Friday, September 23, 2011

On Scary Corrections


In the wake of gold's scary 12.5% three week correction from its all-time high (and having to stew in it all weekend), I thought I'd share with you some encouraging comments I found on another website:
________________________________________________________

1. Perspective

Is today *really* a down day for gold?

For $10,609.37 you could have bought the DOW on May 13, 2000. On June 6, 2006 you would have paid $10,706.37 of inflation-riddled dollars for your trouble. Today you'd pay $10,771.48 for that same DOW.

On the other hand, $10,609.37 of gold purchased on May 13, 2000 would have had a dollar value of about $21,660 on June 6, 2006. And today, Sept. 23, 2011, that same gold would have a dollar value of $63,552.

Choose gold. Hold gold. Don't worry. Be happy.

2. Why Gold is falling

I'm annoyed with myself for not factoring it in before but we can easily see the culprit impacting PoG here. Why of course it's Bonds!

How did we miss it? We credited the market with less nuance than it actually has in that it is discounting PaperGold relative to Paper Bonds as a liquid mid-term hold.

Can we still expect a reversal in PoG whilst Bonds drive inexorably higher under the weight of a tanking Stock Market?

YOU BETTER BELIEVE IT!

3. "Do over!"

That reminds me of the comment I made earlier this week with regard to this pricing consolidation. I remarked that, due to gold's rapid run-up, a lot of people have been left on the sidelines with the sentiment that they have missed the boat.

Well, here's one of those happy circumstances where the boat has made a brief unlooked-for return to the dock. Now the question is, how many of these early boat missers will seize upon this second chance?

Some of them will, but mostly it's the well-seasoned gold-buying professionals who are busy "making hay" while the sun still shines.

Love the mixed metaphors.

4. "FIAT is the wrong play, but the masses don't care. When they see crash... they convert to cash."

More than chalking this behavior up to simple stupidity, I think more than anything this is a sign that that masses are hip deep in debt.

The person that on net is in the black -- that is truly a man of wealth instead of debt -- does not share this same bewildering behavior of preference for digits/paper in times of uncertainty or crisis.

Much of the financial system is a towering network of debt and obligations atop other debt and obligation. The man of wealth will use it to his advantage, sure, but only to a point. He does not build his house on a foundation of shifting sands -- of easily defaultable debt/paper.

5. Picking over the battlefield - better than being in the battle

If you look back at the pre-1987 event you will notice similar results. Because of a RAPID run-up in POG it sold off with everything else. You will notice that POG is still up on the year (look at a 10 year chart).

Contrast this with Argentina a few years ago. There was significant local demand for gold by anybody who could get any.

The bull market has not ended, the uptrend and fundamentals are unchanged. We have witnessed a garden variety correction (in ALL commodities) The speculators have been burned a bit. Practically speaking this is no different than the events of 2002 in gold stocks:

fundamentals + momentum players = avalanche.

Some likely are sitting on coins purchased at $X,XXX and over, well, too bad. On the other hand since we are in the 2nd inning of a 9 inning game there is little to worry about unless you played a leveraged game.

The situation has not changed- only the temporarily overbought and temporarily over-exuberant over-extended players have tripped up (with a little push perhaps).

________________________________________________________

The comments above are from between 6/13 and 6/16 in 2006, with minor editing on my part to disguise the date as well as to update #1. These comments were written in the wake of a very scary 21% four week correction from the recent high of $725 down to $567. Comments #3 and #4 were by Randy Strauss, aka TownCrier, and comment #2 was Sir Topaz. Here's one more by Randy:

TownCrier (6/13/06; 15:04:40MT - usagold.com msg#: 145264)

Thanks for your recent series of good posts over the past week. Hiking up the Trail has given you a good view and a clear head to take it all in.

You've made an astute observation that marking ones tangible gold assets to the market price of PAPERgold is not a good idea. During the reign under which wild and woolly derivatives factor prominently in setting the price for the metal, the physical asset will not appear to demonstrate the steady performance that is expected of it day in and day out -- instead, as reflected in its pricing behavior, it will have the same reckless characteristics of its leveraged derivatives along with the panicky mood swings of the paper pushers. Reserve asset holdings in the form of physical gold (instead of derivative alternatives) would therefore only prove itself uniquely meritorious at such fateful time as the credit and derivative markets collapsed into default.

Valued arbitrarily at just $42/oz, it is apparent that the U.S. Fed/Treasury system holds its 8,000 tonnes expressly as an ultimate mitigation against a final calamity in paper. In the meanwhile, the U.S. rides high around the world on the prevailing illusion that dollars, appearing more stable than derivatives, may be reasonably held by everyone else as an alternative to gold, thereby giving Uncle Sam an unduly large audience to support his ongoing debts via the bond market.

ANOTHER system, of the type on which the ECB-euro system was modeled, recognizes that gold need not sit for its whole tenure underutilized until that final fateful paper/derivatives crisis calls it into action. By simply not using the frozen U.S. price, and instead regularly acknowledging the evolving market price of gold through time, they have established a framework by which the gold among their reserve assets can do some of the heavy financial pulling simply by nature of its steady capital appreciation as expressed in terms of the domestic politically-inflated currency.

We currently exist, however, in a world in which the banks of the mark-to-market model have yet to decisively dethrone or discredit the derivatives-based pricing of their key (politically neutral(!!), confer Russian desire) asset as a means to fully implement the stability benefits of their reserve architecture and the accounting thereof.

Getting back around to answering your question, as an outsider it is not for me to say how close the MTM system now has brought itself to the very brink of where cooperation (with the U.S.-dominated system) ends, being the point where the axe shall fall to bridge the gap for progressive movement forward. As we've severally discussed this with FOA, the rational expectation is for the derivatives market to perhaps initially enjoy a burst of naive exuberance to the upside, but then likely fail in a collapse to the downside as players realize that their paper could only ever be merely exposed as being a faulty means to an unobtainable end. The tangible wealth of physical gold was always the stealthy accumulation of the big players who dictate the terms of the game that everyone else eventually plays, several steps behind.

To be sure, the biggest players use (often SIMULTANEOUSLY) the PAPER markets for shorting (no fear, paper NEVER goes "to the moon") while exercising their longs in the PHYSICAL market to take command of the full benefits of actual ownership, and let the devil take the hindmost.

Could the market in gold derivatives see new highs in the cards? Sure -- there's a lot of naive money just waiting in line for its turn to be sheared, the price to be paid for a lack of insight or wisdom while attending the School of Hard Knocks. The definitive answer, however, I believe comes back to the point about where we have now arrived on the financial landscape with respect to international cooperation. If we are at the brink, gold derivatives will continue an officially preordained meltdown even as unfulfilled buyers chase their bids ever higher for metal on a physical market suddenly bereft of supply.

So, are we still in a cooperative environment? If we are, then us little folks will still have time to seek delivery of metal at derivative prices, and our smalltime success may encourage our neighbors to try to make up for lost time in another ill-advised chase for the derivatives. If cooperation has run its full course, the MTM architecture will be unveiled of its full potential as gold is suddenly revalued according to its physical stature, peerless among its papery reserve bedfellows. We would have to make do with what little metal we already have.

If a person woke up tomorrow morning to a news report announcing COMEX August gold futures down to $200, what would he think?

If he woke up the next morning and the contract was trading at only $30, THEN what would he think?

Throwing "good" money toward the purchase of a bad contract has rarely been a prudent means to increase your wealth, as the low price usually reflects the fact that you can't squeeze blood from a turnip -- you can't get gold from an out-of-favor (unsupported) derivative.

R.


Speaking of neighbors, I have a friend who was almost ready to buy his first gold coins at around the $1,750 level. But by the time he got around to it, it was at $1,850 and kissing $1,900 a couple times. He figured he missed the boat and basically gave up on buying gold. So I just sent him this quote from Jim Sinclair's CIGA Eric today: "Anyone not buying here does not believe in the fundamental story. In my opinion, this will be a huge entry point by 2012."

Am I buying here? No. But only because I finished my buying a few years ago. I didn't buy very well by TA standards in 2008, but even my worst purchase then looks like a total steal today. Here's Randy on timing your entry point, written when gold was $510/oz:

TownCrier (12/7/05; 02:42:21MT - usagold.com msg#: 138878)
On corrections

I had the pleasure earlier this evening having randomly encountered a friend at a coffee shop. Is seems like we cross paths on average about once every one or two months.

Each time, without fail, he picks my brain about the latest doings of the central banks and more especially about the gold market in general. And in fact, in anticipation of this latter line of questioning, I usually cut to the chase and offer the latest gold price as part of my salutation, such as today, "Hello Antonio! FIVE-ONE-OH."

For the past few years he's always been on the cusp of buying gold, but as the price has always been higher than it was previously, he usually expresses a mixed sense first of wonderment and ultimately of agitation (as though he's missed the last boat). Having taken no action during the lower prices, he almost always consoles himself, speaking his thoughts out loud (almost as if seeking my approval), that "I'll definitely buy on the correction".

Sensing that what he really needed was simply a bit more proactive dialogue than I had customarily provided (my personal conversational style is to merely inform and let people make their own decisions), my response to his "correction" comment finally turned the light on.

I suggested that while he was always sidelined waiting for the next "correction" he ought to give some consideration to the following possibility -- that in light of the various things I've previously talked about, the piddly "correction" that he always seems to be waiting for is of no account compared to THE REAL CORRECTION that he needs to tune into -- that being a relentless march to significantly higher prices as gold corrects for 70+ years of undervaluation by the world's banking system.

What a shame it would be for a would-be gold owner to stay sidelined, waiting for some insignificant degree of price-drop that never materialized. I wonder how many other people have consistently tried to save $20 by waiting for a "correction", only to discover that after a series of $5 intraday dips the price overall has moved $50 higher, again and again.

Nike has a good slogan for occasions like this -- "just do it"

R.

________________________________________________________

I also have a couple interesting tidbits I wanted to share with you:

1. Remember in my last post I criticized Indonesia for including gold in its consumer price inflation index? Well, yesterday Bloomberg reported that they are now talking about removing gold from the CPI:

Gold’s Price Surge Skews Inflation Numbers Across Asia

SNIPS:
In Indonesia, gold jewelry was the biggest contributor to a 0.93 percent increase in consumer prices in August from the previous month, accounting for 0.19 percentage point of the gain, government data show.

The issue doesn’t arise in developed nations including Japan, the U.S. and the U.K., or in Asian economies such as Singapore, Vietnam and Hong Kong where the metal is absent from inflation baskets or jewelry has a limited effect.

In Jakarta, Fauzi Ichsan, an economist at Standard Chartered Plc said that removing gold from Indonesia’s basket of consumer goods, was “theoretically logical.” At the same time, it could lead to speculation that the statisticians were under political pressure, he said. Yunita Rusanti, the head of the consumer-price statistic sub-directorate, declined to comment on whether gold jewelry should be removed from calculations.


2. At the LBMA Precious Metals Conference in Montreal this week, one of the presenters suggested: "The US should make a two-sided gold market at $20,000 per ounce."

It's on the last slide here:


And now, since I'm done buying, it's back to sleep for me. Wake me in October.

Sincerely,
FOFOA

283 comments:

1 – 200 of 283   Newer›   Newest»
IronShield said...

FOFOA (and maybe et al) I'm curious as to what you are hedging against when you mention that you are "...not making more purchases." If, as you suggest, Gold will go to $20K, and potentially higher, why wouldn't you be buying? Hmmm...

Ramon said...

@ FOFOA

Would putting a few unobtrusive ads from businesses you recommend be an option? It might make up the difference.

J said...

Scary corrections give me a better exchange rate. It feels great watching the price rise but I end up getting a lot less for my money come pay day.

My target number of ounces seems attainable once again. With the price rising so fast I had my doubts that it would ever be reached.

From now on I will curse any rise in price until I reach my number.

Robert Mix said...

The eBay / 24hgold.com widget shows a huge 19% premium of physical eBay Gold Eagles to spot. To my knowledge, this is the "best" (though very imperfect) way to track physical gold price to COMEX gold.

WE will win,they will not. Gold is the BEST wealth preserver in town.

Non illegitgimi carborundum (don't let the bastards get you down).

julian said...

Nice post FOFOA,

I am interested by that slide from LBMA in Montreal.

the third point under 20k double-sided gold market:

won't do anything for the debt, but think about the asset side

that related me to thought of euro architecture

two-sided gold market is like a "gold window"?

J said...

Julian,
If I understand it correctly a double sided gold market at $20k would be something like the U.S would bid for gold at $19,999 and sell at $20,001.


The U.S would see a large influx of gold and then slowly get drained of it if A/FOA/FOFOA's predictions are correct.

Or it may even immediately set off a bidding war.

IronShield said...

@FOFOA... Well, I just might have to consider that. I do appreciate your site and all you have done. And it is true, it is time for me to step up again and make a donation, and I recommend others do as well.

I made that comment to reassure myself that I wasn't missing something. I don't believe I am and am comfortably positioned with physical and no leverage, no debt. But, I'm human and therefore fallible (but don't tell my SigO :). Cheers.

Mike said...

looks like all eyes are on the G20 meeting in Cannes coming up.

since "Reforming the International Monetary System" is a topic here is more information on the topic from the website.

http://www.g20-g8.com/g8-g20/g20/english/priorities-for-france/the-priorities-of-the-french-presidency/sheets/international-monetary-system-ims.351.html


i found this news also interesting from Germany today.

http://www.dailymail.co.uk/news/article-2041201/George-Osbornes-eurozone-crisis-warning-6-weeks-save-euro.html

here is a quote from the article.

"World leaders were warned last night that they have just six weeks to save the euro from collapse.
On another day of gathering economic gloom, George Osborne savaged eurozone leaders for failing to get a grip on their towering debts.
The Chancellor set a deadline of six weeks – when leaders of the G20 group of leading countries will meet for crunch talks in France – for action."



now that the fed also disappointed i wonder if it too has something to do with the G20 meeting.


finally i also found this interesting today

*CHINA SAYS IMF SHOULD STUDY DEFECTS OF WORLD MONETARY SYSTEM
*CHINA SAYS IMF SHOULD DIVERSIFY GLOBAL RESERVE CURRENCIES
*CHINA SEEKS `STABLE VALUE' IN RESERVE CURRENCY SYSTEM

looks like everyone is waiting for the G20 and if not admitting it then lots of signs are pointing towards something big happening. The LBMA presentation FOFOA put up is also of interest.

anyone else see any signs for the G20?

Mike said...

RobertMix,

IMO i dont think tracking ebay prices is the best way, ebay is a rip off even for dollar store products. i wouldn't pay much attention to them.
would you pay ebay when you know that you can get gold for 1%-2% over spot without any issues? As for eagles, its hard to say here in Canada since they are taxable and therefore no one wants them. But in compassion to Maples, they would be 3% premium at most.

i track my local dealer, if he can't get anything then we are in big trouble. btw my dealer is a distributor for scotiabank. i have never heard of any problems for us shrimps.

Joy said...

Hi, just thought that after all the time I've spent joyfully reading past and current posts I should at least say hi and let you know that even people in as strange a corner of the world as Romania are enjoying your writings... and not just you, big thanks to all the brilliant people who are commenting here!

It's just so great to learn from your debates and thoughts. The community and the discussions here seem to me to be so very different than anything I find out there. The economist community after reading Mises/Freedman/Sowell/Rothbard seems to me so very skewed towards preaching/getting power as opposed to learning, and ZH has great news but such an abundance of shallow insulting comments too... so what I'm trying to say is that I reeeeeeeeallly appreciate all you guys.

It's so fascinating to think about the big workings of the world! I'd love to pick your brains, to ask many questions and discussions, but I don't yet dare (about 70% through the archives)... so I just wanted to say a big biiiig thank you to everybody who's here, and of course especially FOFOA and of course the giants who came before him!

Thank you so much!

Gary said...

Hello everyone.

It's not just gold versus the Dow price where the 'real' value of gold has shone through of late.

Gold versus ALL other commodities has increased over the past few months. Again, it demonstrates what the MSM fail to appreciate, that Gold is not just a commodity, but is transforming back into a preserver of wealth.

I did buy some physical when the price was at $1820, because I was worried about QE3 being announced and the price shooting over $2,000.

I am happy the correction has happened, as I want to buy some more!

Also, as I live in the UK, and sterling has weakened (I think by 5% or so) against the dollar in the past 2 weeks, my gold has protected me against that weakening.

Now, I just eagerly await delivery of it, there is a 3-4 week delay over here, maybe a sign of a tight market. Then off to a vault with it!

Thanks Fofoa.

samix said...

Well I feel that for us small buyers a $200 to $500 correction means absolutely nothing, because we are hardly able to purchase a ounce in one go rather its mostly a fourth or a third of an ounce, add to that the local dealers premium and it hardly matters.

So when I have the money, with utter disregard for the price of gold, I just go and 'do it'

dieuwer said...

@Gary, gold has been outperforming the CRB index since 2001: just look at a ratio chart. Of course, gold also has outperformed the stockmarket and bonds.

Because of that, I sometimes wonder if I should not just close my brokerage account and buy gold coins only.

Gary said...

@dieuwer

I have made the decision to put all of my surplus income and cash into physical, this was the first move.

Even if freegold doesn't come to pass, I still see gold going nowhere but up over the next 5 years, and I do expect the US to hyperinflate and the paper gold market to break: it all adds up to at least $20,000 an ounce.

History will look back on these past 40 years (of fiat) as the craziest and biggest bubble in mankind's history.

And Y said...

We shouldn't cheer the rise in gold's price, nor fret its decline. Given the THOUGHTS of A/FOA (to which this blog is dedicated), I'm surprised at this post. We should expect a paper price near 0. We should not hope for high prices until then, as we want the greatest flow to our friends and neighbors before RPG.

DP said...

-

Jeff Herron said...

@Mike, where are you getting that kind of a premium? I'm going to have to switch dealers, as mine charges between 10-12%!

@samix, I second your purchasing strategy. That's exactly the way we play it, too.

Edwardo said...

"You will notice that POG is still up on the year (look at a 10 year chart)."

I notice that gold is still up from early August when gold broke above the channel it had traded in since '09.

A PIIG said...

(Using rounded numbers for simplicity) If bullion banks are selling 20 ounces for every ounce they have at $2000 an ounce. What is the ounce of gold worth to the bullion bank? $40,000. An ounce is worth $40,000 to the bank because they can sell each ounce 20 times. When these claims on gold are defaulted and burn, putting an end to fractional selling of gold, why should gold go to a price level that is based on the ability fractionally sell it at 20 claims per ounce?

These claims on gold are for gold at a particular price. If someone buys 100 ounces at $2000 and leaves them in an unallocated vault to find out that he can’t claim his gold at that price. Will he be an able and willing buyer of the same amount of gold at a higher price of $3000, $4000, $5000, $10,000 etc. Won’t the rising price kill off some demand and coax physical supply into selling preventing the price from ever getting anywhere near the hypothetical $40,000 linear prediction?

An awful lot of if's need to happen for that price prediction not to be absurd.

If there is a run on paper gold, if paper gold claims are redeemed for currency, if all the redeemed currency bids on gold, if the rising price does not quench some demand, if the rising price does not increase the supply.

The first if could be a when but i can't say the same for the rest.

Am i missing something?

J said...

For those that have not followed FOFOA's link to the LBMA Conference page I highly recommend a look at these slides here http://www.lbma.org.uk/assets/C11S1_Lassonde.pdf

A PIIG - Does that price still seem absurd in a physical only market?

Gold's utility is to store wealth. Does it really matter if you receive an ounce or a gram for $2000? Most people do not build statues with it.

A PIIG said...

@J

A PIIG - Does that price still seem absurd in a physical only market?
Yes a price prediction based on the ability to fractionally sell gold does seem absurd if you cannot fractionally sell it.

Gold's utility is to store wealth. Does it really matter if you receive an ounce or a gram for $2000? Most people do not build statues with it.

Now you are using a different metric to predict the price of gold, you are not predicting a price based on its utility to be fractionally sold but its utility to store wealth.

J said...

I am not predicting a price I was merely pointing out that I do not believe $40,000 is absurd.

A PIIG said...

@J

Your second question has set me off on a line of THOUGHT.

-The fractional claims represent a demand for gold as a store wealth
-Those claims will still want to store wealth, if they can't buy an ounce, a half ounce, if they can't buy a half ounce, they can buy a gram.

thanks

78Rubies said...

Thanks for the article...

Neverfox said...

Someone brought this up in the comments of the previous post and it's exactly a question that has been on my mind:

"you don't kumbaya $100 paper price gains. In fact you wait for paper price to reach ~zero."

I know that is what FOFOA has said, but I have also noticed that he opens a new discussion thread every time the paper price rises $100.


Exactly. I don't get it. If the Freegold theory is that paper prices are going to collapse while physical prices are going to settle higher, why all of the smiles for increasing paper prices and mentions of how well it has done in the past few years for early buyers? There is a tension here that I'd like to understand.

The only thing that seems to make sense is that the collapse in paper prices is not going to be a gradual thing but a nearly overnight realization. In the meantime, the pressures of gold's true physical value are pushing the linked paper pricing mechanism higher, against the friction of forces trying to keep gold cheap (CBs?).

So, FOFOA, is that a good explanation for the seeming tension in what we read? Or is it something else?

Also, can someone direct me to any FOFOA posts that go into exactly how the paper market manages to overpower the physical? I'm looking for a technical explanation of the mechanics of it, because when I relate that idea to other people, I always get raised eyebrows about how such is possible. If that hasn't been explained in much detail, that would make a good future post.

Edwardo said...

http://www.telegraph.co.uk/finance/financialcrisis/8786665/Multi-trillion-plan-to-save-the-eurozone-being-prepared.html

One increasingly gets the feeling that The Europeans are acting like the U.S. as per Winston Churchill's observation that "You can always count on the Americans to do the right thing...after they've tried everything else."

Just start bidding for gold at an order or three magnitude higher and put a stop to the idiocy.

IronShield said...

@Neverfox

Yeah, but it would be stranger if we didn't feel that way. Normal human response to be giddy with price rises and feelings of angst when the price drops. The hardest thing I have ever done is try to control my emotions in the markets; and I still struggle even though I have been quite successful since the start of this PM adventure.

Aaron said...

Hi Neverfox-

"Exactly. I don't get it. If the Freegold theory is that paper prices are going to collapse while physical prices are going to settle higher, why all of the smiles for increasing paper prices and mentions of how well it has done in the past few years for early buyers? There is a tension here that I'd like to understand."

"The only thing that seems to make sense is that the collapse in paper prices is not going to be a gradual thing but a nearly overnight realization. In the meantime, the pressures of gold's true physical value are pushing the linked paper pricing mechanism higher, against the friction of forces trying to keep gold cheap (CBs?).
"

Lookie there, you answered your own question. ;-)


"Also, can someone direct me to any FOFOA posts that go into exactly how the paper market manages to overpower the physical?"

How about this? The paper market manages to overpower the physical market when the majority of market participants are more interested in paper promises settled in cash as opposed to having physical gold delivered to them. The mechanics are simply the clearing houses which accept the trades as people call in.

Does that help?

--Aaron

mr pinnion said...

@ NEVERFOX

Y wouldnt i be happy to see the gold price go up?
FOFOA is either right or wrong.

If he s right , apparently, the price will be going steadily upward at an increasing speed , then the wheels will come off this fiat dancing monkey-fest.At which stage the price will drop to approximatey; a lot lower.Then the system will be rejigged, enter Freegold and i m off to buy me a yacht. And i m happy :oD

If FOFOA is wrong then the price of gold goes steadily higher at an increasing speed as the socialist governments of the western world keep printing money to keep the parasites from rioting.This ends in gold a lot higher after massive/hyper inflation.
Again, i am happy :oD

FOFOA could be wrong in another way, and the governments of the western world could pay of all their debts in real terms by raising taxes,massive austerity,sacking millions of state employees,raise interest rates massively and....no ...sorry i cant go on AHHHH HA HA HA ha ahahahahah.Ho bloody ho!

And if they do manage to pull that off , then we will have a stable ,well run fiat money system, so i guess i win again.


So tell me again why i would nt be happy with the price of gold going up?

Regards
Ozzy

costata said...

I'm not a fan of Gonzalo Lira but this post has a relevant point or two.

http://www.zerohedge.com/news/guest-post-forget-gold%E2%80%94what-matters-copper

The silver bugs should take note of this as well.

Aaron said...

@Costata

FWIW, I stumbled across this Bloomberg video from two years ago and I think Steven Engle would support Lira's assertion given China's response to a similar situation back in 2009.

Silver often enjoys some of Dr. Copper's (stimulus) gains and if that holds true today another round of stimulus might provide certain metal heads a chance to reconsider their portfolio. What do you think?

--Aaron

costata said...

Hi Aaron,

FWIW I suspect that there will be another opportunity to rejig a PM portfolio in the not too distant future.

In the short term if the industrial silver users are expecting a downturn in their sales then it is difficult to see how the tail (retail silver demand) can wag the dog (industrial users).

I'm told that per capita silver "consumption" in the Western un-developing countries is around 10 times higher than the developing countries. That's a lot of leverage to any further decline in economic activity in the West. Can the East offset this through increased demand for silver? I doubt it.

Incidentally Eric Sprott's funds seem to be voting with their feet.

http://kiddynamitesworld.com/sprott-officially-joins-not-fcking-around-crew-selling-pslv-relentlessly/

Will there be further "stimulous" from the money printers? I think that's a given. It would not surprise me to see silver bottom in the mid to high twenties and then go for another run later this year alongside gold.

I would be keeping an eye on SLV in the next few weeks ;) The "spiders" will need to take any surplus silver off the market if they plan to put the squeeze on the industrial users down the track.

On a personal level we are considering using paper silver to by-pass the AUD's weakness with a view to rolling it for gold to hedge an exposure to AUD that matures next year. Using silver as a "call option on gold" to borrow a phrase from Stewart Thomson.

That said we certainly wouldn't risk being below our target level of physical gold if we had not reached it already. It would be straight into gold in that case.

Anyways that's my 0.02

Cheers

victorthecleaner said...

Neverfox,

Also, can someone direct me to any FOFOA posts that go into exactly how the paper market manages to overpower the physical?

I like the following explanation. Think of a small closed economy that is based on physical cash. Some of the cash circulates as people buy and sell things while some other cash is kept under the mattress and saved for the future.

Now they invent banks. People carry their saved cash to the bank. This cash forms the reserve of the bank. The bankers advertise and induce people to take out consumer loans. They reserve these loans only fractionally.

This way, the money supply increases (the correct definition of money supply in this situation is the total volume of bank credit), but their real economy has not changed. More money meets the same amount of goods and services. Prices increase, the value of money decreases. (This mechanism for getting price inflation is empirically studied).

Now replace cash by physical gold and bank credit by unallocated gold, and there you are.

In order to lower the value of gold compared to real goods, you simply create a form of 'credit gold', aka unallocated accounts, and lend this sort of gold on a fractional reserve basis.

This works only as long as there is trust in the bank, and that is precisely the weak point.

Victor

Aaron said...

Hi Victor-

I think your comment is spot on and I'd like to reinforce one aspect you mention which for me captures the essence of your post.

Unallocated money is potential credit.

Unallocated money is potential credit regardless of what form it takes be it gold, dollars, or oil.

In the end this is why gold soon will be fully allocated -- and why soon I'll be up at six AM inspecting the hives and supporting the coffee trade.

--Aaron

JR said...

A couple quotes that touch on 1) the significance of a rising price of paper gold and 2) how the failure of paper gold and its collapse --> 0 fits in.

==================================

Rising paper price now means less physical gold is needed to meet the same demand. From From the Treasure Chest:

"...The physical gold must continue flowing into the physical boundaries of trade surplus zones while the price of gold rises. Weight-based flow and price level offset each other somewhat. But ultimately this will break the paper gold market because we’re talking about physical flows from the debtor zones into the saver zones."?

=================================

The paper gold mechanism was originally designed to guarantee cheap physical specifically for the purpose of 'flow.' From It's the Flow, Stupid

Date: Tue Oct 07 1997 22:37
ANOTHER (THOUGHTS!) ID#60253:

You see, when paper trading volume dries up it's a bearish sign, but when real physical gold volume drops it's bullish! That's because gold is being cornered on a scale never seen in history. LBMA is doing its best to show real volume exists!

Date: Sun Oct 05 1997 21:29
ANOTHER ( THOUGHTS! ) ID#60253:

The Western governments needed to keep the price of gold down so it could flow where they needed it to flow. The key to free up gold was simple. The Western public will not hold an asset that's going nowhere, at least in currency terms. The problem for the CBs was that the third world has kept the gold market "bought up" by working thru South Africa! To avoid a spiking oil price the CBs first freed up the public's gold thru the issuance of various types of "paper future gold". As that selling dried up they did the only thing they could, become primary suppliers!...

The price of gold today is unstable. Anyone with eyes can see that. Worse, it's rising. Which means the flow of physical gold in the quantities needed (at today's gold price) to lubricate global trade is drying up.

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."


cont.

JR said...

cont.

So envision paper gold rising along with demand until people realize what the real situation is, and then paper gold collapses as demand looks elsewhere. So yeah, we should expect and celebrate a rising paper gold price, because its the path/prelude to the eventual collapse in the paper price. From The Shoeshine Boy:

"So, to wrap this beleaguered post up, let's just say that we have the distinct makings of a parity break between paper and physical gold in the works. The supply of paper gold must rise while the supply of physical is withdrawing (deregistering). The flow must also rise, at least in nominal terms, so the price will skyrocket to take up the slack. And as expanding paper competes with a rising price for the "slack taking-up" role, who do you think will win?

Could they each have their way? Could the price rise to take up the extra demand while supply contracts at the same time as easy paper dilution wins itself a lower price? Confused yet?

Well, this situation leaves us with an uncomfortable question. If the only price of gold we know today is the price of paper gold, what is going to happen to "the price of gold?" Will it skyrocket? Or will it plummet?...

And with the supply of paper gold rising to meet demand while physical is being withdrawn, the only conclusion we can come to is that the gold buyers **IN SIZE** will have to stop buying from the price discovery marketplace because, if they do their due diligence, they'll clearly see that subsequent physical delivery has become impossible at the present price.

So, in conclusion, the price of gold will plummet!

That's right. At some point in the future, after the price of gold rockets upward, it will fall like a box of rocks! And right about that time you'll see more of Robert Prechter on CNBC than you ever thought was possible.

But here's the challenge. When the price of gold falls to $200 per ounce, try and get some physical. I'm sure that Kitco will sell you some from their pooled account. And GLD will be standing ready to sell you a share at $20. But just try to take delivery. I think you'll find it will be impossible at that point.

And that's why you've got to take delivery NOW, at the current "high" price of $1,300. Don't wait for the dip. Oh, yeah, the big dip is definitely coming. A **BIG** "correction." But will there be any physical available? Perhaps at $1,200 if you're really lucky. At $200? No way.

When I look into MY crystal ball, here is how I see a future gold price chart developing (roughly, of course)..."

Pete said...

I just had a mini-epiphany:

All of the world's credit-based economies are simply ponzi schemes.

How do you fix a ponzi scheme? (You can't. It will always collapse).

All this talk of confidence: 'consumer confidence', 'confidence in the dollar', 'confidence in bonds'... it's exactly the same thing that keeps a ponzi going: ignorance.

They want to kick the can down the road, keep the ponzi going. They want people to stay ignorant, or 'confident' as they call it.

People who choose to be wilfully ignorant are doing their part for the ponzi, but will suffer the most when it finally fails and there is no more ignorance to be had.

Blondie said...

Victor's succinct response to Neverfox demonstrates exactly why a fully allocated price discovery market would discover a distinctly different price.

costata said...

VTC,

I thought your explanation to Neverfox of the fractionalized component of the paper gold market was very good.

costata said...

It looks like the South Koreans know how to clean house.

http://news.ph.msn.com/business/article.aspx?cp-documentid=5304845

So far this year 16 savings banks have been suspended for inadequate liquidity after financing of soured real-estate projects swelled bad loans.

Busan, the country's largest savings bank, was suspended earlier this year, sparking public anger after claims that wealthy clients were tipped off in advance about its shutdown so they could withdraw their cash.

Prosecutors later charged Busan's owner, family members and executives with embezzlement and fraud.


h/t Max Keiser

mortymer said...

http://www.bis.org/publ/work352.pdf

The end of the doc:

"...As with government debt, we have known for some time that when the private sector becomes highly indebted, the real economy can suffer. But, what should we do about it? Current efforts focus on raising the cost of credit and making funding less readily available to would-be borrowers. Maybe we should go further, reducing both direct government subsidies and the preferential treatment debt receives. In the end, the only way out is to increase saving."

Winters said...

@NeverFox
Victors reply is excellent as mentioned but it also contains assumed knowledge of fractional reserve.
For back to basics, I found this 10minute video gave me an 'ah ha' moment (or more accurately 'holy shit!'):
Khan Academy - Fractional Reserve Banking

@FOFOA
Not worked since 2006! You are a barfly at the All Inn :) I understand though. As I trudge to work on some days I wonder...why do I do this if RPG is coming? Ultimately the answer is I'm pretty sure FOFOA is right...but I've been wrong before and similar for Ironshield, my Significant Other isn't on board to the same degree as me.

[General]
When people mention they have their target number of ounces, I wonder how they arrive at the number? Are they similar to FOFOA and have accumulated enough wealth to see them out for when RPG comes in at 50k/oz?
I have maybe a target ratio (gold to cash say) but not an absolute target.
As I continue to work and earn more cash than I need to pay the bills, those savings will be periodically exchanged for element 79.
Do other people attain their target holding and then spend their excess on lifestyle? I am of simple tastes and that would grate with my natural tightwad tendancies :)

Winters said...

BTW FOFOA - I should mention I count your research and dissemination of your findings in shrimp accessible form as work :)
Highly valued too!

Winters said...

that was an interesting article Costata. I thought the bailout bit at the end was interesting:

Busan, the country's largest savings bank, was suspended earlier this year
...
Authorities...promised to honour a guarantee of repayment of up to 50 million won for each account-holder. Authorities opened a website where deposit holders can apply for such payments over the next two months.
But customers rushed to retrieve their deposits Thursday, the first day they became available. Regulators said withdrawals decreased Friday as investor jitters calmed.


fyi: 50million won ~= AUD 44k ~= USD 43k

So they froze depositors accounts and then when they unfroze, claimed that there was no bank run and it was just some jitters. Of course they would say that to avoid a bank run!

JR said...

DP and Michael H.,

"The Free in Freegold

Okay, here it is. What you've been waiting for patiently, I presume. This is what gold will be freed from: The fractional reserve banking practice, which is a carryover from the gold standard.

This is the free in Freegold."


Freegold Foundations

=================================

So as Victor' excellent post above set out in succinct and clear style, we have a fractional paper system in the gold market built largely on unallocated gold. And we know from the above quote from Freegold Foundations that Freegold is about the end of this system.

Here is some good stuff on how this transition plays out in the context of US currency collapse/hyperinflation and electronic credits and physical cash from The 21st Century Bank Run. In this post FOFOA described what the "21st Century Bank Run" - a run on physical gold - is going to look like, and how that will impact the US as we transition from plastic to paper - particularly in the context of the Fed created excess reserves.

And to be clear guys, we will see wheelbarrow physical cash - there will be no electronic hyperinflation as you have speculated on:

=================================

"...When the bank run finally begins people and entities will want real physical gold, not paper longs, or liabilities from credible sources.

It all comes down to gold, the actual physical stuff.
That's what the people wanted during the bank runs of the 1930's. It is what brought down the London Gold Pool. It is what forced the closing of the Nixon gold window. And it will be what people want this time too. That's the real bank run... to actual physical gold in your own possession.

Think back to Exter's pyramid, and how demand collapses downward during a crisis. Think about "commercial bank credit money" as being higher on the pyramid than FRNs, actual physical cash. This is true. As we collapse downward to gold the banks themselves will shun each other's credit receipts in favor of central bank liabilities.

This is where all those excess reserves held at the Fed will finally come into play...

...Not through economic lending, but through interbank clearing preference, as the banks first try to jettison each other's "digits" as fast as possible. Once the bank run on physical gold begins, these banks are going to be very nervous about holding each other's liabilities, even over night. They will only "sleep well" holding Central Bank liabilities.

This is how the transition from plastic to wheelbarrow begins. We may not see a bank run on Fed cash by the people before we see it within the banks themselves, as interbank faith vaporizes during the run on gold.


By this time, the bond will be gone. As the people are running on the Bullion Banks the Fed is going to be very busy monetizing the entirety of US federal spending, from Social Security to Medicare, national defense and even Nancy Pelosi's entourage's per diem. It will all have to be monetized. Meanwhile the Fed will have to keep its remaining banks happy with Fed liabilities to clear the private liabilities, or else they will cease to circulate. Printing dollars and buying up private equity so that each bank only has to hold Fed liabilities.

And as the US Government starts spending its fresh new Fed credit, the Fed will have to supply the banks receiving those trillions in USG payment transfers fresh cash to back the massive inflow of new Fed liabilities...

Our physical world didn't change just because we invented the 1971 purely symbolic fiat dollar or the fictional reserve banking system."


cont.

JR said...

cont.

From Just Another Hyperinflation Post - Part 1 on the important distinction between credit money and base money (cash or Fed promises to print cash):

"...First of all I would like to clear up probably the most common misconception about hyperinflation. What most people believe is that massive printing of base money (new cash) leads to hyperinflation. No, it's the other way around. Hyperinflation leads to the massive printing of base money (new cash).

Hyperinflation, in most people minds, conjures images of trillion dollar Zimbabwe notes. But this image is simply the government's reflexive response to the onset of hyperinflation, which is actually the loss of confidence in the currency. First comes the loss of confidence (hyperinflation), then, and only then, comes the massive printing to keep the government and its obligations afloat...

...As FOA said, "As debt defaults, fiat is destroyed." Or another way to say is, "As debt defaults, fiat savings are destroyed."

But what is actually happening is the assets are being papered over with fresh base money. FOA: "hyperinflation is the process of saving debt at all costs, even buying it outright for cash." Or said another way, "hyperinflation is the process of saving debt-backed assets (MBS's etc..) at all costs, even buying them outright for cash."...

You see credit money is tied to the functioning of the economy and base money is not. As the debtors balloon deflates, so does the functioning economy, and so does the real world of goods that backs the money supply. Base money does not contract along with the economy like credit money does. And base money is the fuel in all hyperinflations while credit money vanishes!...

And now that you have a little bit of understanding about the difference between economically-tied credit money and base money (cash or its equivalent), as well as the power of fear and velocity, I want you to notice that the hyperinflations of the past have all played out with base money, not credit money, at the helm.

This is where all those "excess reserves held at the Fed" become very dangerous. You see, those are monetary base reserves, not credit money. They may not be physical cash yet, but they are contractual obligations of the Fed to print actual cash. And if velocity picks up in a panic, that's exactly what the Fed will have to do in order to keep the banking system from collapsing. Deflationists think this is a choice the Fed will have to make, but it is not.

It is already happening to a smaller degree with the Friday bank failures. Ever since the FDIC ran out of "reserves," every failed bank has been propped up with more fresh base money. "Saving the savers' deposits!" Converting them from credit money into base money in whatever amount exceeds the failed bank's marked-to-market assets.

So there is already enough fuel in the system to feed the fire when it starts.

And when it starts, that is when prices start to rise... price hyperinflation. And as prices rise, the government will need more money to pay for the same amount of "governing" in each successive cycle (monthly). This is when the monetary hyperinflation takes over and gives the price hyperinflation its HYPER boost.."


Cheers, J.R.

JR said...

From Money Talk Continued:

"14) Base money is either physical cash or a liability (IOU) that traces directly back to the Fed, which includes reserves held at the Fed. In other words, it is physical cash, or the promise of physical cash from he who can print physical cash. The Fed is willing to issue these promises willy nilly but hopes it doesn't actually end up having to do the printing...

18) So the next time the Fed has to create a trillion new dollars of liquidity, it is likely going to stick in the system as base money that cannot be removed. Ultimately the Fed will be contractually obligated to print actual bills and supply them to the banks and CB's that hold the contract for them."


Cheers, J.R.

Patrick said...

Hi FOFOA my friend -
One of my best remembered "Randy" comments from the old USAGold Forum days was (paraphrased) "They will defend the current monetary system - right down to the last Tree" ...and it appears that so far ...they will!
Similar to yourself,I haven't added to my Gold stash for 12odd years now and - whilst I'm pleased with the "price performance" over that period, it certainly wasn't the raison d-etre for acquisition ...and/or on-going retention.

Disconnecting the "Price" from the Ounce" is a difficult mental process FOFOA ...and despite being a P-Gold advocate for well beyond the past decade, I STILL struggle with it.
WHEN the current System is finally put to the sword, Gold will be re-evaluated ...however until then, "price" remains arbitrary I feel.
WHY acquire and hold Gold?
Gold can be likened to those Cords of Firewood we squirrel away for (Kondratieff) Winter ...where it's "true worth" will only be appreciated - deployed when necessary.

Motley Fool said...

@Joy : Welcome.

@And Y : Agreed.

@Jeff Herron : Found this recently which looks decently priced : CNI

@VTC : Nice explanation.

And lastly for myself : comments....

Jeff Herron said...

@Motley Fool: Thanks for the link! I'll look into it shortly.

Motley Fool said...

Kruger 1 Oz at 1.7% above spot atm for example.

Gary said...

The gold dilemmas.

I am awaiting delivery of 30 ounces. I have decided to stick it in a vault.

I have a 22 year final salary pension with a bank (Lloyds), whom I left 3 years ago. Do I move the pension out, as a lump sum, and place it in a self-select pension all in bullion via GoldMoney.

Goldmoney is a Sprott company, he seems genuine, it all seems above board. I don't know.

Not after advice, just sharing my dilemmas!

Patrick said...

…On the subject of Firewood and FWIW …an analogy -
Last week I decided to rid myself of a lot of accumulated junk about the place and came upon a “tool” for converting redundant paper into small bricks for using in the Fireplace in the living room.
We live on a suburban block and several years ago without access to regular free fire-wood, I acquired this gadget as the cost of providing heating via purchasing wood was becoming expensive. I thought this MAY be a cheaper alternative.
Diligently I set about shredding all the redundant newspapers etc. watering it all down to make a pulp, compressing it via the aforementioned tool, then drying the bricks out …and amassing 15 odd “Logs for the Fire” in the process.
This task occupied roughly a full day of my time.
At the first onset of Winter I deployed these Bricks …with enthusiasm only to find (a) they were gone in 2 days …and (b) comparatively they didn’t provide much heat anyway!
Lots of effort for very little gain.
Needless to say we reverted to buying the “real-thing” …as in the long run it was the cheaper and far more effective item for the application.

We NOW find ourselves at the Evolution OR Revolution phase of the Fiat experiment …and the chilly blasts of winter are now cutting through our perceptions deep down to our undergarments. Consequently it bodes us all well to re-consider the contents of our own particular monetary wood-pile yes?
When considering “Evolution” we are all quite familiar with the many-millennial APE >>> MAN transition …and most would expect a monetary evolution to follow a similar “beaten path” however, given the current circumstances, might it not be more appropriate to look to the several weeks only Caterpillar > Chrysalis > Butterfly form of evolution / transition?
…and without prior knowledge of the process, would it not be seen as fantastic! …even “unbelievable” to witness the emergence of a beautiful Butterfly from its erstwhile tawdry golden cocoon?
…and so it may well be with Gold per-se as we evolve / transition to a new, improved monetary system.

Aaron said...

Women know your limits

Wendy said...

Nice one Aaron.... I will certainly keep that in mind the next time I'm at a cigar smoking dinner party for six ;)

Zip before entering :D

Aaron said...

The moment I clicked Publish I realized I should have called it, "Wendy, know your limits".

But my oh my Wendy you became completely brain washed in scene two! I think you could have pushed your challenge about the float a bit further.

A gold standard?

Belachelijk

M said...

The summer(weak seasonally) spike in gold is just as odd as the fall(strong seasonally) crash in gold. Something is up.....

Down hard again as Asia opens. Not that I give a damn but why should gold fall like this ? Flat lining and weakness is one thing but crashing day after day ?

costata said...

A snippet for the China watchers from Doug Noland.

http://prudentbear.com/index.php/creditbubblebulletinview?art_id=10576

September 21 – Bloomberg (Theophilos Argitis and Andrew Mayeda): “Indian companies may turn to Hong Kong’s yuan bond market to raise funds at 40% the cost of top-rated companies at home after the South Asian nation eased borrowing rules.

The government agreed for the first time last week to allow Indian companies raise as much as $1 billion of debt in the Chinese currency, bolstering the yuan’s challenge to the dollar as a funding currency.”

Edwardo said...

If they raise the margins on PMs enough there will be no futures market. Said in Edward G. Robinson's voice, "Where's your paper market now, huh."

costata said...

On Other Scary Corrections

Hi Edwardo,

A blast from the past - Silver Open Forum 2:

Now I have a fresh opportunity to test my theories about the silver market, thanks to Martin Armstrong and this paper which I read a couple of days ago........

Part 2/2 from a comment to radix46 here.

Cheers

Xavi said...

Sh*t!

I have my last 8kg of silver that I want to switch for gold. I lost my opportunity when silver was at 50$. For the comments I can see I might have another chance but it can be the last one. How scary! Will it pay off trying to time it? I'm only considering this because I already have most of my net worth in gold! These are exciting times.

Now I remember the wise words of this blog. Silver will be only a trade and you have to be in the right place before the inevitable happens!

Kind regards,

Edwardo said...

From a TA perspective this is a C wave in silver and it points to a low in the...you guessed it, the $25-$26 dollar range.

Jeff said...

Silver moved 17% overnight; a wild ride for silverbugs. Gold moved as much in 2 hours as it has does in 2months.

sean said...

Enjoying the comments and stories on this thread.
A quick comment for Gary: I have nothing but praise for Goldmoney. They have always answered my concerns rapidly and in detail, and I would encourage you to email them if you have any questions. Once, James Turk even stepped in to personally resolve a problem with funds transfer (which turned out to be my bank's error). I think a lot comes down to personal preference and whether you prefer to keep your "precious" at arms reach.

Motley Fool said...

I wonder if it's 15 minutes of fame time. I doubt it, but I'll just keep watching.

sean said...

@M,
regarding the gold price crash, I think it is pretty well explained by the various theories around suggesting a combination of gold margin increases, liquidating gold for profit-taking and raising $ for increased margins as stock markets crash, and quite likely some deliberate pushing by CBs... on this last point it will be interesting to see the COT report to see if open interest decreased as much as would be expected with pure liquidation. See trader Dan Norcini's blog for some excellent,insightful and reassuring comments, particularly the observation that the 30% sell-off in gold in 2008 was no less dramatic, but now barely significant on a long-term chart.

Gary said...

Thanks Sean.

I have sent tham a a few queries, such as: where do they get all of their gold from? I see that 2 gold miners are major shareholders, so I suspect that may be the answer.

PA said...

Gold and silver went parabolic. It became a mania. Parabolic advances are always followed by sharp selloffs. Gold can easily drop 50% and silver can go to $10 or less. If you people can't see that you need to realize that you should use bounces to liughten up. And BTW the whole Another thesis was that the US dollar would be replaced as reserve currency - ,clearly that isn't going to happen anytime soon

JR said...

From Red Alert: Gold Backwardation!!!:

"Dollars Bidding for Gold? Or Gold Bidding for Dollars?

...Now, if I am a liquidity creator for the dying $IMFS - a bullion bank - how do I create dollar liquidity? I take a piece of unencumbered physical gold (owned or borrowed) and I fractionalize it. I sell it off to the extent that the probability of a delivery demand is lower than my physical reserves. And in the process, I am creating DEMAND FOR DOLLARS because my "golden tickets" are bidding on dollars. Remember what ANOTHER said...

Date: Fri Jan 23 1998 19:01
ANOTHER (THOUGHTS!) ID#60253:

All modern digital currencies do not go into an investment, they move THRU it... There is an alternative. Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies".

This is the key to EVERYTHING!!! It is not "gold liquidity" that the bullion banks create... it is DOLLAR LIQUIDITY. Dollars bidding on MSFT stock set the value of that stock. If dollars are frantically bidding on MSFT (high velocity), the stock skyrockets. If dollars stop bidding for MSFT all at once (low velocity), the price falls to zero. This is true for everything in the world except gold.

Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero."


=================================

From a FOFOA comment to "Gold: The Ultimate Wealth Consolidator":

"..New liquidity can only be created through gold as long as real physical gold is willing to bid for dollars somewhere in the world. This is why the dollar must depreciate against gold, to coax fresh gold "stock" into bidding for dollars! (ANOTHER taught us that gold prices dollars, and then dollars price everything else.)

In the past, the CBs supported this process with guarantees of their own gold (to bid for dollars). But today they are less willing to do so. Only unencumbered physical gold can be fractionalized, and only as long as people are willing to buy golden tickets in lieu of the real thing.

If you lease me an ounce of physical gold, I can safely sell 10 golden tickets knowing that only 10% will come for delivery. And most of the time, I can get my hands on more ounces from the private sector so I never have to come ask you for that physical ounce. (You leased it to me, but you held it for safe keeping) At some point you will stop leasing to me, I won't be able to get more ounces from the private sector, and more than 10% of my golden tickets will demand delivery.

At that point I'll come back to you for the physical and you'll just print up some euros to pay off my golden tickets rather than giving out physical ounces. Why? Because golden tickets NEVER WERE worth real ounces. It was all just an illusion of liquidity. Real liquidity is and always has been "that which you cannot print", "that which is tradable outside your zone", "that which is hard, not easy, to get"."


Cheers, J.R.

JR said...

one more - a comment to Relativity: What is Physical Gold REALLY Worth?

"It is the total amount of currency riding in gold (on average - at all times) on the price discovery markets divided by the "window dressing" gold stocks that are actually available for delivery demands against that currency, times the published "trading price of gold" that creates the true value of physical gold in currency terms...

The more currency that piles into paper gold and unallocated gold deposits the more valuable your coins become!"


A visual presentation of this concept from Relativity: What is Physical Gold REALLY Worth?

Cheers, J.R.

PA said...

with all due respect JR, the price fluctuates and right now there is a liquidity crisis. Until the dollar is replaced with something better, all cash shortages like we have now will cause precious metals to drop in value. If I said silver will go to $2 and Gold to $500, would you still be so convinced in the long-term?

burningfiat said...

PA, if paper gold goes to 500$, Freegold must virtually already be here. Let's see how much physical you'll be able to get at $500...

If I was a "liquidity creator for the dying $IMFS" :-) I think I would be shitting my pants if price was $500. I would need to be creating a lot more "golden tickets" to create the same amount of dollar liquidity, hence the dying $IMFS. Also, I would be at much greater risk of not being able to fulfill the physical demand.

JR, thanks for your ability to dig the right stuff (according to context) out of the FOFOA archives.

/Burning

PA said...

That doesn't make any sense - at gold $500 as the bullion price clearly I could fill my basement again. too many people have my a one way bet on pm's; look I was buying in 2000 when gold was below 300 and everyone said I was nuts. I have been selling my metals and going short since the Bin Laden bs story came out. and everyone says I am nuts again. Its OVER. Or you people that are over-exposed better at least take off your bias and consider this as a possibility

burningfiat said...

PA said:
That doesn't make any sense - at gold $500 as the bullion price clearly I could fill my basement again.

Yeah, If you could get any physical gold at that paper price point. Yes you could.

Better wait till price is $500 then, before you load up again.
I respect you for the big, cold balls of steel right there :-)

/Burning

PA said...

I have two bullion dealer friends. They informed me that last Wed - Fri, and today, small gold buyers are lining up. Does that seem like a bottom to you? These people are going to get harmed. I will wait to cover my shorts until the lineups are for sellers and they last for at least a week. Gold and silver will bounce on the bottom for probably months after that, and gold forums will go dead quiet. IMHO

byiamBYoung said...

@PA,

So, central banks, sovereign nations, the rich and powerful around the world, massive numbers of investors in Asia and the middle east are hoarding gold because...they are foolish?

PA said...

Don't put words in my mouth, I never said anything like that. I said there is a liquidity crisis, and too many small fry became convinced about the metals and commodities too late in the cycle. This always happens and that is how tops are formed. Now silver buyers since almost a year ago are trapped! Gold soon to follow. Fat cats will always survive BTW the CB's and nations were sellers in 2000, 2001 - remember that? So the fact they were recent buyers was the last thing that convinced me it was OVER for the pm's. If you want to stay stubborn, that's your call. How any experienced investor can look at a silver or gold chart and remain bullish is beyond me. Wake up

Biju said...

This weeks weekly close in Gold is very important. If it closes below $1617, it is dangerous based on charts which has held up good for the past 2 years.

http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&b=5&g=0&id=p28385840989

PA said...

right on. notice the MACD has already confirmed the sell signal from the H&S top. The break of 1800 was the first sell pivot. Its OVER

Aquilus said...

PA, with all due respect, have you read FOFOA's Reference Point Revolution article?

The dollar you are using as a yardstick for technical analysis varies in "size" with alarming volatility and speed every day.

Just saying, since you're on the man's blog, please read and consider that before your next answer.

Joel said...

Hey PA,

A few questions for you:

How is all this debt going to be paid off in all these different countries? How will the balance sheets of these countries look in six to twelve months after a worldwide recession? None of the debtor countries can ever produce their way out of this mountain of debt, so someone is going to take a haircut, right? Who will that be, in your opinion?

The opinion of many here is that it will be the taxpayers, through monetization of that debt. ECB, EFSF,Federal Reserve, IMF, pick your poison, there is a veritable plethora of bailout organizations looking to "solve" the problem. But they are just doubling down on the inevitable with taxpayer money. What happens to gold prices then, as these vast new quantities and/or velocity of fiat increases, inflation kicks in, and people see the the purchasing power of their fiat denominated wealth disappear?

It is not gold, my friend that is "over". It is our fiat system--just a matter of time. Good luck with your gold trading timing, but myself, I am much more at peace sticking with a store of wealth that cannot be duplicated on a printing machine.

PA said...

Nope, I haven't and I will. Thanks for the link. But perfect world analysis may not sway me, and I was pretty sure that contrary respectful opinions were welcome, but if only stubborn gold bugs are welcome I will leave. What does change my view is price action - only real transactions will do that. The market given a clear wake up call. Shoot the messenger. If I save one person from losing $ they cant afford to lose, it's worth it

Gary said...

@PA

You sound like a savvy trader, which is fine.
I just bought my gold (which is currently underwater) because I can see what is happening in the world.
The dollar debt-driven system is falling apart, it's a house of cards, and when it collapses there will only be one asset worth holding: gold.

I don't care where the price goes, as the paper price is essentially meaningless. It's when the sh&t finally hits the fan that gold will demonstrate its true value.

Apart from your trading know-how, what fundamentally has changed in the world these past few days? Nothing.

And finally, just look at any charts of gold versus real assets, such as oil, copper, silver (any of them)..gold is increasing still in real value for real things.

There is more to this than trading momo (although a simple daily chart shows me that gold has merely dropped back into its rising channel), this is about money and storing one's wealth.

PA said...

Gray, if you can hold on, and if gold goes below $1000 and you dont lose sleep over it, good for you - I'm writing for those not so sanguine.

Joel I don't have time to educate you on the role of money. Suffice to say your argument is actually to the benefit of dollars, because most of the world's debt is denominated in US dollars and these must be repaid. Hence the current dollar shortage, I say again a dollar CASH shortage? People should ask themselves how much real cash do they have in their own hands, not in the banks. Look, all the reasons you have for owning gold, I had from Aug 2000 until a few weeks ago. But the short-term will now trump the long term. If you are prepared to wait 18 months or longer for Freegold to appear, fine.

Gotta go

PA said...

repost becuz of typos: key board problems

Gary, if you can hold on, and if gold goes below $1000 and you dont lose sleep over it, good for you - I'm writing for those not so sanguine.

Joel I don't have time to educate you on the role of money. Suffice to say your argument is actually to the benefit of dollars, because most of the world's debt is denominated in US dollars and these must be repaid. Hence the current dollar shortage, I say again a dollar CASH shortage! People should ask themselves how much real cash do they have in their own hands, not in the banks. Look, all the reasons you have for owning gold, I had from Aug 2000 until a few weeks ago. But the short-term will now trump the long term. If you are prepared to wait 18 months or longer for Freegold to appear, fine.

Gotta go

Max De Niro said...

PA,

18 months? Are you kidding? That's a walk in the park!

You mention Freegold, so I assume you are familiar with what kind of price projections that entails.

You are comparing selling long term fully paid up gold holdings now for a bit of dollar profit with waiting for maybe 18 months and then benefiting from Freegold-level revaluation, during the largest ever monetary crisis the world has ever seen, all because gold corrected down to it's primary channel as it has done many times before?

As I said before:
18 months? Are you kidding? That's a walk in the park!

byiamBYoung said...

@PA

Don't leave now, contrarian opinions are excellent tools for illuminating the truth. Let me just point out what I see as a flaw in your thought process.

Your technical prowess may very well be formidable (almost certainly superior to mine), but better applied to other commodities. The fact you seem to overlook about the commodity gold, is that most of the gold doesn't flow. It will stay tucked away, regardless of market fluctuations. Paper traders are wringing their hands over the gold price right now, not the holders of physical gold.

At any price, gold is a buy. It was a preferred store of value thousands of years ago, and is today. If I give you dollars for some of that gold in your basement, in a few year's time, I'll still have that value in my possession, and possibly much greater value. I can't say that about dollars, or other commodities. Gold stands alone.

Beyond all that, though, is my original point, which I'll try to offer again without the sarcasm this time. The most powerful forces on our planet have chosen gold, and did so long,long ago. I can't fathom an end game where all of these powerful forces get reamed. Face it, they will win. So gold will win. And so I buy gold.

Cheers,
Byoung

PA said...

they said the same thing in 1980. If you can ride out losing positions and go thru the whole negative psychology cycle with a smile on your face, good for you. I can't- when the market tells me to act, I act. Who knows how long it will be? My guess is 12 - 18 months at least. Note gold is also breaking the 2008 -2011 uptrend line. We shall see just how many people can hold on - dont forget most of the buying was above $1550. And there is no dollar replacement looming, that was the whole basis for Another's writings 11 years ago.

byiamBYoung said...

@PA

It's clear the difference here is that you are looking at a much shorter horizon, and for a different reason. Good luck in your trades.

Cheers,
BYoung

Dante_Eu said...

@PA:

$500/ounce I will be buying hand over fist! Physical of course.

Lady Fortuna here I come... :-)

Mike said...

"Brokers and traders will show you, "turn your gold into wealth", "put it to productive use, Trade It"! "Sell your gold and buy it again, many times". "Do this and find the value lost from your youth"!

But I say, spend your time in the company of truly wealthy ones, see how they make gold lie very still! Know this now, the world will again, in your time, feel value in gold as never before. And that value will be as the "productive use of holding wealth thru the fire of change". "Yes, you can also walk in the footsteps of giants".

Mike said...

FOA: In the event of a large enough default, the entire world of paper gold trading will be forced into full cash settlement. The question will be presented: "if there isn't enough gold around to settle these commitments, then there isn't any point in letting the price rise further to effect still no metal settlement",,,,,,, "This was a contract trading market anyway, not a gold market"! Further, the international banking industry, in accords with their governments, will enforce a kind of "position limit" on the amount of gold liability they or their customers can carry. Both long and short. It will have nothing to do with the exchanges, rather it will be a bookkeeping problem being addressed by the banks. Still, it will impact the illusion price we use for gold,,,, downward. The net effect of this will be just the opposite of what paper gold players expect as positions are "force liquidated" prior to even a "cash settlement". This sudden dumping of major contract commitments onto the markets will drive the cash settlement price of gold,,,,, ?.

PA said...

Yes he wrote that at the bottom of a 20 year bear market, and when the highest price paid was only $800

PA said...

And do you think people get wealthy by riding out losing positions? Read "Reminiscences of a Stock Market Operator"> I am not saying"truly wealthy" should protect themselves, I'm talking about the truly vulnerable. And I note, not one person here shares my opinion. When everyone is on one side of the boat it is time to shift.

Jeff said...

Many people share your opinion, probably more than share FOFOA's, or ours. But this crowd tends to take the long view. I can't keep rushing in and out of the All Inn; I might lose my seat and be left out in the rain.

PA said...

BTW in case you all didn't know it, Asia is a bubble, esp. China. Huge bubble built on credit that will collapse. That means lots of new sellers of anything that is liquid.

PA said...

Remember, Another wrote we will know when gold is entering the stage we all dream about, when Gold, Oil and the Dollar all rise at the same time. That is not NOW

Gary said...

@PA

You wrote:
'Note gold is also breaking the 2008 -2011 uptrend line.'

Sorry, but that is wrong.

I personally prefer linear scale charts, you may be using a log chart (mistake in my opinion).

But on either format, gold bounced away from the trend line very forcibly.

By all means have your opinions, but best not to state untruths, they will be spotted quickly.

Gary said...

@PA

Really, you think when the China bubble bursts (like the US bubble) all of those Chinese savers will dump their physical gold? You actually think that will happen, rather than a mad scramble for the last few ounces of gold available? You actaully believe that will happen? If so, man, you are wasting your time posting here.

They buy their gold (as we do) for precisely when that bubble bursts.

You are confusing 'paper traders' like you with holders of a wealth reserve.

Gary said...

And finally from me, that is a very bullish-looking hammer candle that gold painted today.

Buyers were out in force.

PA said...

You wrote:
''Sorry, but that is wrong. I personally prefer linear scale charts, you may be using a log chart (mistake in my opinion).

But on either format, gold bounced away from the trend line very forcibly.

By all means have your opinions, but best not to state untruths, they will be spotted quickly."

Look Buddy, I stand by what I wrote and I will not tolerate being called a liar. The trendline was breached pure and simple. If you want to stick your head in the sand, that's your choice. BTW any fool knows an oversold market will have bounces.

In a few weeks you will wish you listened. My job is done. Good luck to all, I hope you dont suffer too much while you are waiting for Godot.

And Y said...

@PA

I hope you stick around. You seem like a good sport.

Edwardo said...

Amen, Gary. Based on that crapulous bit of bilge about gold breaking the '08/'11 trend line, PA stands for (piss) poor analysis.

victorthecleaner said...

PA,

they said the same thing in 1980

I don't want to argue about the charts. Others can do that much better than me. But I'd like to argue about the fundamentals.

What happened in 1980-1982? Paul Volcker hiked the short term interest rates to 15% annually and higher. Invest a couple of minutes and try to imagine what would happen if the Fed, the ECB, the BoE and the BoJ would do the same today.

Sure, Bernanke is a professional. He knows that when he inflates the monetary base too quickly, he gets an unstable system plus commodity price inflation and nothing else. So it makes a lot of sense that he keeps scaring the speculators for a while and tries to get the price level down before he continues to monetize additional debt.

He might even do this a few times. Each time, those that use leverage and play inflation as in the 1970s, will get hurt and lose part of their capital. We might see a few of these waves of deflation scare, then monetization of additional debt, then deflation scare, and so on.

If you can time these waves and turn this into a profit, sure, why not. Just make sure that you convert your profits into something tangible before the final downward leg of the market - whenever that might be.

Victor

Joel said...

PA,

Yeah, so go ahead and educate me on the role of money. Educate me as to how the fact the dollar is the reserve currency is going to allow us to pay off all of our debt, heal a terminally ill balance sheet, and keep people from fleeing the currency as a store of value, as we print like drunken sailors to fund our own debt (when everyone else has bailed on us). Please, enlighten me.

Biju said...

I am not a fan of charts, but keep an eye on them to read the sentiment of the market and move against it.

My last purchase was at around $1780, and I think this week is a great time to buy.

Both the daily and week chart has not been penetrated.
(1) Daily chart : only a close below $1574 is dangerous

http://stockcharts.com/h-sc/ui?s=$GOLD&p=D&yr=3&mn=0&dy=0&id=p16910057976

(2) Weekly chart : only a weekly close below $1619 is dangerous

http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&b=5&g=0&id=p28385840989


Let's see how this unfolds.

Greenie said...

london gold exchange closes permanently for business.

Ash said...

burningfiat,

"PA, if paper gold goes to 500$, Freegold must virtually already be here."

For once, I agree with Joel (who probably hates the fact that I'm still around ;-)

"It is not gold, my friend that is "over". It is our fiat system--just a matter of time.It is not gold, my friend that is "over". It is our fiat system--just a matter of time."

And VTC:

"Just make sure that you convert your profits into something tangible before the final downward leg of the market - whenever that might be."

Still, we should at least continue to make the distinction between fiat currencies being "over" and Freegold. I understand that one naturally flows from the other for most here, but, nevertheless, the distinction still exists.

JR said...

Fiat currencies will not end, they will be with us - they are ideal for exchange.

What is happening is the end of "the fiat currency system" based on holding, as a store of value, the derivative debt instruments of fiat currencies. And the concurrenct emergence of Freegold. The fiat currency system as we know of it today, aka the $IMFS, is ending. But fiat currencies are here to stay.

"FOFOA's dilemma: When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma."

=================================

Gold is Money - Part 3

"On a short timeline [length of time is the key variable: "t"] fiat currencies will perform our necessary monetary functions, medium of exchange and unit of account. But at some point on the x-axis, 'length of time', we will switch to a different medium, gold.

On a long timeline, gold will perform our necessary monetary functions perfectly, store of value and long term unit of account. By the way, there is no upper limit on the x-axis of 'length of time' when it comes to gold. If plotted out it runs to infinity!"

PA said...

Edwardo said...

Amen, Gary. Based on that crapulous bit of bilge about gold breaking the '08/'11 trend line, PA stands for (piss) poor analysis.

I don't usually engage morons, but here is the chart. Hopefully the link comes thru. http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&st=2008-02-10&en=%28today%29&id=p32985354228&listNum=1&a=244668577

if you cant see it, the draw the trendline yourself. It works for a reason.

and BTW Eduardo, and Gary, you are no gentlemen. You are assholes with a keyboard. I see the mod left your posts up there, so your behavior must be condoned. I would like to meet you in person and have you say that to my face you cowards.

Obviously I am wasting my valuable time here. I will bet the idiots in this bunch have been only here for a few weeks to maybe months. I'll bet they are recent buyers, lemmings. This place has confirmed my views that most gold buyers are so entrenched in their illusions that they will not tolerate any other opinions, so thanks for that.

Jeff said...

PA,

Exactly how do you define gentlemanly behavior? Evaluate your own words, first.

You are obviously new and haven't read the posts here. You don't know the subject. What do you hope to accomplish with name-calling and threats? We don't need a lot of 'mods' here; most come to discuss the issue, to teach and to learn.

Polly Metallic said...

HMmmm, how strange that PA shows up on this blog at this particular time, trying to "save us" from our flawed understanding of gold and fiat money.

Most of here, both the regular posters and the lurkers, have studied this subject diligently for months if not years, and have a deeply rooted understanding of why we are invested in gold. Charts may be meaningful in determining price projection possibilities, but people who frequent this blog are not invested to obtain dollars gained from trades. Only someone with a very surface knowledge of Freegold and the nature of fiat currencies would come here spouting doom and expect us to be rattled. As others have said, it would be wise to read ALL the material presented here before trying to debunk the concepts.

I have been invested in gold since 1999 and I am not concerned about the current correction.

byiamBYoung said...

Uhh, PA ol buddy, you seem to have an anger issue. I respect your opinions, because I have a hunch you may be successful timing your trades in gold, if the goal is to flip gold for a small quick profit(not that I'm going to sell any of mine).

I am quite sure though, that although there may be a range of opinions here, there aren't many, if any, morons.

Cheers,
BYoung

Aquilus said...

Just my 2c on the gold technical analysis: I must point out that trading is not what this blog is about IMO.

If one has even skimmed this blog, one would understand that this blog is talking about storing EXCESS wealth in gold for the likely end of the fiat dollar-based actual system. And by EXCESS I don't mean money you will need for rent next week, or next year's vacation money - I really mean long term savings as excess wealth.

This gold is in physical form and definitelly not for trading.

So when PA talks about "saving" us, I thank him for looking out for anyone that has not purchased yet (assuming he is correct in his technical analysis - for time to decide), but the rest of the crowd, trading (selling) gold at these levels is irrelevant. That probably should explain the reasoning behind some of the comments PA.

So, no, PA, this is not your typical "gold bug" forum. If you would like to read some more of the articles and debate their substance I'm sure you'd be welcome, regardless of your opinion. But if you're here to save gold traders, I'm afraid you're in the wrong place.

Texan said...

FoFoA, congrats! I think you have finally been infiltrated. It would make a lot of sense, actually. I don't think he even knows what lift cost is.

Please do us all a favor and turn him off.

Joel said...

PA,

Still waiting on your stable US dollar defense. Love to hear how you think we can fund our ever growing debt and still keep dollar demand strong. Short term dollar strength resulting from larger problems in Europe doesn't provide a fix to our problems here in the US. Haven't read a plausible scenario yet, and would love to be convinced that I am too bearish (but don't hold your breath).

Texan said...

Let's see, well timed periodic raids in the dead of the night - check.

Stupid MSM articles debunking gold - check.

Rabid "cool guy trader types" who no one has ever read a single comment from loudly proclaiming "it's over!!!". And "trapped longs!!!" and "macd is rolling over!!!"

Roflmao! PA - you go big guy! Tell us how it is in "traderville"!

Texan said...

I suggest you all acquaint yourself with Paid Trolls.

Texan said...

And also chilled Argentine Malbec, which is seriously awesome

byiamBYoung said...

Please don't turn him off! His posts and the responses have been very educational.

Most of you entrenched here are probably unaware of how so many opinions in agreement tend to make the conversation 2 dimensional. Relative newbies, like me, need a spectrum of opinion to create a stage upon which the prevailing arguments can be displayed.

Shutting down debate- even contentious debate- is a degradation of the purpose of this blog.

Freegold either can withstand dissent, or it is unworthy. Let the detractors have their say.

Cheers,
BYoung

Joel said...

Lol Texan,
He's either Mickey Rooney short gold, or a bonafide member of Bernanke's Plunge Protection Team.

Texan said...

Uhm.......huh? You just be new also. Or paid. Whatever.

We have about 3 running debates that never ever end.
1. Silver....safe haven, or not?
2. Which is next, HI or Deflation? Or Deflation followed by either total collapse, or HI, and then total collapse.
3. Is fiat for "real"? And if so, which fiat? euros? Eeeew. Dollars? Double eeeeewwww.

But we never ever discuss technical analysis! Why? Because (a) it's bullshit for any asset, (b) gold doesn't just trade in, gasp, dollars (check out gold versus corn/oil/CHF), and (c) futures gold is PAPER.

Texan said...

Joel, that comment was for BYoung by the way.

I hope you are watching the game, btw.

byiamBYoung said...

@Texan,

I promise you I'm not paid :D

Okay, I hear you, there are subjects that get tiresome...to you, my friend.

Us new folks, we need to digest it all. Old concepts are new to us.

Here's a thought, if a subject bores you, don't participate. Or do us all a favor and deliver the conventional wisdom of this community as a response. Cut and paste if need be.

But enough with looking down your nose at those of us who are approaching the subject. We are not stupid, just new.

I've read many thoughtful responses from you. Those are your better posts.

Be well, friend.

Cheers,

BYoung

Cheers,

Texan said...

BY,

He doesn't bore me. I know what he is, and what he hopes to accomplish.

I see it every day, all day, through the "lens" of channels like CNBC. The great "herding" of all capital into dollar and euro stocks. The desperate

I consider this place a refuge from that tower of babel level of discourse. This is where i come to learn from Costata and Blondie, and and have real debates, to have the nuances of this stuff elucidated by those such as JR, or to be baffled and kind of agree from time to time by those such as Ash.

I am not going to let yahoo message board punks (or much, much worse) invade this blog.

I don't care where the gold price goes. I care about my family,and their opportunities in the future within a
democratic civilization. I think Freegold has an important place in that debate.

And my vote, and it is just one vote, is that this is what the purpose of this blog is. To understand how the IDEA of Freegold relates to our existence.

So that is why I react the way i do. Seriously, if you want technical analysis, go read Trader Dan (who is great), or Seeking Alpha (horrible), or just look at a chart.

And then think about why price action happens, as opposed to what the price action is. That is what this is all about.

Robert Mix said...

We have seen over the past few days our favorite asset go DOWN! Oh, the horror! (j/k)

Was it a hedge fund that dumped paper gold? Was it the margin hikes? Was it HFT finally making it into the gold pits?

How would I know? But, I took the gift that these PTB (or whoever) gave us, I took the gift of a big downdraft in the price of gold, I took that gift and BOUGHT some more physical gold.

---

"Mis dos contavos" re PA and other dissenting opinions: I welcome challenges as well. I have even challenged FOFOA himself when I was confused or thought differently on a matter... He was kind in explaining my errors in reasoning. I like diversity and always questioning.

But, in a civilized manner, pro and con gold and freegold.

Robert Mix said...

Ah, it's too bad you cannot edit a comment.

I forgot to mention that I paid a premium of about 5% on my small purchase of Gold Eagles from the coin shop (5% is what I have been paying recently). He had NO 2010 or 2011 Eagles in stock, though he had (I guess) plenty of older coins.

I saw at 24hgold.com that the premium of Gold Eagles over spot is now down to around 11%, still rather high.

J said...

Charts exist in a dying system. You won't find too many people here that are afraid of the squiggly lines.

Would you sell a piece of fine art while it's creator was dying of cancer? Would you do this hoping to buy it back at a lower price before his death or would you simply wait?

On this blog we sit and wait. We know this cancer ridden monetary system must die, it must be killed off before it destroys it's carrier. We won't part with our Mona Lisa trying to make a small profit..we wait for it's value to be realized post-mortem.

From FOFOA's Mona Lisa or Ben Franklin - This brings us back to those traders that play in the gold market. They choose gold because they understand the problems with fiat money. Yet they use gold in the same way that fiat money works, they trade it back and forth hoping to profit from price changes. The same way we loan to (invest in) non-productive companies with the hope that someone later will pay us more. And in doing so, they never even touch the physical gold metal.

This is the ultimate confusion of fiat and physical. We instinctively know one thing, yet we are completely immersed in something else. The gold that these traders trade is no different than fiat money. It is a piece of paper that holds its value based on faith in the system, and it can be created from thin air (in great quantities). It is someone else's non-productive, non-collateralized debt. We lend them our money with the hope that someone else will later pay us more for that debt.

The paradigm shift that is now in progress will change the gold market from this fiat paper gold market (price betting) to a purely physical gold market (wealth reserve). When this happens, it will be instantaneous. When this happens, your fiat paper gold will disappear like a magic trick, and your physical gold will suddenly feel like the Mona Lisa herself.


http://fofoa.blogspot.com/2009/05/mona-lisa-or-ben-franklin.html

Robert said...

I think that the reaction to PA's comments was a little bit overdone. It is always good to have people around who do not drink the Kool Aid. Even FOFOA has acknowledged that his mindset is to always revisit and retest his assumptions as circumstances develop.

Having said that, PA's perspective seems focused on movements in the contract price for gold, which, if you have been paying attention to FOFOA at all, can be unpredictable and manipulated. FOFOA's point seems to be that before freegold, we can expect anything to happen to the contract price. It might continue to rise. It might go to zero. Or anywhere in between. It is only when the great reset finally occurs that we reach the promised land.

PA does make a good point that I do not think anyone has addressed yet. He argues that Another believed that the move away from the USD as the world's reserve currency was imminent. As PA says, there does not seem to be any evidence that is the case at the moment. Another, FOA and FOFOA have made arguments about the superiority of the Euro architecture, but the current reaction to the market turmoil does not seem to movement from USD to EUR. Do does anyone expect that to change anytime soon?

Although there are occasional articles quoting Chinese officials complaining that the world needs a new reserve currency, does anyone see any movement in that direction in the imminent future.

As FOFOA says, better a decade too early than a day too late. I think we need to take that to heart and to remember that these things may play out over a much longer period of time than any of us expected. There is a danger of going "all in" at any point, and that means that you are trying to time something that cannot be timed. That's why the giants have some assets in gold, and other assets in the financial system. They are hedged, just like we should be. If and when freegold comes, you will not need a lot of gold to do well in the new paradigm.

victorthecleaner said...

Robert raises a few relevant questions:

1) When will the unallocated accounts of the BBs blow up?
2) When will the US$ lose its reserve function?
3) Is the euro really any better than the US$?

You know my opinion on 3. Now the British press say they expect the European bailout fund to be leveraged using the ECB balance sheet. I don't know whether this is wishful thinking or whether they have inside information, but if the Europeans actually implement this, then it is pretty much guaranteed that even the future government deficits find their way onto the ECB balance sheet. In this case the euro would be toast just as the US$ will be.

Some thoughts on 2. So far, the Chinese are still propping up the US$ by pegging their Renminbi to it and thereby absorbing a good share of the US inflation. They are in a position in which they can only lose. As long as they continue, they will suffer from price inflation and asset bubbles. As soon as they stop the pegging, they will destroy their export sector (and puncture the most recent bubble).

If Jim Chanos and the other China critiques are right (you can listen to some interviews on youtube), they are just about to have a hard landing, but in an inflationary environment. It might be China who is going to break the US financial system. Not because they have planned it and made a decision, but rather because China is the weakest link of the financial system.

Victor

Panelproli said...

I suppose PA's opinion is rather a manifestation of "FIATtackWatch"
(FED's campaign against gold - according to an article on ZH from
yesterday).

Still I am rather concerned about my USDs/EUROs and not my gold
even if I bought most of it last year.
I'd like rather see news where central banks sell away their
gold for charity. All many hundreds tons. They won't do that.
Waiting for the next ECB report with MTM gold valuation, soon
it is end of Q3.

jc said...

PA seems like an interesting character, is quite aware of Another and directly quotes him, held what I presume was physical gold from Aug 2000 until a few weeks ago. Yet presents a completely different view to freegold, and knows how certain TA is. PA, your thesis could be as valuable as physical gold around here, please explain it very clearly for us?

Jeff said...

Victor,

Why would the euro be toast 'just as the USD'? Isn't the euro made to devalue? Isn't there a big difference between the floating gold on ECB balance sheet and the Fed? Isn't that the whole point of the euro architecture? Why would two currencies based on two different designs suffer the same fate?

One is a world reserve currency backed by nothing but full faith and credit which no longer exists. The other is not. Diverging paths ahead.

Winters said...

@texan "We have about 3 running debates that never ever end..." lol

@JR
How exactly do you pull back these super relevant snippets of text? Are you using some phenomonal wetware or something like evernote....with an index to main topics?
I'm intrigued!

Michael H said...

comments ...

Edwardo said...

Well, I guess this blog has already had a visitation from one of the Fed's henchman. Or maybe he's just a useful idiot doing it, as it were, for free.

http://www.zerohedge.com/contributed/federal-reserve-plans-identify-%E2%80%9Ckey-bloggers%E2%80%9D-and-monitor-billions-conversations-about-f

And now a word or two to the useful idiot. False signals from trend line penetrations are legion, and, because of this, most decent technicians like to see a close or two below a trend line before declaring a trend line violation. A very brief (minutes?) move through a trend line most definitely doesn't cut the mustard. Finally, regarding the efficacy of TA, it's a wind sock not a crystal ball, and that's being generous

Joel said...

The fact that the Euro is devalued doesn't make it toast. The ECB has something on their balance sheet that offsets the loss of value in the Euro, gold, on a MTM basis. The Fed does not. So who has more staying power? As JR correctly pointed out, fiat will lose it's purpose as a store of wealth, but not as a medium of exchange. So which central bank's architecture is set up to withstand the pain of currency devaluation and loss of demand from the store of wealth function, and which is set up to go down like a sub with screen doors? PA?

JR said...

Hi Winters,

Nothing special, just more this, less that.

enough said...

Strong message from the physical market- UBS



In a continuation of Friday's trend, we saw very strong physical demand in Asia yesterday, particularly from India. We also lost metal to professionals in the market, confirming that demand is being seen across the industry. Additionally, European retail demand for coins remains very robust. To be clear, physical demand right now is not just decent, it is exceptionally strong. And while Friday's volumes mirrored flows not seen since late January this year, demand yesterday was a good deal more impressive. While physical demand alone cannot shield the metal from persistent spec liquidation, current prices are a buy for some elements in the gold market. This message is powerful: it worked as the best indicator that a price floor was near in late January when gold fell to a low of $1308, and also in July 2010 when gold gave back close to $100 to trade to the mid-$1100s.

JR said...

Hi Winters,

I hope you realize I was kidding before. :)

If you search google with the prefix "site:fofoa.blogspot.com" and throw in the word/phrase/concept you are looking for, its often easy to quickly scan the previews and identify it.

Like for example suppose somebody was going on and on about the "elite" and how they would control Freegold or how the Euro is just an extension of the dollar system's "control" or whatever. Ugggh!?! ;). So you were like wait a minute, one of my favorite FOFOA comments ever about "crackwhoregold" was made in response to this very line of thinking. But maybe you can't recall in what post it was he made that comment. Meh

But wait - you go to google search and type "site:fofoa.blogspot.com crackwhoregold" and voila - it pulls up that famous comment from "One Tin Soldier".

So then you fill in this format link format, or maybe you are on a phone or whatever and you just post the link (http://fofoa.blogspot.com/2010/10/one-tin-soldier.html?showComment=1287467362163#c3464507585098634123).

I like to use bold and italics too.

cont.

JR said...

cont.

So it ends up like this Winters:

=================================

You see, CrackWhoreGold is like Valhalla to savers! Its all about the savers (like super-producers) who comprise the Superorganism - aka "demand". Another wrote "Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"!". Its not about elite control, it is more like the lack of a system, as the dollar reserve system and its supporting paper gold system fail and the perception of savers shifts.

From a FOFOA comment to "One Tin Soldier":

"The term FREEgold seems to be hopelessly confusing a great many of you, especially the ones suffering a myopic obsession with the "elite." So I would like to suggest a new name for this system, which is not really a system at all. It is more like the lack of a system: the dollar reserve system and the paper gold system. Without them, Freegold is what we have, along with whatever "system" develops. It is not something the debtors or the elite can fight. It's just a shift in the perception of savers. Can't change that.

So here's the new name I propose: CrackWhoreGold. Maybe this way all you NWO-types will stop associating it with whatever utopian concept you think TPTB will never let you experience. CrackWhoreGold works very well actually:

1. Always available at the right price.
2. Will go with any guy (or gal) regardless of nationality (subject to 1 above).
3. Gets high whenever possible and tries to stay high.
4. Has a pimp called Uncle Sam who wants her down on "the Street".
5. Milks big spenders for everything she can get but ultimately prefers the company of rich patrons.

So from now on, when you "elite-ophobics" come at me with something like ShamefulPath did here: "Freegold is like Valhalla to savers...", I'm going to insist that you call it CrackWhoreGold instead: "CrackWhoreGold is like Valhalla to savers." Maybe it'll make you think things through a little.
"

================================

Cheers, J.R.

Jeff Snyder said...

@JR, thanks for bringing that particular nugget to my attention. I had never seen it before and it is very helpful and illuminating.

Alphaville has an article up today, "Why the Gold Forward Rate Inversion is Important" disussing the implications of a negative gold forward leasing rate such as currently exists.


"On the surface, the negative rate implies extremely low demand for gold compared to cash. Or you could say, there are currently more people prepared to lend gold at a terrible rate (because there’s so much of it around) than prepared to lend their cash for gold. (Contrary to anecdotal reports from the physical market which suggest a lack of gold sovereigns and such the like.)

In this scenario, nevertheless, gold is seen as the risk. Gold has become a lousy monetary substitute, and is anything but optimum collateral. In fact, it is US Treasuries that are being over-bid, not gold.

The lower the rate goes, the more it suggests an extreme rush to pawn gold in exchange for cash in the marketplace. Anything but gold, you might say. Meanwhile, the more gold that ends up at the pawn shop, the less favourable the rate received for pawning in the market. (The pawn shop doesn’t want to carry all that risk and has to cover that risk by offering less cash for gold.)

Thus it’s not money that is dying, quite the opposite, it’s gold.

But there is one important other factor to consider: Central bank intervention."

The article goes on to talk about the Central Bank use of gold ETFs and raises the following Qs in regards to the rumors of Paulson's liquidation of GLD:

"Are bullion banks demanding increased compensated for supplying borrowed gold into gold ETFs because there’s suddenly been a genuinely large amount of gold thrown back into the gold system?

Is this also why AuM has stagnated and GLD has become ineffective as a central bank policy tool?"

I would be interested in any of your reactions to this piece.

http://ftalphaville.ft.com/blog/2011/09/14/677021/why-gold-forward-rate-inversion-is-important/

Ash said...

VTC,

"As soon as they stop the pegging, they will destroy their export sector (and puncture the most recent bubble)."

As discussed in the article linked below, I believe the point you raise also relates to why rumors of China "bailing out" Europe are ridiculous.

Global Imperatives of a Chinese Exporter

"Chinese elites know that any firm commitment they make to purchasing bonds of EU debtor nations will not stabilize their public finances long-term, and, in addition, will not even make the Euro appreciate considerably against the USD or other established reserve currencies. They also know that Northern Europe will never agree to "fast-track" the WTO process, because, at this precarious time for exporters, that may cost them even more than the price tag on preventing EMU collapse.

China’s bailout would merely serve to preserve the present situation, in which the Euro officially survives, but as a freak of nature that may be devalued at any time with nothing more than an unpleasant rumor, and major exporting nations continue to pursue considerable monetary interventions which the Chinese simply cannot afford to match due to their already under-stated rate of domestic inflation. From their perspective, the only "legitimate" option is to let the EMU splinter.

...For all of China's talk about becoming a powerhouse consumer economy, domestic companies moving abroad, investing in foreign companies, or its currency contending for the role of global reserve, we must remember that it is still by and large an export economy according to the dictates of the global market system of trade.

The Chinese are under no illusion that anything has changed in the last few years for their economic model, and that means they must remain "competitive" until the bittersweet end. In this system, you don't stay competitive by bailing out the competition."

jc said...

Is the Mexican Central Bank admitting that its 110 ton purchase of physical gold is actually unallocated storage in London?

"The gold that composes the reserve in question is made up of bars that may have a minimum and maximum of gold. The bars with minimum content weigh approximately 10.9 kilos, while those with maximum content have an approximate weight of 13.4 kilos. The information is published by the London Bullion Market Association. ... Due to the variability of the content of gold in the bars, it is not possible to specify with certainty the exact number of bars purchased."

more from the Seeking Alpha article:

"Mexico bought physical gold with the intention of owning an asset that is immune from counter-party risk and which cannot be printed. When Banxico forces this issue, and I think they will - at least behind the scenes - it is going to be difficult for the bullion bank, desperately short on gold, to come up with 110 tons of it. That is especially true in light of Venezuela's recent demand for physical delivery. The bullion banks are going to call for help from western central bankers, and those bankers are not going to be very happy."

http://seekingalpha.com/article/296124-seems-like-mexico-purchased-110-tons-of-gold-that-don-t-exist

JR said...

An important point is raised - the current system can't be saved - no one is "bailing out" anyone. The current system is failing, and "this very long term transition is playing on a move away from dollar domination with Europe preparing to suffer less than us by pulling in as many other political trading blocks as they can."

As FOA wrote:

"The world is heading towards a huge financial/currency crack up, but it won't work out with gold coming back into the money game. This very long term transition is playing on a move away from dollar domination with Europe preparing to suffer less than us by pulling in as many other political trading blocks as they can.

When you look at who they are reaching out to; every one of these blocks wants gold moving higher to shelter their dollar trading losses. None of them expects to unload dollar reserves because our end time trade deficit won't permit it. They can't just send the dollars to each other, buying their own goods... that would never exhaust the external dollar float. Hell they now have their own money to do trade with, the Euro.

The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage (of dollars). This is more than enough to end the dollars timeline as we are already stretched to the leverage limit. They know that Greenspan has but one policy to use and that will be super printing. He is doing it now, right on que!

The ensuing domestic price inflation will waste away all buying power of dollars overseas."


==================================

FOFOA from Synthesis

"...Fiat currency, for all its flaws, has provided the flexibility and computer-age transaction ease and record-keeping that is valued by not only those few ego-maniacs that believe they can control everything, but also by business and productive enterprise. So it is not going away no matter how good the argument. But the worst of its flaws can, and will, be neutralized. And this is where (what I like to call) Freegold makes its debut.

Here is an important question: Is it theoretically possible for a fiat currency to devalue, or more precisely, to hyper-depreciate against only one single asset without affecting the price of a can of peas?

Of course it is! Just look at any number of investments that have appreciated quickly by an order of magnitude or two. Look at GOOG! Or how about AAPL? When an asset appreciates against a currency can we not also view it as the currency depreciating against that one asset? Or more precisely, can we not say that the asset was awaiting massive revaluation based on market recognition of its value?

Now, what if the revalued asset is gold, a monetary asset held by Central Banks? What could such a revaluation do to today's dynamics of national debt? ..."


cont.

JR said...

More from Synthesis

A Thought experiment!

"Let's just try a little Thought experiment. Imagine Rand's community as described above. And imagine that one entrepreneurial spirit in that community started a gold coin dealership sometime after "best customer" showed up with his paper promissory notes. Now, since we are dealing on a much smaller size scale, we will speed up our time dimension as well. So in our imagined community let us say that confidence in "best customer's" notes disappears the second time he shows up with freshly printed paper. People still accept them in trade for goods, but they don't trust them enough to hang onto them for any length of time. They would rather exchange them for gold, the old currency used before.

So now all of a sudden our gold coin dealer's business takes off. Those market participants who are barely producing enough goods to sustain their daily existence will be spending the notes they receive on other goods right away. But eventually those notes will find their way to a super-producer, someone who is able to save some of his efforts for the future. And he will walk those notes over to our gold dealer.

Over the course of a few days all paper notes in circulation will flow to the gold dealer, and pretty soon his supply of gold coins will run low. He may try to give the notes back to "best customer" in exchange for some more gold for his business only to find that "best customer" has no gold, only more paper notes.

So our gold dealer's first response will be to raise the price of his remaining gold coins. And then, since gold coins are his stock in trade, he will have to venture out into the marketplace to replenish his inventory. He will have to bid gold out of the hands of the agrarian workers with more and more paper notes. And then he will have to sell those gold coins for even more than he bid for them.

Very quickly this will raise the price of gold coins when priced in "best customer's" paper notes. And agrarian traders coming to exchange their paper for gold will realize that the cost of gold is rising. And then they will have to charge more for their goods when paid with paper.

The end result of this little thought experiment is that on any given day the price of goods in paper notes will seem stable to the naked eye, but over time "best customer's" inflation will be absorbed into the price of gold and will not affect the savers or destroy their capital accumulation because they saved only gold.

"Best customer" will eventually have to bring wheelbarrows full of his notes just to buy one apple. This development will expose his scam to even the most retarded villagers, and he will ultimately lose his reputation as "best customer".

The moral of this little story is that there actually is hope because gold can absorb most if not all of the pain inflicted by inflation if it is allowed to do its job as a wealth reserve. It is all about how long you hang on to the paper. The longer you hold it the more you transfer the value of your own labor into the hands of "best customer".


"The moral of this little story is that there actually is hope because gold can absorb most if not all of the pain inflicted by inflation if it is allowed to do its job as a wealth reserve."

Cheers, J.R.

JR said...

Hi Jeff Snyder,

Regarding gold lease rates, its kind of a messy topic and I'm a little outta my element.

However, if you are interested, I would urge you to check out "Red Alert: Gold Backwardation!!!" and then The View: A Classic Bank Run. I think these may help you see FOFOA's perspective on the issue and assist your evaluation the commentary on "Gold Forward Rate Inversion."

Either way, this is a key point from "Red Alert: Gold Backwardation!!!" - its all about gold bidding for dollars (physical gold holders wanting to sell gold for dollars or "demanding" dollars). Gold's gotta flow:

"Dollars Bidding for Gold? Or Gold Bidding for Dollars?

When you think about the message that the lease rate sends, it is directly tied to the liquidity the dollar desperately needs. On Sept. 29, 1999 the message was "lease us your gold, PLEASE, and we'll pay you handsomely for it." Today the message is "we don't need to borrow your gold, and if you insist on lending it to us, it'll cost you."

Now, if I am a liquidity creator for the dying $IMFS - a bullion bank - how do I create dollar liquidity? I take a piece of unencumbered physical gold (owned or borrowed) and I fractionalize it. I sell it off to the extent that the probability of a delivery demand is lower than my physical reserves. And in the process, I am creating DEMAND FOR DOLLARS because my "golden tickets" are bidding on dollars. Remember what ANOTHER said...

Date: Fri Jan 23 1998 19:01
ANOTHER (THOUGHTS!) ID#60253:

All modern digital currencies do not go into an investment, they move THRU it... There is an alternative. Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies".


This is the key to EVERYTHING!!! It is not "gold liquidity" that the bullion banks create... it is DOLLAR LIQUIDITY. Dollars bidding on MSFT stock set the value of that stock. If dollars are frantically bidding on MSFT (high velocity), the stock skyrockets. If dollars stop bidding for MSFT all at once (low velocity), the price falls to zero. This is true for everything in the world except gold.

Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero. This is backwardation!"


Cheers, J.R.

Jeff Snyder said...

Thanks, JR, I will study those two articles.

J said...

"We've seen a lot of buy-on-dip type on the physical market," said Dick Poon, manager of precious metals at Heraeus in Hong Kong. "While speculators were busy liquidating their positions on the futures market, we didn't see any selling of physical material."

"Physical demand right now is not just decent, it is exceptionally strong," said UBS in a research note, after observing strong buying from India and elsewhere in Asia, as well as robust retail demand for coins in Europe.


Asiaone

Bollo said...

According to the UK treasury's annual accounts, the BOE has been marking it's gold to market since 2000/2001.

Quote from 2000/2001 account, pg 21:
"Gold assets are recorded in the balance sheet at market value. Changes in the market value of gold assets are recognised in the income and expenditure accounts when they arise."

Prior to this gold was marked at 75% of market value. Publicly available accounts only go back to 1998 though, so I don't know how long the 75% rule was used.

Has anyone picked up on this before? Does this mean the BOE has prepared for freegold?

Blondie said...

An interesting set of quotes, charts and commentary here that tie in closely with comments on this and other recent comment sections, regarding leasing of CB gold and the liquidity this supplies to the dollar.

On another note, PA, you are addressing the price of gold (contract gold at that) in your analysis, while the readers of this blog are predominantly considering the value of gold (physical gold that is). You may find more sympathetic ears at a trader focused site such as ZH.

As several have observed, TA can be interpreted in various ways... the gold price charts are interpreted by some as in this analysis for example.

ForLiberty said...

A little disappointing to see people here have such thin skin and lose temper to PA's position. Also, calling someone a troll makes you the loser, keep in mind.

While everyone, even PA, (certainly me too) seems to agree that in the long run the dollar is doomed and there can be nothing other than gold to replace it, I find it rather important if the gold price is going to plummet below 1000 and stay there for a while. Unlike most of you, I have limited $$ for purchase of physical, and this information is useful to me.

What I haven't seen anyone discuss is What Happens if M3 collapses and the Fed does not pump M0 fast enough? These mountains of debt have a history of liquidating violently. The total money supply can really crash temporarily. Do you really expect the Fed to print a trillion in a day?

I think cash will become valuable before gold price takes off. By that I mean digits in a bank account will be discounted for the physical Paper Dollar note. And the gold price can really hit the floor in the interim. Eventually the Fed will saturate the liquidity crash and confidence of paper holders will start to crack. But the order of the events under which gold takes off is very important, and I want to invite some patience to entertain PA's view, even if we knew he's on the Fed's payrol.

mr pinnion said...

Forliberty said
Do you really expect the Fed to print a trillion in a day?


The fed can print a trillion in a second.Just add zeros.

Regards
1000000000000zzy

Mike said...

ForLiberty,

Please read FOFOA's posts below, he explains this. Cash will have its brief moment.

http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post.html

http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post-part-2.html

http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post-part-3.html

sean said...

Forliberty, as tempting as it is to wait for "the" major decrease in paper price of gold before freegold, remember that it will be next to impossible to physically attain any at this price. Even with this recent recent "correction", or "buying op" (depending on your point of view), many vendors seemed to be overwhelmed around where I am, and some had to shut their doors.

JR said...

Hi ForLiberty,

You say:

"What I haven't seen anyone discuss is What Happens if M3 collapses and the Fed does not pump M0 fast enough?"

Umm, the currency collapses. The printing is the response, not the cause. From Credibility Inflation:

"First of all I would like to clear up probably the most common misconception about hyperinflation. What most people believe is that massive printing of base money (new cash) leads to hyperinflation. No, it's the other way around. Hyperinflation leads to the massive printing of base money (new cash).

Hyperinflation, in most people minds, conjures images of trillion dollar Zimbabwe notes. But this image is simply the government's reflexive response to the onset of hyperinflation, which is actually the loss of confidence in the currency. First comes the loss of confidence (hyperinflation), then, and only then, comes the massive printing to keep the government and its obligations afloat."


=================================

You also write "I find it rather important if the gold price is going to plummet below 1000 and stay there for a while. Unlike most of you, I have limited $$ for purchase of physical, and this information is useful to me."

I find it rather important to understand whether physical gold would still be available should such an even occur in the paper gold market.

cont.

JR said...

cont.

You also comment "What Happens if M3 collapses and the Fed does not pump M0 fast enough? These mountains of debt have a history of liquidating violently. The total money supply can really crash temporarily."

Here is some FOA:

""Yes, even my untrained eye can see that we are approaching the end of a currency life cycle. When all of the debt can no longer be rolled over, the world does not end. It moves on, into another fresh system! "

=======

"Hyperinflation begins when pushing on the string no longer is an option. As you pointed out; "the consumer is binged out"! But there is more (smile).

We would not embark into such an obvious currency destroying process if we could drag the rest of the world with us into a cleansing recession. Call it an "almost deflation" where we start the inflation / deflation circle over for one more credit cycle. This is our record from most the dollar's life.

No country ever hyper inflates for the pleasure of the ruling class, as many want to believe. They / We inflate to keep the domestic system in use and do so because it's the last resort. In other words you are forced into it! Today, the advent of the Euro has created a currency competition that will allow world investors to run from any deflationary, restrictive policy the US can offer. Our currency will be lowered to non reserve status no matter what route we take."


=======

"My above explained why a deflation cannot be in the cards. But if so, foreigners holding even government guaranteed paper debt in a deflating currency is little more than bookkeeping wealth if the actual goods buying power of the currency is compromised.

Yes, our US would continue to print dollars to service its debt, making the accounts look good. But, in such a deflation situation, foreign exchange controls are a 100% guarantee. Foreign held dollar assets would not come home, at least not at the same exchange rate one needs to become financially whole!

When the world begins to abandon a currency at the end of its reserve timeline, deflationary gains on debt instruments are an illusion of bookkeeping."


=======

"Your presentation shows a lack of understanding about how exchange rate risk works during unsettled times. Failing nation states that have opted for a fully """""fiat currency"""""" (the US dollar) do not simply stand by and allow ownership of everything in the country to be transferred to foreigners. Or even local creditors for that matter.

Truly, the vast bulk of overall debt assets standing against US credit extending institutions dwarfs our ability to service with real goods. Even at vastly diminished prices. These debt structures are held for further fiat accumulation only. Truly a Western Thought concerning wealth. Once an economy begins to get into trouble, everyone flees these very instruments you stand by in your analysis."


Cheers, J.R.

P.S. - we'll just have to agree to disagree on the troll part - whether PA is a troll is perhaps a not yet completely settled issue, but that aside, there is lotsa utility in calling a troll a troll, as unfortunately trolling is not a novel enough occurrence here.

Gary said...

@Bollo

Yes, I commented on that a few weeks ago. I had also noticed that the gold was transferred from the Bank of England's balance sheet to that of HM Govt. I've no idea why.

Also, the balance sheet statements are all in US dollars (uh oh!).

It all smells a bit to me.

Texan said...

For Liberty,

Of course the Fed could pull the rug out and make dollars really valuable. They have lots of ways to do that. The simplest would be to raise rates and create a positive real rate. Do you think they would do that? I don't, their actions are the exact opposite of that.

I think if anything cash is starting to have a positive real rate even at zero as austerity kicks in, but they feel politically constrained to act until it's obvious to even their critics that they need to print.

So you might get lower entry points. But here is my caution. If everyone races for the cash bunkers because it looks like the economy is collapsing, at some point they could realize that their "bunker" isn't maybe very safe, because of the asset side of those bunkers. They may be
forced to buy Treasuries at negative rates just to get out of bank deposits with principal risk. Or maybe they flee into swissie, yen, or yes, gold.

And the problem is no one knows if and when that switch gets flipped.

ForLiberty said...

Here is a paradox: I am the most vehement defender of free markets and the use of pricing mechanism to distribute resources vs government agencies redistributing capital to their cronies and the zombies that will vote for them. But at the same time I am entirely convinced that people are stupid, even 'educated' investors are stupid, and when the so called shxt hits the fan, they will react the same way the always do, the same way a herd of sheep acting on instincts acts -- they will rush for the cash. That's all they know, most of them do not have independent judgement. I can't find a logical way out of this paradox.

if that happens gold will temporarily take a hit right in the nuts. Also i find it hard to believe that nobody from the herd will be selling their gold. Really? Does anyone here honestly believe that if gold falls to 800 there will be NO physical on the market?

Best regards,

Ron Paul 2012!

ForLiberty said...

oh, and I am fully aware the Fed can print the paper notes with many zeroes. It's just that.. you guys put too much faith in the fact that the Fed can smoothly and immediately handle a run on the banks. This will be a call for outright printing of trillions of paper notes, not just giving credit to the member banks. This will require SOME political support, congress will have to make some ridiculous debate to defend this, and they will probably come with some act called Deposit Protection act or whatever. Then the logistics of flowing the fresh paper to the thousands of bank runs. It's just that government sux at everything and it will take time to do that as well. I find it hard to believe all paper claims will be satisfied quickly.

byiamBYoung said...

The physical on the field at 800.00 will be snapped up in no time at all. The appetite for physical gold is enormous. I'd donate plasma 3x a week to buy it at that price.

Texan said...

FL,

I think you severely overestimate the shrimp investor's effect on the market price of gold. Retail US bullion demand isn't squat.

And large investors in physical aren't going to sell for cash en masse. Most likely they will be the buyers.

As for bank runs in the midst of deflation, who exactly do you think will be withdrawing trillions of paper notes? Most of those trillions are held by institutional money or a very concentrated group of wealthy individuals. If you had a $100 million sitting in Treasury Bills, could you conceive of
any circumstance under which you would want those in physical form? You would need trucks to carry it out.
I just don't see it. They would just switch safe havens so to speak electronically. That's kind of what is going on now.

JR said...

Hi ForLiberty,

Did you know FOFOA wrote a post about Mises, Menger, Hayek, Rothbard, Dr. Paul and others titled The Return to Honest Money? And that he followed it up with a post called Open Letter to Ron Paul?

Good stuff there if you didn't!

Cheers, J.R.

Wendy said...

JR said....
"Nothing special, just more this, less that. "

JR with your amazing command of this blog, and your deep understanding of the content, if I didn't know better I might have thought you wrote those posts.

As Aaron so recently pointed out we women have tendencies toward delusional thoughts at times, and do best when we concentrate on kittens ............. (faint)

:P

ForLiberty said...

JR, thanks for the links,chewing through the lines right now, but FOFOA is making me dizzy again and I am losing him. Perhaps better to finish in the morning.

Special thanks to Motley Fool for sharing CNI. Beats my Kitco purchases hands down.

And Mr Pinnion, I laughed out loud at my desk when I read the following line: 'then the wheels will come off this fiat dancing monkey-fest.' The type of humor I love the most! : )

Wendy said...

Mortymer,

Thank you for that BIS post. It's gonna take me awhile to work through. Much appreciated.

Wendy said...

I meant to say link, not post .... lost in kitty-land

M said...

@ ForLiberty "What I haven't seen anyone discuss is What Happens if M3 collapses and the Fed does not pump M0 fast enough? These mountains of debt have a history of liquidating violently. The total money supply can really crash temporarily. Do you really expect the Fed to print a trillion in a day?"

All 14 trillion in US debt also represents 14 trillion in credit.Publicly traded credit, I might add.. When US creditors realize that the US economy cannot realistically pay the debts, there will be capital flight out of US debt(publicly traded credit) Just like SE Asia in 1997, Russia in 1998 and Iceland in 2008, the US dollar will collapse in value even if there is no money printing.

The US, in its current financial shape, would not qualify to enter the Euro zone.

Börjesson said...

"The US, in its current financial shape, would not qualify to enter the Euro zone."

But then again, interestingly, neither would most countries currently in the Euro zone. Germany for instance would fail because of an overlarge public debt (somewhere north of 80 percent of GDP, where the entry criterion is 60 percent or less).

Bollo said...

@ Gary,

I had also noticed that the gold was transferred from the Bank of England's balance sheet to that of HM Govt. I've no idea why.

This happened in 1931 after the abandonment of the gold standard.

Also, the balance sheet statements are all in US dollars (uh oh!).

Where are you reading this? All the tables I can see in the accounts are denominated in '£ millions'.


One of the reasons I raised this is to ask if there are not other central banks in the world who also use mark to market? If so, is the Euro's M-2-M still 'superior' in some sense? Will it still be necessarily chosen as the oil currency after the end of the dollar?

DP said...

Market Oracle: [...] The problem with Greece is that it's Government and population have become lazy by spending well beyond their means (not helped by their gambling banks). The first thing Greece needs to do is to cut its budget deficit, it needs to wipeout the welfare state that it could never afford, this is the purpose of the austerity measures, to reduce the burden of the public sector that is acting like a noose around the Greek state, the debt is not the problem, the debt is the stick to beat the Greece economy into a competitive state so that it can grow, because the debt will be defaulted away, but this will only work if the economy becomes competitive. [...]

No wonder the euro architects put a firewall between national politics and monetary authority.

Gary said...

@Bollo

Here is the link I found when hunting around the BoE site:

http://www.bankofengland.co.uk/statistics/reserves/Backdata.pdf

It shows that the gold was gradually moved across from the BoE to the UK Govt until it was in the Govt column (I forget the dates, no time to look right now, but scroll through and you'll see it.)

DP said...

Bollo/Gary,

I think you may be talking at crossed purposes: Bollo looking at the EEA stats (HM Treasury, £-denominated); Gary looking at the BoE stats (CB, $-denominated).

I think the gold was moved into the EEA (HM Treasury) from the BoE (CB) in order to protect the national treasure against calls from creditors. Putting a firewall between the assets and the monetary authority.

Similar to the US Fed having gold certificates, rather than the actual gold, issued to it by the US Treasury.

DP said...

JR,

Thanks for pointing out the overlooked matter in my earlier conversation with MichaelH: if the banks do not trust each other then it doesn't matter that the vendor trusts the buyer - if the vendor's bank doesn't entirely trust the promise of the buyer's bank that payment will be forthcoming at midnight, the debit card transaction will not be completed. Got cash?

mortymer said...

Interesting:

http://en.wikipedia.org/wiki/Chiemgauer

DP said...

@Mrt, I was reading about that over the weekend and I thought it was a pretty interesting story too

Bollo said...

@ DP, thanks for clearing that up.

@ Gary,

Had a look, and you're right about the dollar denomination on the BOE statement. It's all still mark to market though.

Are you saying that the fact that the BOE's statement is in dollars weakens the 'value reporting' effect that the Euro's confinstat has? Is this not addressed by the treasury's EEA being in sterling?

Jeff said...

While shrimps don't drive the price of gold, they certainly can clean out the gold shops in the event of a price plunge. Found on another board:

proaurum, one of the largest precious metals dealers in Germany has two announcements on its homepage:

Because of enormous demand


1. minimum order by fax, post, or internet has been raised 3000€. (walk ins are not restricted).
2. delivery time is two weeks

More telling is this:

The number of orders now exceeds the level seen in 2008 (bankruptcy of Lehman Brothers) and 2010 (first reports on the questionable liquidity of Greece). Also in the Munich branch and in other proaurum locations, the customer demand has greatly increased. Over 99 percent of customers are currently on the buy side.

http://www.proaurum.de/lieferzeit.html

So if the price dropped, and gold went into hiding, what makes you think you would get your gold?

Winters said...

@JR
ha - that is a way to find the text you are thinking of but I think the secret sauce is to know what to look for. CrackWhoreGold is easy since it is sticks out like a sore thumb.
Take your response to the China bailing out Europe question. The quoted content is all about 'trading blocks' and not China.
All totally relevant mind you but you would have had to translate "China" into "trading block" in your head to get the right hit.

It certainly demonstrates a deep knowledge of the content. I use the google site: search operator routinely but that still wouldn't help me respond with such well targeted quotes!

Winters said...

Nice find there Jeff.

If the price drops low then that would burn the paper gold wick faster I imagine, since as FOFOA has pointed out, by walking the price up they can stretch out the physical supply further

See JR - I tried to do as you described but I can't find the exact FOFOA quote I am after. I'm pretty sure he said something along those lines above but to pull the exact phrase out of the site....its not easy!

search:
+stretch +price +walk site:fofoa.blogspot.com

Jeff said...

Winters, from Freegold Foundations:

And as the price of "paper gold" rises, the demand on "physical gold" measured in weight (not dollars) falls relative to the demand measured in dollars. In other words, the same amount of dollars buys less physical by weight at a higher price. So a rising paper price tends to "stretch" your limited physical stockpile (as it relates to everyone except oil).

DP said...

--> Prepare to be amazed! <--

some investors aren't confident with what gold is backed by, or if it's backed by anything at all, as compared to something like the US dollar

... O.M.F.G.! ROFL

(H/T Biiwii)

ForLiberty said...

Some people here, and also FOFOA and Another, are in denial of an undeniable truth: PHYSICAL GOLD HAS ALWAYS BEEN AND WILL ALWAYS BE AVAILABLE for physical dollars. That famous quote from Another that sounds something like this ‘gold is funny in that way; it tends to dry up as prices go high’, that is a cool sounding quote to this community, but is flat out wrong. It has never dried, in any country, in any currency. Gold was available in Zimbabwe, for Zimbabwe dollars, when hyperinflation was 10 000% a year.
In hyperinflation times the value of gold in the eyes of the beholders rises faster that what the buyers are ready or able to offer. There is no supply at their price, and they scream that gold ‘dried up’. Gold was 1300 last year and then there was inflation. Now I am offering 1400 and nobody will sell me an ounce. So I go to FOFOA’s forum and I post ‘gold disappeared’. No, it didn’t. See, the price discovery process becomes very difficult in fast moving price environment. But gold, physical gold, is still available at every single point of time. It dries when buyers don’t keep up with the actual market price. I lived in the last hyperinflation of the 20th century. 1997. Gold dried up. But you know what – SO DID SUGAR. Everything frikking dried up. That drying was not particular to gold, and some people still were able to purchase everything they wanted on the black market.

If Kitco is selling physical gold for 800$, 1 year from now, physical gold will be available for 800 dollars, BY DEFINITION. There is no shrimp-frimp, drying-mrying-trying. This is how the price discovery process works. Physical gold dealers will always sell physical gold, and some people should just accept this fact and deal with it. Perhaps the physical gold price is different from the paper spot price. But it will still be available. The question you need to ask yourself is: do I have enough physical dollar to buy the physical gold?

enough said...

For Liberty,

Only .15 of 1% of total global wealth owns physical gold. If it stays at that % maybe you are right but if that moves to just 2%there will not be enough mine production or scrap to accomodate. I could envision a minimum of 5% of global wealth attempting to move into physical gold. At that % buyers will be bidding for gold already owned at multiples higher in price.

JR said...

ForLiberty,

We are talking about gold being the currency of oil, a worldwide reference point for Central Banks to look to in managing their national currencies, and you are talking about miniscule gold orders.

********************************

Consider FOFOA's quote of Jim Rickards from Open Letter to EMU Heads of State

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

********************************

We of small worth follow in the footsteps of giants:

"Think now, if you are a person of "great worth" is it not better to acquire gold over years, at better prices? If you are one of "small worth", can you not follow in the footsteps of giants? I tell you, it is an easy path to follow!" --ANOTHER (THOUGHTS!) 1/10/98

Cheers, J.R.

JR said...

FOFOA comments from Forum 201 on paper gold, hyperinflation and the role of gold in stabilizing a currency:

"...The global gold market was suppressed by paper gold, not physical. It's impossible to suppress it with physical.

Remember, the dollar itself was once paper gold. And they tried to suppress the gold market with physical during the London Gold Pool years and again during the Treasury auctions a decade later. Both failed. The official U.S. physical has been lying very still ever since...

...The legal problems the US faces with regard to past gold history have only to do with controlling gold to avoid real meritocracy moving forward. This is why another confiscation or a new fixed dollar-gold standard are simply not in the cards. Both are attempts to control gold and end-run meritocracy. The world will not tolerate that again. Fool me once, shame on you; fool me twice shame on me.

We can't turn back the clock. But we can move forward. The world would not resist the US revaluing its gold. There is no reason to. FOA said the US would eventually mobilize its gold at a much higher price. That means revalued, at the floating Freegold price. The US will ultimately have to make a market for its own dollars by buying them up with physical Freegold from Fort Knox.

When the trade deficit is no longer possible, the US will have to import all that inflation it has been exporting if it wants to keep oil flowing in. Real goods going out (gold) and less real goods plus some inflation coming back in. That's the reverse of today's trade deficit...

...By the way, that's post-hyperinflation I'm talking about. They may well lop 12 zeros off the dollar before making a market for it. Exchanging one trillion old dollars for one new dollar. But gold will still be at Freegold prices (e.g. 55,000 new dollars/ounce) and they will have to make a market for that new dollar or it will continue to plunge like the old one.

That's the choice. You can collapse your currency against the non-economic good gold, killing the paper gold market and driving up the price of physical in advance of hyperinflation by buying it up. This gives you some hope of avoiding the worst of hyperinflation by providing a real outlet for unwanted surplus dollars.

Or you can wait until your currency collapses against economic goods and then you will have to buy back your own currency with your gold, also at Freegold prices. Even if you start a new currency you will still have to make a market for it because your credibility will be shot by that point."

Gary said...

@Bollo

I have no idead why one is in sterling and the other in dollars. I'd prefer to see it all in sterling, as I believe the dollar is headed to oblivion.

I mean to write a FOA request to the BoE to find out why, and why they transferred the gold to HM Govt's balance sheet.

When I do, and assuming I get a response, I will post it here.

mr pinnion said...

@ Forliberty

Was'nt joking mate.The boffins at the fed truly have created a fiat danceing monkey-fest.This rare footage should dispel any doubts.

http://www.youtube.com/watch?v=Cujri54RPKw&feature=related

Regards
Ozzy

Gary said...

Let's hope the Euro (currency) can survive the Eurozone's troubles.

Some thoughts here on that:

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100012223/frau-merkel-it-really-is-a-euro-crisis/

Joel said...

Crap DP,
Please don't send links to videos like that without a warning flag. Blew hot coffee right out my nose, lol... You are right, I am truly amazed--one, that a reporter could actually say something that stupid, and two, that they didn't edit it out before airing it! They are either really stupid, or it's a conspiracy. I'm going with stupid.

DP said...

:-D how big of a flag did you need buddy??

jojo said...
This comment has been removed by the author.
jojo said...
This comment has been removed by the author.
JR said...

Business Week news article with some interesting perspectives - German Industry Chiefs Unite to Save Euro as Lawmakers Bicker

"Sept. 29 (Bloomberg) -- German executives and industry leaders joined forces in the fight to save the euro as lawmakers quarreled over the stakes, drawing the battle lines for a parliamentary vote on a second Greek bailout...

Germany, Europe’s largest economy and the single biggest contributor to the aid, sends more than 40 percent of its exports to euro-region countries and has the most to gain from an intact monetary union. Lobby groups, led by the BDI Federation of German Industries and labor unions under the umbrella of the Confederation of German Trade Unions, or DGB, made a last-ditch appeal to lawmakers this week to back the changes.

The end of the currency union would cause immense, incalculable damage to Germany,” Hans-Peter Keitel, the BDI’s president, said at a Sept. 27 conference in Berlin attended by Merkel and Greek Prime Minister George Papandreou.

For this reason, it’s short-sighted to talk only about the costs” of sovereign rescues, Keitel said. “One thing that’s needed is political responsibility” and readiness to make sacrifices, he said....

On the same day, the DGB took out ads in several of the country’s regional newspapers with the headline: “Yes to Europe! Yes to the euro!”

Our mothers and fathers have built a peaceful Europe out of the ruins of World War II,” the ad read. “Today, we face the danger of retreating back into national demarcations and losing sight of what binds us together. Europe needs Germany and Germany needs Europe, which is why we’re campaigning for approval of the EFSF umbrella.”...

“The situation is serious and it’s high time we did something about it,” said Franz Fehrenbach, CEO of auto supplier Robert Bosch GmbH, in an e-mail. “This isn’t just the task of politicians. The business community and other responsible leaders have to take a stand. What’s lacking in the public debate is a clear commitment to the European ideal and to the euro. We have to make it clear to the people what advantages, consequences and possible burdens that these bring with them.”

German companies were among the greatest advocates of the single currency at its inception in 1999
, having contended for decades with a surging deutsche mark that hammered exports every time European neighbors devalued their way out of recession.

The euro area is Germany’s biggest export market. Shipments of German cars, high-speed trains and chemicals have more than doubled since the single currency was introduced, helping Siemens AG, BASF and Daimler AG to bounce back from the financial crisis stronger than their European counterparts.

Exports led the German economy to its strongest growth in two decades last year, in turn pushing down joblessness to a 20- year low...
"

Aquilus said...

And here, for the N-th time we have confirmation from the Chairman himself that deflation will never, ever, ever, ever be allowed.

"If inflation falls too low or inflation expectations fall too low, that would be something we have to respond to because we do not want deflation," Bernanke said.

Source: Sep 28th, 2011 speech at forum sponsored by the Cleveland Fed: Bernanke says Fed would act if inflation falls

Hide them garden gnomes; your front lawn is about to be papered over in the next few months...

holdinmyown said...

@Aquillus
Thanks for the link. I especially liked this quote from Thomas Hoenig:

"When you encourage consumption by inhibiting your interest rates from rising to their equilibrium level, you will in fact buy problems, and we have, in fact, bought problems," said Hoenig, who is due to retire on October 1, in his last speech in office.

Refreshing to see such honesty coming from a Fed President. Maybe you become more candid a few days before retirement?

holdinmyown said...

I know that Hoenig has been a thorn in Bernanke's butt in the past but I don't recall anything this damning of Fed policies.

costata said...

Thoughtful piece from Bill Bonner of the Daily Reckoning:

http://dailyreckoning.com/why-the-us-dollar-is-for-now-still-in-demand/

Aquilus said...

Good link Costata.

Here's another link that made me think of you (re: silver).

Specifically, this references the fact that nothing that has real industrial use can appreciate for long past regular inflation rates:

“If you think you can keep raising the prices for those materials and still keep your customers, you’re crazy,” Jack Lifton, co-founder of Technology Metals Research, said in a telephone interview. “The principal customer for rare-earth metals is a global automotive industry using rare-earth permanent magnets. That industry will engineer this stuff out.”

Link: Rare Earths Fall as Toyota Uses Alternatives

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