Tuesday, May 28, 2019

Freegold in the IGWT Report

I did an interview for the new 2019 In Gold We Trust Report, just out today. Here's the 7-page teaser:

Highlights: 20 Years
Later – a Freegold
Project: Interview with

Key Takeaways

• There is a group of “physical gold advocates” that have
a completely unique view on money, the energy markets
and gold. They believe, we are entering a new monetary
and financial system in which gold will displace the
most conservative types of investments, those used by
passive savers.

• The term they use for this system is “Freegold”. The
theory dates back to the late 1990ies when a mysterious
writer showed up in online gold forums. He called
himself “Another“ and wrote about the gold market in a
way no one before or after could. Many still consider
him a genuine insider.

• We have conducted an extensive Interview with the most
high profile writer who is still actively exploring
“Freegold”. He uses the pseudonym “FOFOA”. In this
extensive interview he explains “Freegold” like never
before and calls for a much, much higher price of gold.

FOFOA on how the Freegold view on gold is different from the "classic goldbug" view:

For A/FOA, gold is the master proxy for real wealth, meaning not money, but the actual wants and needs that contribute to our standard of living. That's real wealth, useful things, and gold is the useless proxy we can save and exchange for those things in the future.

To goldbugs, on the other hand, gold is the rhetorical proxy for a whole menu of other metals, commodities, hard assets, and shares in the companies that produce them. When goldbugs talk about gold, they're really talking about gold and silver… and platinum and palladium and rhodium and mining shares and so on. You'll often hear goldbugs say things like "silver is like gold on steroids," but you'll never see A/FOA say anything like that.

On the Freegold view of fiat money, and how it's different from the “classic” view we all know:

Freegold really is an easy money system, if we're talking about the monetary system and not the wealth asset used for saving. Freegold money is just like today's money. And that's, I think, the big difference in A/FOA's view of the fiat monetary system.

Yes, there are many problems today, but they stem from the $IMFS, not from modern fiat money. And by that, I mean they stem from savers all over the world saving in today's fiat money. That is truly the root cause of most of the problems people blame on easy money. We don’t need to fix modern fiat easy central bank money, we just need to stop saving in it.

On how A/FOA's view on oil is it different from the “classic” view we all know:

So here's the other big difference between A/FOA's view and the "classic" view. The "classic" view is that if we ever see $30,000 gold, then oil would have to be at least $1,000 a barrel. But Another foresaw a post-revaluation gold/oil ratio of as high as 1,000:1, meaning, in real terms, not nominal terms, gold could be revalued to $30,000 an ounce with oil still at $30 a barrel!

This is possible, because A) the price of gold has no impact on the price of other things—it's basically an arbitrary price—whereas the price of oil is closely related to the general price level, i.e., inflation, and B) because the gold/oil ratio of the last 73 has never been allowed to find its physical equilibrium price. As I said, it all comes down to "the battle to keep gold from devaluing oil ( in direct gold for oil terms )."

The "battle" has already ended. Europe stopped when the euro was launched, and the rest of the foreign public sector stopped supporting the $IMFS five years ago. The gold/oil ratio which persists today is merely an artifact of the $IMFS, the result of regression and the expectation of traders that tomorrow will be just like yesterday, just like the gold/silver ratio is an artifact of the same. It won't break until the $IMFS ends. But when it does, the outcome A/FOA foretold is about 50 times greater than "the classic view we all know."

On the future value of gold:

$55K is my number. I first used it in 2009. A/FOA used $30K, but that was back when gold was under $300 an ounce and oil was around $12 per barrel.

What is the thinking behind those numbers?

Well, first let me address A/FOA’s number and where it came from. FOA was asked that question back in 1999, and he said it was a projection taken from a study done way back in 1988 in response to the stock market crash of 1987. It was based on the dollar losing “reserve use”. Here’s what he wrote:

“This work started back in 1988, not long after the 87 crash. Important people were asking some very serious questions about the timeline of the world monetary system. They expected a long term evolving report that would expand ongoing events into a format of true life context. A context to be understood at all levels of economic exposure. In other words, it had to do a better job of explaining the (then) recent illogical swings of world economic affairs and the effects of those swings on various national economic groups. Were we progressing into a new, better age, or was our system responding in a death-like downtrend?

Because the questions grew from a fear that the world economy would indeed contract in the future, leaders wanted to know how one could retain the most wealth during such an event. It was thought that if the basic extended family blocks of a nation could survive such a collapse, savings intact, those nations and their children would be a benefit to economic affairs of the future. In effect, negate a possible return to the Dark Ages of European history. Our time frame was outward some 20+ years. I cannot offer the full report or its complete ongoing analysis. But, the effort you have seen to date is one of sharing somewhat for the common good of all.”

That gives us a good framework for understanding Another, as well as an idea of where the $30K number originated. We don’t have all the details or calculations that went into it, but at least we know it was the result of a study.

On the potential for a dollar collapse:

What’s important today is not what’s priced in dollars or the dollars used for transactions, but the dollars held as reserves, savings and wealth. If you buy oil in dollars, what matters is if the seller then holds those dollars as reserves, savings or wealth. If he exchanges them for another currency he needs to pay his expenses or employees or whatever, then the transaction is basically irrelevant to the dollar.

The ball that I watch is capital inflow, that is, foreigners buying US assets. That’s all it takes to support the current system. When that stops, we will get dollar hyperinflation. Since 2013, the foreign public sector has been flat, which means foreign central banks stopped more than five years ago. It’s been the foreign private sector buying our bubbles since then.

That will stop when the markets crash, and an important part of my theory is that I don’t think the foreign central banks will pick up the slack this time like they have in the past. That idea is based on a number of things, from trends to statements to actions. And I view developments like the European uneasiness over Iran sanctions you mentioned as supportive of my theory.

You interviewed Ewald Nowotny last year, the governor of Austria’s central bank and a member of the ECB governing council, and he talked about Europe’s efforts to counter the USG’s use of the dollar as a weapon. When the markets crash, and the foreign private sector stops buying US assets, the dollar will devalue. This devaluation will force the USG to print money hand over fist, but all that will do is cause the dollar collapse to accelerate.

The question is whether Europe and China will prop up the dollar at that critical juncture between when the stock market crashes and the dollar devaluation begins. In the past, they couldn’t let the dollar collapse without it taking them down with it. But today they are prepared, and because they are now taking active measures to counter the USG’s aggressive use of its exorbitant privilege, I don’t think they will be very quick on the draw trying to prop it back up. And that hesitation is important, because once the dollar collapse gets underway, there will be no putting that cat back in the bag.

On bubbles and the stock market:

In January of 2016, I wrote a post called The Unicorn Economy focused on the tech bubble, and ever since then I’ve been looking for bubbles. In January of 2017, I wrote about the “bubble of bubbles,” and in November of that year I had a section in a post titled, “Bubbles Built on Bubbles Built on Bubbles”. By that time, a few people were calling it the “everything bubble,” and in January of 2018, I called it the “Bubble of Bubble Bubbles,” dubbing 2018 the year of the POP.

I heard something on a recent interview I watched, I think it was Jeffrey Gundlach. He said, basically, that the first sign of a bubble market turning is usually some single crazy mania thing that happens. Like in the dot-com bubble, it was Pets.com, and in this one it was Bitcoin. It’s a sign that something has changed.

That whole run-up in Bitcoin from $2,000 to $20,000 during the second half of 2017 was pretty insane, and I had several posts during that time on related topics. That manic phase ended on 12/15/17, and a little over a month later, on 1/29/18, the stock market bubble popped. That was when it dropped 10% in 10 days. The turn in the market was confirmed with the October 3rd retest, and again on Christmas Eve with a 6% drop from the previous day’s high.

As I write, we are testing the highs for a triple top, but I’m pretty convinced that the nine-year bull market turned into a bear last year, and this year I’m looking for a big drop, not just in stocks, but in the “everything bubble”, which includes virtually all US wealth assets except gold, things like real estate and art, too.

That’s what I’m looking out for, because I think that’s the next (final?) step on the trail to Freegold.

On floating exchange rates, the US trade deficit, and hyperinflation:

You see, the whole world is in a floating exchange rate regime today, ever since the Jamaica Accord in 1976. It’s been a dirty float for most of that time, but since 2013 it’s been pretty clean. That means the dollar is floating too. But its position in the float is the result of a constant inflow of capital, meaning a constant buying of dollars by foreigners which has been ongoing, non-stop, since 1975.

It’s reflected in the US trade deficit. That’s how you can see it. That’s how you can know it’s flowing in. A 44-year non-stop trade deficit doesn’t just happen organically. It is caused. It is caused by a capital inflow. A capital inflow causes a trade deficit. And over 44 years of living with it day in and day out, the USG has grown addicted to it.

It’s like the water in a fishbowl. The USG is a fish, and the perpetual trade deficit is the water. Only there are holes in the bottom of the fishbowl, so water is constantly leaking out. But there’s also an equal inflow coming from a hose propped on top of the bowl. When the markets crash, that hose will be turned off, and the USG will find itself short on water.

When the markets pop and the inflow stops, the dollar will drop, and the USG will find its current nominal budget insufficient for even its most basic operations. It won’t be able to borrow or tax more, so it will print. At that point, the dollar will have only undergone a devaluation, a sudden drop to a lower level. But when the USG starts printing just to maintain the status quo it has grown addicted to, the dollar will start slipping again.

The slip will become a slide, and the more they print, the faster it will drop. That’s how hyperinflation works. You can never print enough, because printing begets more printing, and you can never outrun the bear.

So that’s where I think we are in the dollar timeline today—right on the cusp of a big change. I can’t say when it will happen, only that it’s way overdue.

On how the “next financial system” will look:

It’s important to draw the distinction between Savers and professional investors, traders and speculators. True professionals were in Wall Street long before all the easy money came in, and they’ll be there when it’s gone. But there are also a lot of Savers today who think they are professional investors, traders and speculators, but wouldn’t be very good at it without the ocean of easy money.

Just like in online poker. While it was big, there were lots of mediocre players who thought they were really good, just because there were so many bad players playing. But that all ended on April 15, 2011, when they shut down online poker in the US. They call it Black Friday, and poker hasn’t been the same since. You can still play online outside of the US, but it’s not the same, because the easy, passive, dumb money is gone. The floodgates that opened in 2003 were closed on April 15, 2011. And that, in a metaphorical nutshell, is how the “next financial system” will differ from today.

The floodgates that let an ocean of passive Savers’ money into the shark infested waters of Wall Street will close. Much savings will be lost, but new savings will go elsewhere. Investors, traders and speculators will still invest, trade and speculate, but it will be a smaller pool in which they play, and their skills, which have likely atrophied over the past 44 years, will once again be tested.

This is a big topic, and there are many implications worth exploring. It’s something I do at the Speakeasy once in a while, gaze into my crystal ball, and write about how I think the future will look. But the bottom line is that when this sucker blows, all those savers still invested in Wall Street are going to be so badly burned that they’ll never go back. At least not for several generations. And in my assessment, savings or Savers’ money makes up the majority of the financial system today, so you can imagine how it’s going to have to shrink.

Passive investments such as ETFs will probably shrivel and all but disappear. Real estate investing will be boring and difficult like it used to be, so REITs will probably follow ETFs. Far fewer kids will study finance at college. You get the picture.

On the Euro and the future role of gold:

Money will be just like it is today, mostly credit, denominated in a purely symbolic unit like the dollar or the euro. The dollar will have fallen far, and the euro will help bridge the gap. Most of the problems with the euro today, and criticisms of it, are actually effects of the current system, the dollar international monetary and financial system ($IMFS), the fishbowl in which even the euro swims today. Once it is free from the $IMFS, the euro will be money par excellence. The reason is mostly because of its management structure.

The reason I have positive things to say about the euro is because, no matter how it’s being used today, it was conceived and constructed to bridge the end of the dollar reserve system to the next one. Its design, its architecture, will not only allow it to survive the transition, but also to flourish within the next system.

In his famous acceptance speech for the International Charlemagne Prize of Aachen for the euro in 2002, Wim Duisenberg said, “It is the first currency that has not only severed its link to gold, but also its link to the nation-state.” You see, the euro solved two problems. 1. It severed its link to the wealth reserve function of money. And 2. it severed its link to the Triffin Paradox of an international currency being managed by a single nation. These are the dollar’s two greatest problems, and the design of the euro resolved them.

Is it susceptible to politics and political influence? Of course it is. But it’s the currency of many very different countries, and that’s why its susceptibility to political influence is actually a strength, not a weakness. FOA wrote:

“The dollar is ruled by one country and one country only. This implies that only one Economy is taken into consideration when policy is discussed, the USA. The management of interest rates, inflation, dollar value and crisis intervention, are therefore politically motivated to benefit one world group, again, Americans. We have seen the news events of how this tramples upon the needs of other geopolitical groups (countries).

On the other hand, the Euro will utilize a totally different structure of consensus management. It will be governed by many nations of obvious conflicting needs. This very weakness, that is so well documented by analysts, is the “major” strength that will contribute to the popularity of the Euro. In time, it will be governed by many cultures, including an “open market” valuation of gold.”

So money will be just like it is today: easy. Easy money, not hard money. We don’t need hard money. Hard money is bad. It’s bad for the economy, and it’s bad for the debtors. Savers (and gold bugs) seem to want hard money, but after a while, those hard money systems end in either tears or bloodshed for the savers, as we abandon hard money once again. It happens over and over in history.

Freegold solves this problem, and ends the Groundhog Day repetition of easy and hard money systems forever. The role that gold will play is that of wealth reserve par excellence.

That doesn’t mean that gold will be the very definition of wealth, but it will be the master proxy for wealth. And at a high enough price, there will be plenty of it to fulfill that role.

And on timing:

I think we’re close. I think we’re almost there. Like I said, I think a good stock market crash like 2008 will do it…

I think it will be a chain of uncontrollable events that will start with a stock market crash that could happen at any time. It could be something else, but whatever it is, I think the endpoint is still the same. And whatever it is, you can bet we’ll be talking about it at the Speakeasy!

You can download the full 46-page interview for free at the following link:


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