments/global news/and advanced warning team

What type of new information or news article are you looking for? Comments from a politician? Analysis by the mainstream media? Was it news stories that confirmed your belief and understanding in freegold in the first place?

Tommy2Tone said...


I disagree that it's a question of timing. I think the more one understands gold AND FG theory (one in same? or does that make me uber Kool aid drinker) the less timing will matter.
FG is not about timing.

"jojo, I don't think its a question of understanding gold or understanding the FG theory.It's predicting the timing. And timing is everything."

"If you see physical gold as part of your disaster preparation plans, you can stack a little and get on with your life."
And you'd be doing so to the best of your understanding.

"If you see physical gold as the lottery ticket to untold riches, you need to recognize you are making a bet against a future that has yet to unfold." Again, doing what is understood personally.

How is that different than what I said?

Robert said...

jojo, I think everyone understands what I mean when I say it's all a question of timing. Even if Freegold comes to pass, even if it is inevitable, it doesn't do you any good if it happens the day after you die. In that case you might as well consider yourself wrong. And it would be a costly mistake if you were forced to liquidate your physical gold to pay your bills.

Those who say "Buy as much gold as your understand" seem to believe that "The more you understand, the higher percentage gold will be in your portfolio." The attitude seems to be "If you are not all in yet, you still have some homework to do." But I think this is nonsense. The gold trail is a long trail. Some have been walking it for a lifetime. Waiting for Freegold is like waiting for an earthquake or a tsunami. You need to be prepared in case it happens, but you cannot live one day to the next expecting it to happen at any moment.

ein anderer said...


it’s always possible that someone reads this blog—and does not understand. Understanding is not only a function of reading but also a function of intelligence and background knowledge (and of language skills if he/she is a foreigner).

BTW: Everybodyis buying gold »as much as he understands«, right? There does not seem to be any need for stressing the obvious.

But I was happy that FOFOA helped out a bit with some other remarks saying (in my understanding) that the first priority should always be to ensure to make one’s living. Buy gold if there is something left.

If there is a farm needed first to make ones living—fine! Business has to go on. But may be one could buy a cheaper tractor so that some cash is left.

In general: Long term saving is always good. And, yes: Save in gold. Everything else is dangerous and speculation. Espacially in these times.

Bron Suchecki said...

Got a response up here Cliff notes:

FOFOA: "It is well known that banks use delta hedges or complex derivatives based on correlated assets and currencies in these high-volume markets, which provides a reasonable explanation for how and why "paper gold" could have expanded so much in one quarter."

This is the crux of our disagreement. You believe this statement is reasonable, hence it explains the LBMA survey discrepancy and you thus see no point in questioning the survey. I think the delta hedges idea doesn't hold ....

FOFOA: "As far as the Trust is concerned, the bullion banks are already the owners of record of all existing shares. They don't even need to pry them out of strong hands in order to redeem. They can potentially redeem at any time they want."

... So the above is an open thought process where I'll now agree coat checking is possible.

VTC: Since serving as an extra reserve of the LBMA clearers was one of the main rationales for the creation of GLD, they are not going to change the way GLD operates.

This, however, I will dispute on two grounds ...

ein anderer said...

@Michael dV:

»… it can't move up or down much from here …«
Thanks for this reminder.

frankthetank said...

Robert:" ....Even if Freegold comes to pass, even if it is inevitable, it doesn't do you any good if it happens the day after you die....."

If you are lucky enogh to have Children, it does you still a lot of good, doesn't it?

Tommy2Tone said...

"If you are lucky enogh to have Children, it does you still a lot of good, doesn't it?"


Look, if you believe FG is coming at some point, all you need to do to front run it is buy phyz gold.
Buy as much as you understand and then forget about it.
From that point forward who gives a shit what you do with any of your money big or small. If you have PLENTY then maybe you would add more gold or maybe not. Maybe you just buy hookers and blow. Maybe you just play the markets the rest of your life. Who cares if you have secured your potential FG position first?

The more money one has, the easier to prepare for FG and then forget about it IMO.

If FG fails to show in your life but you are sure it will, then anyone you care about enough to give them that gold will surely win.
If FG fails to show at all, then you are left with your preparations for it- your gold (and likely cash, maybe silver, food etc). oooh...that sucks.

Indenture said...
This comment has been removed by the author.
Biju said...

One comment about dollar bidding for real estate.
I have made several unsuccessful "competitive" offers for real estate over the past 2 months in Bay area, California. All unsuccessful.

Yesterday made an offer of $860K for a house listed at $849K. The seller took an all cash offer which I believe was lower than ours. Talking to my agent, she has been involved with all cash buyers in $800K's range from China, family money from NY. I think there is a serious "undercurrent" of dollar bidding for physical assets going on now.

Biju said...

One comment about dollar bidding for real estate.
I have made several unsuccessful "competitive" offers for real estate over the past 2 months in Bay area, California. All unsuccessful.

Yesterday made an offer of $860K for a house listed at $849K. The seller took an all cash offer which I believe was lower than ours. Talking to my agent, she has been involved with all cash buyers in $800K's range from China, family money from NY. I think there is a serious "undercurrent" of dollar bidding for physical assets going on now.

DP said...

First, a concession:

"So the above is an open thought process where I'll now agree coat checking is possible."

Then it's right back to LaLaLand:

"First, having being involved in discussions with the WGC and others in the early days of the creation of the ETFs, this was not the main rationale or driver of the project IMO."

Perhaps all this says is that the people tasked with actually sitting around a table and working out the finer details of how an outline concept would ultimately go on to be constructed, were not aware of the reason the whole concept was dreamed up by others in the first place? Just because you didn't realise during the process WHY you were being asked to do something, that doesn't mean you enjoyed full visibility of the situation since you were there at the table helping make the decisions about the finer details. Perhaps the elephant was so big its shadow didn't expose any edges to give itself away.

"Second, as the marginal cost to a bullion bank to hold physical reserves is zero (vaulting is primarily a fixed cost business), there was/is no pressing need to create ETF's to save costs by parking metal in an ETF structure."

OK, maybe The Perth Mint only gets customers to finance its inventory to save on storage fees. After all it's not a sophisticated investment bank — it merely takes in gold at one end of the factory, refines it into convenient sausages, then squirts it out the door at the other end for the waiting customers.

This is not at all what FOFOA gives as the reason BBs would engage in "coat checking" or "inventory financing" their "excess reserves". He isn't saying they do it to avoid paying the costs of storage (although the costs of storage are, handily, also covered by the GLD shareholders due to the excellent detailing work the WGC & their helpful elves put in on behalf of those lucky BBs).

What FOFOA is saying, but it doesn't seem to have been heard despite him even having used The Perth Mint's inventory financing model as an anology to make it as easy to see as he could, is that they don't just get to not pay any costs for vaulting inventory… they get to use the cash value of the gold "excess reserves". Because the GLD shareholders give it to them, despite the fact they can never redeem the shares for the gold they think they have a claim on in exchange for all that lovely lucre.


DP said...

BB has excess gold in reserves behind their fractional book - a dead asset to them.

They check it into GLD for baskets of shares. So far, no cash... and the GLD shares will in fact deplete in value over time (thanks to that sweet design work from the elves).

So they "sell the GLD shares off"... knowing that the new "share owner" can only sell, not access that gold in the Trust.

BB now has the shareholder's cash to play with ("inventory financed"). And knows they can access the gold any time, just by hitting the bid for GLD shares*. They can redeem the GLD shares one basket at a time to release the Trust's gold ("collect from the coat check room") into the subterranean stream of fractional BB system reserves.

It seem clear to me, the avoidance of (as you rightly say, to them negligible) storage costs is the last of their Hi-5's.

Seriously? This concept is not at all like a "coat check room"? ;D

"we are talking 2002/2003 here when the ETFs were being developed, there was no belief in a gold bull market nor any chance of stress on the fractional reserve bullion banking system."


*In fact, I am over-simplifying for the sake of clarity. I didn't bother to cover the GLD shares being themselves fractionally reserved and irredeemable. ;D (You cannot take direct ownership, they are held in street name only. You own an unallocated claim to a GLD share, which you cannot get allocated/delivered anyway. The BBs already have the GLD shares 'that they sold'… in their reserves.)

Again, thanks to all the elves for the awesome job they did designing this subsystem for the BBs. I wish they could have done something like it for me instead. #EpicWinning

Bron Suchecki said...

"BB has excess gold in reserves behind their fractional book - a dead asset to them."

Yep fine.

"They check it into GLD for baskets of shares. So far, no cash... and the GLD shares will in fact deplete in value over time (thanks to that sweet design work from the elves)."

Fine, they now hold GLD shares rather than physical on their metals balance sheet. Doesn’t make sense for a BB that isn’t the custodian as they now have to pay ETF management fees, but lets run with it.

"So they "sell the GLD shares off" ...BB now has the shareholder's cash to play with"

Sorry, so now they are naked short? That is not "financing" (borrow/lend), that is trading (selling/buying). So you're saying collectively the BBs went naked short 2000t of ETF gold?

I can see BBs borrowing ETF shares (just like they can borrow physical in the OTC market) to get them over a “temporary” liquidity problem with their fractional reserve loan book, but a BB can’t coatcheck in its reserves as you describe. You are confusing lending and trading books.

A BB can buy physical and sell it to GLD holders, and then coatcheck (borrow) that physical out later, but it can’t sell its reserves to GLD holders because then it is short gold. I can see the sense of coatchecking in the flow, but not the stock (ie reserves).

Ah, but I suppose this is where the idea that a BBs can hedge that short perfectly over many years by “delta hedging” with some complex combination of “correlated” FX. And all those correlations will hold up, or can be adjusted with no slippage, and never gamed by other traders for years on end, and never blow up. That is La La Land IMO.

When coming up with a theory of how the bullion market works, I have found the best way is to drawing up a T-account of a BB’s balance sheet at time zero and then post the debit/credits of each of your proposed transactions and then revalue it. It is the only way I know to test whether a theory makes sense, because that is what BBs do and that is what determines their P&L.

“And knows they can access the gold any time, just by hitting the bid for GLD shares”

So coatcheck theory relies on the GATA et al manipulation thesis? I would note that the BB needs to take a big short position to blow through stops and ignite more selling, but they need to cover that short so the only gold they get hold of is the net of the selling volume induced less their short. I’m not sure what the payoff ratio is for that, but I doubt it is consistent and can be relied upon.

The above “BB’s coatcheck their excess reserves into ETFs because it was a dead asset to them” theory is highly elaborate process requiring a lot of moving parts (complex delta hedging, hitting the bid) to work that could blow up. You’ve constructed all this to explain what BB’s do with excess reserves.

Here is a simpler theory. If a BB has excess reserves, they lend them out in the OTC market – might have something to do with the fact that lease rates dropped from 1-2% pre 2002 to sub 0.50%? Simple, quick and easy way to earn a (small) return on their reserves. If a BB needs cash, they just do an OTC swap where the repurchase leg is guaranteed and locked in – unlike your ETF coatcheck which has not guaranteed buyback lock in and the BB has to rely on “hitting the bid”. Occam’s razor.

“having used The Perth Mint's inventory financing model as an anology to make it as easy to see as he could”

The Perth Mint unallocated business model is not what you described above re ETF coatchecking in, we never sold/don’t sell our “reserves” (inventory) to our Depository clients. If that is what you think we do then you don’t understand it. We sold/sell flow, not stock.

Bron Suchecki said...

"the reason the whole concept was dreamed up by others in the first place? Just because you didn't realise during the process WHY you were being asked to do something"

Who exactly are the "others" and who are those "being asked". I think you have constructed some creation myth for ETFs when the reality is far more boring. Coatcheck is an OK theory about using GLD, but not for why ETFs were created.

Unfortunately due to the Perth Mint's confidentiality laws I can't give you more background to the ETFs, of who sued who for stealing IP etc. But having been involved in that case I know who dreamed up the concept. Either take my word for it, or believe your theory. As both rely on faith I don’t think we are going to resolve it.

DP said...

Good morning, Bron. :-)

"So you're saying collectively the BBs went naked short 2000t of ETF gold?"


So they "sell the GLD shares off"... knowing that the new "share owner" can only sell [i.e.: for cash], not access that gold in the Trust.


knows they [i.e.: collectively the BBs] can access the gold any time


They [i.e.: collectively the BBs] can redeem the GLD shares one basket at a time to release the Trust's gold ("collect from the coat check room") into the subterranean stream of fractional BB system reserves.

GLD Inventory

COMEX Gold Inventory

Ain't war hell?

Have a great day everyone!

Peter said...


DP said:

*In fact, I am over-simplifying for the sake of clarity. I didn't bother to cover the GLD shares being themselves fractionally reserved and irredeemable. ;D (You cannot take direct ownership, they are held in street name only. You own an unallocated claim to a GLD share, which you cannot get allocated/delivered anyway. The BBs already have the GLD shares 'that they sold'… in their reserves.)

Bron said:

your ETF coatcheck which has not guaranteed buyback lock in and the BB has to rely on “hitting the bid”.

FOFOA said...

Hello Bron,

From the BB point of view, the slack in the flow is their reserves. You're talking stock versus flow, well, in essence, the differential between incoming and outgoing physical flow is, and always has been, their physical reserves. You can call the slack in the flow their "stock" if you want to, but if there's more flow coming in than going out, then the BBs will accumulate reserves. If there is more going out than coming in, then their reserves will decline. This is so simple.

The BBs can handle the accumulation of reserves because they also carry ounce-denominated books. That's what makes them bullion banks; they carry ounce-denominated liabilities on their books. If they didn't, then it would be a very capital-intensive operation to warehouse any slack in the flow. They'd have to buy that stock and carry it until it was sold. But they don't bear that burden, their unallocated account-holders do.

In fact, the BBs have plenty of ounce-denominated liabilities on their books. Much more than the amount of physical reserves they have standing behind those liabilities. Even Jeff Christian admits it's at least 10:1. So, standing behind all of those ounce-denominated liabilities, they have some combination of two different things: 1. reserves, and 2. other assets. Those "other assets" probably cover a wide range of long positions, some denominated in ounces like gold futures, forwards, swaps, options, loan notes and client short positions, and possibly some denominated in other correlated commodities and currencies. I realize that you dispute this, but I'll come back to it in a moment so let's just move on and consider it a possibility for now since it is in dispute.

If the incoming flow of physical is greater than the outgoing flow, then the BB will automatically accumulate (increase its) reserves. This will alter the mix (ratio) of #1 and #2 above. #1, reserves, will increase, and to "finance" (or balance) that intake of new reserves, it will either sell new ounce-denominated liabilities (spot unallocated) or it will have to sell (or unwind) some of those "other assets". Bullion banking is similar to, but different from, domestic commercial banking in that the unallocated credits are not necessarily lent into existence such that the offsetting asset is automatically a promissory note from a borrow, especially ever since the price of gold started rising in 2001 and it no longer made much sense to borrow in an appreciating unit.

Now let's think about the 32 or so non-custodial LBMA bullion banks and their reserves. The LBMA has 10 LBMA-approved custodians, 6 of which are bullion banks, and the other 4 are the BOE (probably initially for CB/BIS leasing purposes), Brinks and VIA MAT (for secure transport) and Johnson Matthey (for local assaying and refining). So around 32 LBMA bullion banks which maintain ounce-denominated books (the very definition of a bullion bank) have their reserves stored in the vaults of the 6 bullion banks which are both LBMA-recognized custodians and also the clearing members of the LBMA. Talk about pooling reserves!

The gold reserves on the asset side of the balance sheets of those 32 non-custodial banks, which include names like Citibank, Credit Suisse, Goldman Sachs, Merrill Lynch, Morgan Stanley and Société Générale, are actually deposits at the 6 LBMA clearing-member banks, which include names like HSBC, JP Morgan and UBS. Now think this through carefully… Goldman Sachs' gold reserves are JP Morgan's gold liabilities (or one of the other 5 clearing members). What do you think, Bron? Are Goldman Sachs' gold reserves, which are deposited at JP Morgan, physically allocated to GS or unallocated bookkeeping credits? The answer is that they are obviously unallocated credits. If you happen to be one of the 32, then a spot-unallocated liability from one of the 6 custodians constitutes a reserve in your books.


FOFOA said...


I'm sure you'll dismiss or at least dispute this notion as well, but just think about it. It makes perfect sense, even if it doesn't fit into your limited view of the gold market from your little corner that happens to be mostly physical. Why would the reserves of 30+ non-custodial bullion banks be held in allocated storage in the 6 clearing members' vaults? They wouldn't, of course. They would be unallocated bank-to-bank credits much the same as domestic commercial bank reserves held at the Fed are unallocated dollar credits.

The Fed doesn't have pallets of $100 bills set aside for each commercial bank, it simply carries the liability of potential pallets to each bank, and those Fed liabilities can be transferred from one bank to another bank when clearing the day's transactions. In the same way, a JP Morgan gold-ounce-denominated liability (since JP Morgan is an LBMA custodian) to, say, RBC can be transferred to CIBC in the end-of-day clearing process. Those 30+ non-custodial bullion banks are essentially depositors or deposit holders at the 6 LBMA clearing banks just like commercial banks have a reserve account at the Fed.

The "clearing job" of the clearing members is to manage their limited reserves such that there are enough after "netting out" the interbank transfers amongst 38 different bullion banks at the end of each day. It's not unlike the Fed's job of making sure it has enough physical cash to ship to individual banks when necessary, except that in this case "the Fed" consists of six different banks which creates a second tier of interbank clearing. So there's your pooling of reserves, inventory financing and coordinated reserve management, in LBMA spot unallocated alone. GLD is a whole other level resting on top of the LBMA system.

With this concept of the majority of the BBs' "reserves" being unallocated interbank liabilities, you can start to see how Jeff Christian could say that each bank is maintaining its fractional reserves at about 10 to 1, when the system as a whole could be much more thinly reserved since 84% of the banks' reserves are fractionally reserved on a different level, the LBMA interbank clearing tier, for which we have only very limited insight. This is not a conspiracy theory, simply logical deduction.

Let's switch focus for a moment to the LBMA survey. We can ignore the discrepancy between purchases and sales here since its explanation is in dispute. Let's just look at the sheer volume which is not in dispute. I don't think I've ever seen you give your explanation for the astonishing volume. I have, in the post above, but I've never heard what you think explains an average of 170 trades per bank, per day, each averaging almost a tonne per trade.

Of course it's got to be mostly paper gold, at least I hope you agree with that, but what do you think could possibly account for such tremendous volume, especially if the BBs are, as Christian says, only leveraged 10:1? This WGC document, called Liquidity in the global gold market, published before the LBMA survey came out, confirms the high volume. From page 10, under "Trading volume and turnover":

"Many dealers estimate that actual daily turnover is an absolute minimum of three times the amount of transfers reported by the LBMA and could be upwards of ten times higher. This would put global OTC trading volumes anywhere between $67 and $224 billion. Using the more conservative estimate of $67 billion means that average daily trading volumes in gold are larger than the UK gilt market and the German bund market combined. Chart 11 illustrates that the estimated daily turnover in gold is greater than most sovereign debt with the exception of US Treasuries."


FOFOA said...


As it turned out, just four months later, once the LBMA survey was released in August, the higher estimate of $224 billion was even short of the mark. The survey reported $240B per day, with paper gold eclipsing even the daily turnover of US Treasuries as per the WGC's "Chart 11", in both "percentage of outstanding" and nominal (dollar amount) terms. Just for reference, that $240B compares with COMEX at $20.8B per day, and TOCOM and MCX each at $1.8B per day.

So my question to you, Bron, is what do you think could possibly account for that amazing and unbelievable volume amongst only 36 reporting BBs? And what could possibly be offsetting their net exposure given that the volume is ten times higher than the gold futures markets (and 100 times higher than GLD's daily volume)? Physical? ;D

Which brings us back to those "delta hedges" you dismissed on your blog. Do you even understand how the banks use these? Here's an email from FOREX Trader which I posted back in June of 2012 (my bolded emphasis):


Re correlated assets:

All the big IBs [Investment Banks] have delta-1 desks. Do you remember the UBS trader that blew up and was big in the news last year? He worked the UBS delta-1 desk.

What is delta-1 trading? It's exactly what's described:

"The only answer I can think of is that they hedge it by going long correlated (but not identical) assets. What's correlated with paper gold? Silver, copper, euros, crude oil, interest rates, yield curve spreads, whatever."

The job of the trader is to use quantitative methods to build *a synthetic instrument with a delta as close as possible to the desired underlying*.

I made a quick delta-0.7 using some regression and eyeballing, with AUDUSD+(0.5*CADUSD)+(0.2*10YNotePrice) providing a good starting 'kernel'. Good enough that you could make up the other 0.3 deltas dynamically in the OTC/FOREX gold options market. Obviously any quants who want can build their own synthetic too. If they have access to OTC markets, it will be very very simple. Obviously the goal would be to 'long' this synthetic, to hedge the underlying short, to reduce deltas to 0 or near 0…

If you are long/short the underlying and don't want the directional risk you can hedge your deltas relatively cheaply by trading around your position using options. **If you are a big player in the market, you can actually make money doing this**, using the options to get better prices for your underlying position that the market wouldn't be able to otherwise cope with."


FOFOA said...


Here's a little more on Delta-1 in case you're interested (my emphasis):

Delta one: the special ops of equity trading
Izabella Kaminska Apr 11 2011

"FT Alphaville moderated a panel on “The rise and rise of Delta One”…

Ask someone from outside the industry to define Delta one, and you’ll struggle to get a cohesive answer. Ask the industry to define it, meanwhile, and you’ll get a multiple of different explanations.

And that’s because Delta one means different things to different people. Every financial institution seems deeply involved — all the usual big-name suspects, and many smaller names you might not have heard of too. But each financial institution views the sector uniquely.

Some sit their Delta one teams on their equity desks, others in prime brokerage. Some are pure brokers or market-makers. Others are more focused on the funding side and/or motivated by the needs of their asset management or structured products divisions. “It really depends what the institution’s strengths are,” said one industry source.

From a product point of view it’s simple. Delta one equals ETFs, sector swaps, dividend swaps and thematic baskets. It can include warrants and options too. Anything really, providing it involves returning a one-to-one performance to your client."

This is the age of complex derivatives, and to dismiss them being used in the "gold" market, especially given the incredible volume reported in the LBMA survey, simply because you don't see them being used in your little physical corner of the market, is simply silly.

Now back to GLD. You and I have been arguing about this coat-check room view since January of 2011, but I didn't come up with it. I got it from Randy Strauss in 2010, and it had been around even before that. Here's a perspective, from someone who was freshly trying to deduce GLD's essential function back in 2007, which sounds similar to the coat-check room view (again, my emphasis):

"GLD is a passive investment trust. That is, it doesn’t do much. The underlying economic model is that of a warehouse in which gold periodically gets deposited in exchange for claim checks, and claim checks periodically get presented for gold. From time to time the boys in the warehouse sell a little gold, just to keep body and soul together… In our model, “Gold In” reflects deposits made in the warehouse; “Gold Out” reflects withdrawals…"

The point is, this "claim check" or "coat check" view is not mine, and it's not new. But it is obviously the correct view if you give it proper consideration.


FOFOA said...


I'm not arguing that there was a plan, conspiracy or even premeditation by the bullion banks. Maybe there was, but that's not what I'm arguing. This function (coat-check room) is just the way it naturally turned out. The coat-check room view only applies to GLD, and not to any other ETFs, gold or otherwise. It's not an ETF thing, it's only a GLD thing, because GLD is the LBMA's gold ETF. It's because gold is different from all other commodities and various assets for which ETFs are created, and also because the LBMA is head and shoulders above all other gold selling organizations. And that's very simply why GLD is 10 times larger than other gold ETFs. Not because of marketing (PHYS arguably has better marketing), but because it's the LBMA's gold ETF, and the LBMA had that much gold to put into its ETF!

The simplest explanation is this. If someone wants to capture a GLD discount-to-NAV arbitrage opportunity, it suffices to buy GLD and sell spot unallocated (XAUUSD). Then you wait until the selling pressure in GLD has abated, and you square your position. No redemption necessary. GLD is so large that, even if institutional investors dump it, someone else, including the bullion banks, will take it instead of allocated if it is cheap enough. But why redeem? And here's the clincher: It is ultimately the BB's decision whether or not to redeem. Hence the coat-check room view.

If you can get your hands on this list of institutional positions in GLD, you'll see that BB/APs represent some of the top positions, and they just sit there, quarter after quarter, without redeeming. And I'm not suggesting that those numbers represent all of the shares held by the BB/APs. Those are actual positions reported in quarterly filings. In fact, all of the actual shares remain registered to the brokers at the DTC, and the shares that you can buy are essentially GLD-share-denominated liabilities carried by your broker and offset by the actual shares that are still on your broker's books.

You said: "When coming up with a theory of how the bullion market works, I have found the best way is to drawing up a T-account of a BB’s balance sheet at time zero and then post the debit/credits of each of your proposed transactions and then revalue it. It is the only way I know to test whether a theory makes sense, because that is what BBs do and that is what determines their P&L."

Well, here you go. It's one way a bullion bank could turn a dead asset (surplus reserves) into a live one. In step 1, the bank's reserves are converted into GLD shares of the same value. In step 2, the bank sells those shares to one of its clients. Notice that the shares remain on both sides of the balance sheet. That's because the actual shares remain registered to the bank at the DTC so the bank is, in essence, holding those shares on behalf of its client.

In step 3, the bank uses a portion of the cash it received in the sale of the GLD shares in order to hedge its short exposure to its ounce-denominated liabilities. As of step 3, the bank is technically "flat" again which means it is not exposed. In step 4, the bank invests the remaining cash and any yield it earns is income for the bank.


FOFOA said...


Then, once those reserves cease being "excess", just reverse the steps. Simple is as simple does. Before GLD, there was a storage cost associated with sitting on excess reserves, but the banks had no choice but to eat that cost. After GLD, there was not only a way to get someone else to carry that storage expense, but now there was also an opportunity cost in addition to the storage cost of sitting on "excess" reserves.

It is even possible that, if reserves are in short supply as they seem to be, the LBMA could be using GLD shares in its internal clearing process, only redeeming them when the underlying physical is needed to restock the subterranean stream, that is, for physical allocation or delivery. No need to redeem simply for interbank clearing, just transfer the shares.

I realize that you're trying to be Bron-the-Debunker, superhero destroyer of precious metals charlatans and defender of rational analysis, but with this GLD drain issue, I sometimes wonder if you really can't see how irrational your physical arbitrage view appears, or if you're just sticking to your guns. And yes, I did see your latest post asserting that PHYS redemptions might be due to an arbitrage opportunity rather than a general shift in preference toward physical.

PHYS lost what, a little over one tonne in the last 5 months? GLD has lost an average of 46 tonnes per month for the last 10 months. That's well over a third of its holdings in less than a year. The title to all of that physical gold, 485 tonnes, has been transferred to someone. As Randy Strauss wrote in 2010, which I quoted in Who is Draining GLD, this reflects a preference for the physical metal over paper substitutes… "And whereas the claim tickets (ETF shares) may freely circulate on the open market, any significant outflow of physical inventory is simply and primarily indicative of a bullion bank reclaiming the original inventory based on a heightened need or desire for physical metal in a tightening market — for example, to meet the demands emerging from Asia."

Yet, if you wanna stick to your physical arbitrage view, it must instead reflect a shift in preference favoring other forms of paper gold over GLD shares. So it's either preference for physical over paper, or preference for "other paper gold" over GLD. I know you can see this difference in implications between the two views, I just can't understand how you think the latter is more rational given the drain we've seen this year.


FOFOA said...


I must admit, I don't envy you gold sellers right now. I mean, think about this: If you completely discount Freegold, is there any reasonable argument for gold right now? There was, of course, a good argument at the turn of the century, and all during the commodity bull run from 2001 – 2011, but what's your rationale right now? I know that every gold bug has one, and there are two sides to those arguments; the conspiritard side you are debunking, and the "rational" side which you are defending. But, in general, what is your argument for buying physical gold right now?

I have come to realize that there's really no argument for gold right now other than Freegold, which is an overnight revaluation of gold in real terms, followed by new functionality, its sole use as the primary physical reserve asset. None of the old arguments make sense anymore. Everything about a financial system collapse is deflationary. It is deflationary to the economy (the economy will struggle to get back on its feet) and it is deflationary to assets, both real and imagined (although real assets will eventually recover more or less). And that goes for dollar currency collapse as well. It is well-known that, in real terms, assets, both real and paper, collapse vis-à-vis necessities during a currency crisis. Hyperinflation is not "inflationary", it is deflationary. It is just like the deflation imagined by the deflationists, so why would you hold a speculative commodity for profit if you expect a financial crisis and/or a currency crisis? At best you'll ride it down and then hope to ride it back up again after the crisis subsides.

And if you don't expect a financial, economic or currency crisis, then why hold gold or any speculative commodity for that matter? You must be banking on either normal inflation or the resumption of another bull market. But the commodity-bull/dollar-bear market apparently ended a couple of years ago. So I can certainly see how defending the old-standard gold thesis must be stressful for gold sellers right now. I feel for you and others who have to explain the standard old reasons to buy gold at shows and investor conferences right now. Get to know and embrace Freegold, because it's a really great reason to buy physical gold right now at a time when there aren't many others.


PS. We can resume the survey discrepancy debate if you want. The simplest explanation for more sales than purchases showing up on the survey is that… there were more sales than purchases. Occam's razor FTW, especially when your alt-explanations have so far failed to suffice for more than a tiny portion of the discrepancy. But first I'd like to hear your explanation for the sheer volume reported in the survey. Then we can resume our 16-month-old debate! ;D

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