the flow of value

The Pyrrhic Victory

2012-02-24T23:17:00.000+13:00

It is not possible to win a currency war against gold, only a battle.

Gold cannot be permanently dominated (ie. valued) by any currency. Gold can however be temporarily controlled by any party with enough gold in its possession to constitute a corner. But exerting this control costs… gold. So after a time of control, there is no longer a corner, and thus no longer the means of control. Thus the only question is the length of this time, which is determined by the rate of gold outflow from the cornerer, and more importantly by the perception of the cornerer’s rate of outflow and remaining stock by other parties (ie. the wider market).

Gold is controlled (albeit temporarily) by pegging one’s currency to it, fixing the rate of exchange. Gold must flow to some extent at that rate to defend the peg, to whatever extent required to convince the wider market that this peg will be defended. It follows that the cornerer would prefer other parties’ gold to flow at this rate to support it’s peg if possible, and it also follows that over time the cornerer would prefer to not publicly declare exactly how much gold they have left with which to maintain this corner/peg. The cornerer would ultimately be very happy if the market were to accept almost anything in lieu of actual gold… contractual claims on gold which can ultimately be settled in currency fit this bill perfectly. The peg and thus the corner can be maintained with the issue of contractual (ie. paper) gold instead of actual physical as long as the market accepts this paper in lieu of physical.

For as long as the peg is successfully maintained, all surplus value which would have otherwise flowed into gold as a store of value (taking it) over and above the pegged rate is instead flowing into the pegged currency, increasing the currency’s relative value. Without the peg the value being stored would otherwise have moved the exchange rate higher. Of course the cornerer can produce more of this currency at will, allowing them to consume this “stored” value. This is the reason for the peg. Access to the savings of others. For the cornerer, real goods and services purchased have become artificially cheap because they are effectively being subsidized by the savings of others in your currency which has been made to appear extra valuable by the peg to gold.

Eventually, the corner is lost as the demands of the market exceed the capabilities of the cornerer to defend their peg. As control is relinquished by the cornerer, it remains advantageous to them to retain possession of as much of their gold as possible (for when the market succeeds in valuing it higher), and to slow the ascent of gold's value to the natural market set rate as much as possible and for as long as possible.

Gold, however, remains, and in doing so it remains where it always does, wherever it is valued most highly.

Blondie

Wealth is Real Stuff

2011-12-04T13:56:00.001+13:00

"Wealth isn’t abstract numbers. Wealth is real stuff: food, oil, steel, houses, people performing useful services, etc. You can flood the world’s financial systems with liquidity and create the impression of economic activity, but that does not create one automobile, pair of shoes, or bag of coconuts. You can finesse the economic metrics, but that doesn’t make you any richer."

-Exchequer

Wealth is real stuff, and for those with such wealth that additional real stuff serves no further purpose, the only real stuff left whose usefulness remains is real physical gold, as the only asset not subject to decay nor counterfeit, nor having other use causing its consumption. The wealth reserve asset par excellence, in which surplus value (aka wealth) may be stored indefinitely.

As the abstract numbers go down the drain, expect to see real physical gold come into its own.

The Consolidation of Value:

2011-11-25T03:00:00.000+13:00

Short and Sweet 3

2011-11-01T21:57:00.008+13:00

The important thing in any monetary system is neither currency nor gold, but value. Any monetary system exists only to enable an equitable flow of value between the system’s users. Correctly used, currency and gold are but tools to assist users in objectifying and regulating this flow so as to ensure exchanges of value made inside this system are mutually beneficial.

Symbiosis

2011-10-16T09:18:00.008+13:00

In a properly functioning monetary system in which the flow and the valuation of elemental gold is uninhibited, deflation is neither good nor bad, it just is. In such a system both inflation and deflation have a role, as the brake and the spur. As the value in gold of the local currency changes, so the users of that currency adjust their efforts accordingly. And the result is an equilibrium, a self-correcting system, a natural symbiosis between the producers and the consumers where one is naturally encouraged to become the other.

To sterilize gold is to neuter such a system, to resist what would otherwise naturally be.

We can talk about such a system in terms of economics, but it is really an organic process, a natural law that is part of all natural systems. Or we could perhaps say that this is nature’s economic system. If you look closely, it is visible in all processes, at all scales. Give and take. Symbiosis. This is a relationship where each is a pre-requisite for the other, like light and dark; high and low; life and death. There is no existence in isolation; neither the producer nor the consumer can exist without the other.

Our current monetary system attempts to be an exception, which is why its demise is inevitable. What we witness in the world around us are the results of this current sterilized system, a system where the consumers have artificially removed the brake on their consumption and the spur for them to produce.

None of us like what we see ourselves doing, both individually and collectively, to each other and to our environment, yet despite this we remain apparently involuntary participants, seemingly powerless to opt out. The positive change we can make in this regard is to store our own surplus value in gold, to make it fertile again. When enough physical gold is being treated in this fashion either by those who understand gold’s function, or by those who store their value there through self interest (and both groups who can do this are by definition net producers), then the current system collapses (synthetic paper gold no longer trades at par with physical gold) and net consumers find they are newly motivated via an objective unit of value measurement.

Because value can then be assigned correctly, the effects of any activity can be accurately factored into the value of the resulting product, and much of what we see today in the way of negative impacts would be immediately disincentivized. People are then able to value themselves objectively too, changing the way they feel about themselves as their perspective becomes less subjective.

If you are not currently in a position to produce a surplus with which to procure physical gold, don’t worry about it. The benefits of this change will flow to all, producer and consumer alike, and with hindsight capital gain will appear very small cheese indeed in comparison. Everything will be recalibrated, and everything will become ridiculously straightforward. The participants in any symbiotic relationship are not necessarily aware of how this relationship functions, but rather participate intuitively.

A properly functioning value exchange system is no different.

"God always takes the simplest way." - Albert Einstein

Blondie

Gold: Arbiter of Value

2011-09-17T15:19:00.007+12:00

Physical gold is the unbiased arbiter regulating the natural ebb and flow of human value. In this role gold supplies integrity to the flow.

The Paradigm Shift

2011-08-24T23:06:00.008+12:00

The nature of the system which binds individuals into a society has a great deal of influence upon the nature of that society, of the motivations, behaviours and resulting experiences of the individuals within it.

To state that differently: Human society arranges itself in response to the monetary system it utilizes to facilitate the flow of value between its constituents. It is the monetary system that dictates the nature of the society, and the motivations of its individual members. It exists as a society because of the existence of this flow of value; because it has a monetary system. Without a monetary system we are simply many self-sufficient individuals, not a society.A focal point is a point of convergence. In optics this is the convergence of light, which is caused to converge by a lens whose influence alters its trajectory. In game theory a focal point is a convergence of attention or action, brought into focus once again by a lens.

The paradigm we inhabit as a society is created by the monetary system we utilize to trade our value; change the system and the paradigm changes too.As our confidence in the integrity of monetary instruments we currently use to store value diminishes (because these instruments are claims on value rather than assets of value), so physical gold is increasingly coming into focus as the foremost asset in which one can have confidence others will also turn to store their value. Value (the expression of utility) is the fundamental good a monetary system circulates, and this circulation is the very reason for the system’s existence; our desire to specialize in our productive efforts for mutual benefit whilst avoiding the austerity of self-sufficiency.

This diminishing confidence in the integrity of the claims in the current system is the lens which is refracting our attention, bringing into focus the point at which a paradigm shift occurs.When the monetary system’s existence is threatened, those with value held as claims in the system (savings) naturally seek to preserve it by removing it from the system, exchanging their claims on value for assets of value. That a replacement system will emerge is guaranteed by the distaste for and the inability of most individuals to be self-sufficient. The path of least resistance to a replacement system would be to one that is essentially the same as the current one, except for one crucial difference: the stock of surplus value (savings) is never returned to be stored in the monetary system, but instead held outside the system in physical assets. Such assets can be sold as and when their owner desires in order to utilize the value they have stored. The storing of value inside the monetary system has always been the root of our problems.

The paradigm shift occurs as we collectively transfer our stock of value (savings) from the abstract claims of the monetary system into tangible assets, extinguishing the claims and their counter-party risk and receiving our payment in full.

Only one physical asset, gold, specializes in the storage of value (gold's only utility), with a potentially infinite time horizon and a stable stock. Any other asset will store value too, but for a limited time in a fluctuating stock, sooner or later being consumed as all other assets have other utilities too. Gold is simply the best asset in which to store value.

"Indeed, there can be no other criterion,
no other standard than gold. Yes, gold,
which never changes, which can be shaped
into ingots, bars, coins, which has no
nationality and which is eternally and
universally accepted as the unalterable
fiduciary value par excellence."

-Charles de Gaulle

An honest monetary system requires but one denominator.

The process by which we change our monetary system is both natural and spontaneous, and it is already underway. An honest monetary system is one in which the money is valued by the assets, not the assets by the money. In such a system gold, as the best value storage asset, will serve as the proxy for all assets, for value, as the denominator of the monetary system we utilize to flow value between us.

The current paradigm is within an inequitable system, while the future paradigm is within an equitable one. We will experience a paradigm shift because the inequities of the current system are finally overwhelming our society.

It's just time.

Blondie

Short and Sweet 2

2011-08-15T21:45:00.000+12:00

The root problem remains the intentional undervaluation of gold;

all others are merely derivatives of this.

Short and Sweet

2011-07-11T21:15:00.000+12:00

There is never too much currency nor too little gold,

just an incorrect rate of exchange.

The Pyramid Scheme

2011-06-18T23:04:00.002+12:00

Physical gold is an asset, and as such finds its place at the pinnacle of the asset pyramid of tangibles as the wealth reserve asset, freely chosen by the market in which to store surplus value for any (potentially infinite) length of time. The inverse debt pyramid which stands atop the asset pyramid is composed entirely of abstractions rather than tangibles. These abstractions are all claims on assets, or further derivatives thereof as merely claims on claims, excess claims (synthetically created by being “borrowed” into existence rather than representative of value already created), wagers on the value of this claim or that claim, spreads between claims... the list goes on.

All these claims (ie. the entire inverse debt pyramid) are subject to counter-party risk, which is to say that default will diminish their value. They are promises of payment, dependent upon the means and intent of the debtor (counter-party).

All assets in the tangible pyramid merely are what they are, dependent upon no one in the sense that they are payment in full, already taken.

As claims on assets, the inverse debt pyramid is a derivative of the tangible asset pyramid. Long before any element of the claims pyramid ever came into being, gold was the pinnacle of the asset pyramid as the supreme store of surplus value (wealth) in a barter economy. The first of these claims originated as claims on gold, as notes claiming ownership of x amount of gold stored at y by z (and as such “z” is the issuer of the notes), circulating as a medium of exchange for the sake of convenience. After gaining currency in this function of convenience, the quantity of notes could quietly become greater than the quantity of gold they purported to represent... How Does Paper Find Value?

The values of the assets and the claims had been disconnected.

All monetary claims making up the inverse pyramid are ultimately extensions of credit based originally upon physical gold. These extensions have been steadily inflated for the entire existence of the debt-based monetary system... should physical gold, the wealth reserve asset, cease to be available in exchange for claims upon it, the debt pyramid will deflate. This contraction of credit will not be slow and steady as the inflation was, but rather sudden and catastrophic. Being based purely on confidence in the claims, the situation can and will change as quickly as one can change their mind, with this loss of confidence being known, paradoxically, as hyperinflation. (It will be much like the popping of a bubble, because all this debt in fact is a bubble of epic proportions; when people start finding the utility of an item to be in its value (ie. ever increasing value or capital gain) rather than its normal utility, then it is a bubble.)

Initially, this process creates demand for paper money and paper gold, as whatever value is present in the upper levels of the inverse debt pyramid must pass through these on the way down into gold and the security of the asset pyramid... contracts must be redeemed for dollars before gold and other assets can be purchased, and paper gold is far more readily available than much rarer physical item. This is the deflation which precedes hyperinflation, where the paper currency (cash) increases in value as the value flees the less liquid claims higher up the pyramid. Hyperinflation follows, as the value of physical gold decouples from paper gold claims, and the paper currency circulates faster and faster seeking refuge in anything tangible, becoming practically worthless in the process. This is in reality the deflation of the remains of the inverse pyramid against physical gold, and the consolidation process is complete.

The market has discounted the claims in accord with their true value as given by the assets.

Blondie

Artificial Scarcity

2011-05-03T00:19:00.001+12:00

Value, like beauty, is in the eye of the beholder. It is the measure of the utility a person assigns to something at that point in time. That which gives your day’s work value is the utility found in it by either yourself or another, depending upon which is the ultimate consumer of your efforts.

A monetary system exists solely to facilitate the trade (flow) of value between the users of that system. The current monetary system creates an artificial scarcity of value amongst some of its users and an artificial abundance amongst others via its inequities, effects which have no small impact upon the choices made and the behaviour exhibited by these users, not to mention the effect’s influence on the perceptions of all users of one another, which by extension causes further effects to be felt.

The thing is, there is no actual shortage of value in the world at present, and there is a large quantity of new value created daily via the efforts of billions.

As the human economy has evolved from subsistence and gift culture to quid pro quo (like for like) forms of exchange, so has newly enabled division of labour continually increased productive output. This increased output has been further augmented by the exploitation of energy sources such as fossil fuels, and technological progress applied to production, distribution and research and development.

What makes the existing system inequitable? If you produce value, and trade it within an equitable monetary system, you should, all else being equal, still have the same relative amount of value in your ownership with which to consume, save or trade further. The current system does not allow this, for two reasons:

1) Extra currency can be and is produced by the currency’s issuer (governments or their proxies), which dilutes the value (buying power) of existing stock. Note that the production of new currency required no simultaneous creation of value, yet the issuer is able to exchange this currency for other goods or services of value. The act of acquiring value without ever producing any to exchange for it is inequitable: this is not a quid pro quo exchange.

2) When anyone borrows money, they receive credit, which is a claim on currency. Once again, no value has been created and yet the number of claims on value has been increased. A borrower can (and does) exchange this credit for tangible items, thus they have consumed value without creating any, similar in fashion to the currency issuer.

This is inequity in action, as sanctioned by our current monetary system. Both the currency issuer and the borrower are net drains on the aggregate value in the monetary system.

One way to attempt to avoid this dilution of one’s claims on value is to exchange the ever-diminishing currency for tangible goods as soon as possible. Of course if you were wanting to save this surplus value for the future this strategy has obvious limitations too: a stock of widgets or commodities may become obsolete, rot or tarnish, or simply fall in value as more are produced elsewhere and brought to market. They may not be easily divisible; they make take a lot of space, incurring both inconvenience and cost to their owner. Excepting governments and borrowers, everyone else would ideally like access to a compact, divisible, fungible, portable, widely recognized, of fixed quantity, and with no other uses for which a substitute could not be found asset in which to store value. Such an asset would be of great utility to a lot of people, and as such be greatly valued.

People with surplus value thus become investors, to seek a return on their invested surplus to offset the otherwise unavoidable loss of value. All investments are made with surplus value (some of which has been borrowed to be invested), which has been netted out of the flow of value by those who produce more than they consume. This stock of value is commonly known as wealth. But governments and borrowers are consuming more than they produce, and as such are consuming from this wealth accrued by others. Nominally, the investor’s wealth is stored, but in real terms much of the value has been utilized elsewhere.

Those who are able to consume more than they produce do not have the same appreciation of value and the skills and efforts required to produce it as those who choose to or have no other option but to live within their means. Value becomes distorted, becoming subject to more than just the utility of the good or service to the prospective purchaser, because now how one came into possession of their claims on value with which to make the purchase has bearing. Again, when you did not expend effort commensurate with the value you consume, you do not value the things you acquire with it as highly as those who did.

Those who work for their value value things more highly than those who do not. For those who work for their value an artificial scarcity has been created, whereas those who do not expend as much effort experience an artificial abundance.

This artificial scarcity is not illusory: those working for their value are able to utilize less of it than they create, and vice versa. Over time the extra leverage enjoyed by those able to utilize more value than they have created helps them accrue ever larger quantities proportionally. The worker, meantime, finds they are working harder and harder just to standstill. This is not sustainable. Today a larger percentage of the world’s wealth is owned by a smaller percentage of it’s population than ever before.

This is inequitable.

Such inequity has consequences on the actions of both groups, and their perceptions of both themselves and one another, and these actions and perceptions both have continuing ramifications rippling out through society and the world we interact with. Much of what is considered human nature, while certainly being potential human action, is in reality symptomatic of the causes outlined in the two points above.

Those experiencing scarcity must compete, and because ultimately they are competing for survival. Moral codes may be broken, as a matter of necessity, or at least perceived necessity. People are forced to behave in ways they otherwise would not, with negative repercussions for society, as well as for their own feelings of self-worth. Acting outside one’s moral code is not a way to build self-esteem.

In contrast, those experiencing artificial abundance, undervaluing everything, exhibit a propensity toward consumerism, wastefulness and hedonism. Things are promoted and consumed regularly on the basis of want rather than need, sometimes even just to demonstrate to others that one possesses the means to do so. Capital, being undervalued, is routinely misallocated into all sorts of marginal activity. Easy come, easy go. All kinds of demand is created for goods and services that there would not otherwise be such demand for, leading to unnecessary pressure on resources, and the pricing of many things out of the reach of much of society.

Quality is lowered in the bulk of all goods and services, except at the very top end, which experiences unnaturally high demand.

The negative consequences of both these artificial experiences are manifold.

Generally speaking, who are these people experiencing artificial scarcity? Those who have few or no assets to collateralize. The poor. And who enjoys the artificial abundance? Those with assets to collateralize, the affluent. We have two feedback loops here, where the rich get richer while the poor get poorer. This situation is caused by the monetary system, and cannot be sustained indefinitely.

Financial sector executives can (and do) receive tens of millions in bonuses (on top of already stratospheric salaries), for what? For creating value? No. For manipulating value, and accruing large volumes of it for their employer, courtesy of massive amounts of leverage (borrowing i.e. utilizing the value of others) unavailable to anyone else.

While it is clear that all the people involved (ie. everyone) enjoy wildly divergent standards of living not necessarily commensurate with the value they toil everyday to produce, nowhere can anyone be seen to be enjoying a better quality of life than they would in an equitable system, when the psychological effects are also considered.

"I got a good job and I tried to put my money away,
But I got debts that no honest man can pay"
-Bruce Springsteen, "Atlantic City"

To get something for nothing implies that somewhere someone must have received nothing for their something. To consume more value than one has created has a cost which must be felt somewhere by someone.

The governments and borrowers of the world have been enjoying a seemingly free lunch for many years. The bill is due.

Blondie

The Value of Objectivity

2011-04-23T17:45:00.000+12:00

A shared objective reference point for value gives people the ability to value themselves.
The irony here is that if you understand what this means, you don't actually need the reference point to do this. You'll also find something to consider in my proposition that the most abundant element in the universe is not stupidity, but irony.
This idea of valuing oneself via the utilizing of an objective reference point for human value further reveals the staggering untapped utility of gold for humanity, utility which can be enjoyed by all irrespective of whether or not they actually own any gold. This function is found as a corollary of a simple free-floating market in unencumbered physical gold, the basis of an asset-based monetary system.

It is also another flap of the butterfly's wings with regard to the evolution of our collective consciousness.

Blondie

A Freegold Standard

2011-04-14T23:43:00.001+12:00

Value is created whenever one brings into existence a good or service in which anyone finds utility. Any surplus value (stock of value, aka wealth) accrued after income and expenses (flow of value) are netted out is most expediently stored in unencumbered physical gold (Freegold). Currency finds value in accord with its ease of exchange for gold. If a currency is valuable, it is easy to find gold bidding for it, if not then more currency must be offered until gold is coaxed out to exchange for it.

The monetary system, as the sum of its functions (unit of account; medium of exchange; store of value), is simply the system we collectively agree to use to facilitate the flow of value between individuals and groups in society (without such a flow we would all need to be completely self-sufficient individuals). As such, the functioning of the system is much easier to visualize when we consider it in terms of only the value and how the value circulates, is stored, and ultimately consumed as a sophisticated spontaneous and continually evolving arrangement of stocks and flows. Viewing money as simply currency (medium of exchange), and accounting for transactions only in nominal currency terms is misleading - currency has value in accord with the value of real goods or services for which it may be exchanged only, and this exchangeability is not fixed, but rather always in flux. Value is simply the measure of utility, and if a currency buys less or none of what one wants, then it has little or no utility, and hence little or no value. A system of account requires a unit with at least some sort of objective basis to have relevance.

To perform well, any store of value should not be used also as a medium of exchange, as at least part of the value being exchanged in any given transaction would not be kept as savings, and would need to be further exchanged to meet current expenses. This increases the velocity of the store of value, reducing its value. Gold, like any other store of value, stores value best when it lies very still.

With a Freegold Standard, only the exchange rate of a currency with Freegold need be established to find the currency’s value, as Freegold is the proxy for the stock of value, wealth.

Freegold acts like a sponge, absorbing surplus value in any given zone, and transferring it between zones through arbitrage, out of deficit zones (net value consumers) and into surplus zones (net value producers). All sovereign entities, whether individual, state, or nation, interact with this system in the same way, only on different scales (micro/macrocosm). They may have different motivations for individual transactions when storing value in or retrieving value from Freegold, but the mechanism they use will be the same - the purchase or sale of unencumbered gold in a floating free market.

The Freegold market is established by the bidding for unencumbered physical gold in preference to encumbered gold derivative products, as these derivatives are found to not perform as well as unencumbered physical in monetary crisis, and as a result are discounted by the market. This is a simple and spontaneous reaction in accord with the self-interest of market participants. When monetary confidence falters the preservation of value becomes the focus, and in this gold is the obvious focal point.

In practice, any currency is valued by the market only by that which it can be exchanged for. Under a Freegold Standard, currencies are technically, but not officially, backed by gold - a currency that cannot be exchanged anywhere anytime by anybody for gold will be avoided in favour of one that can. It is privately-held gold reserves that make themselves available for this exchange, at the right (floating) price, not Central Bank gold reserves. CB reserves are for currency credibility purposes, and a national savings reserve for facilitating international trade in times of distrust and/or great monetary stress. A Central Bank buys or sells gold to manipulate the value of its currency, buying to inject currency into circulation thereby weakening its exchange rate, and selling to remove currency from circulation and strengthen it.

The Gold Standard
The fixing of the exchange rate between gold and a given currency (aka the classic Gold Standard) is a (barbarous) mechanism which seeks to appropriate surplus value (aka wealth) into the currency rather than the gold reserves via fixing, making the value available to the issuer of the currency (ultimately the government), and obviously no longer available to the savers who stored their value there (this deception leads to bank runs and bankruptcy). Official gold reserves dwindle, while claims on them rise. Inequitable and unsustainable.

The Fiat Scam
The ruse of ceasing redemption of currency for gold leaves the creditor with no benchmark to evaluate said currency as time passes, and as such leaves them behind the curve as currency continues to be issued, now relatively unimpeded, the creditor always imputing more value to the currency than they should. Until that day when confidence is entirely lost, at which point the debtor consolidates their position by revealing that they place a very high current value on their gold reserves - one high enough that they can pay down their entire obligations with only, say, half of their physical gold reserves.

Keeping the actual quantity of the debtor’s physical reserves a mystery all the while adds to the debtors advantage, and every extra day that this scam can be kept intact in the latter stages is worth far more to the debtor than many days were in the early stages.

Debt as Wealth
Deferred payment (debt) is only able to be accumulated with accompanying deferred purchase of goods and services of real (tangible) value. In other words, if the overhanging debt (deferred purchase of tangibles) is corralled in non-tangibles like bonds and currencies.

Stored there it will have no effect upon the perceived values of real goods and services, because it is not bidding upon them. As discussed in It's the Value, Stupid, debt is synthetic/promised/yet to be created value circulating at par with real (already created) value, both in the form of currency. The difficulty in telling them apart is that you can’t, because currency is fungible. They both function equally as medium of exchange, exchangeable for either tangibles or non-tangibles.

This corralling requires inflating the credibility of the issuer of the non-tangibles. As the quantity of the non-tangibles inflates, so must the credibility of the issuer, because anyone storing their value in a non-tangible will only do so if they have confidence they can actually get the value back later, if they consider the issuer to be credible. To issue ever more non-tangibles, it follows that the issuer must have ever-increasing credibility in the face of these claims.

There are lots of savings in these non-tangibles containing almost no real value, but only the confidence of those using them to “store” their value. Of course when someone goes into debt by borrowing currency, and then uses the borrowed currency to purchase tangible goods or services, value passes into their possession. The currency was only a claim on this real value; it took an exchange of these claims for payment in full, a tangible, for actual value itself to pass into their hands. There are currently fantastic quantities of these claims corralled in non-tangibles, dwarfing the current supply of tangibles, or payment in full. When this confidence falters, it “snaps all at once” rather than unwinding smoothly.

A Freegold Standard
Unencumbered physical gold as the ultimate monetary denominator, benchmarking the value which the monetary system serves to exchange, acting as the objective reference point. From the exchange rate (price) of Freegold in any/all other items (currencies and assets alike), the relative value of any/all can be established in a completely objective fashion. In this arrangement it can be seen that it is gold valuing currencies, and therefore everything inside the monetary system, from its position as the physical wealth asset outside the monetary system. Gold is the master numeraire because it is the master proxy for value, denominating all lesser units of account, and thus providing relativity to all participants in the value-exchange (monetary) system.

This can only come about when gold is traded on a physical only basis - no form of gold derivative should ever be traded at par with physical, on the assumption that it is “as good as gold”, because any derivative is not and could never be as good as possession of the real thing, by definition. Gold is physical gold in the here and now only. Nothing more, nothing less.

Human society arranges itself in response to the monetary system it utilizes to facilitate the flow of value between its constituents. This is to say that the monetary system dictates the nature of the society, and the motivations which drive the behaviours of its individual members.

The current monetary system is completely inequitable, as can be seen in the continual movement of wealth (stored value) to the wealthiest .01% of individuals, and away from the poorest. This discrepancy has never been greater, and continues to grow. Value is liberated from its creators and spirited away through the continual depreciation of the savings medium. A Freegold Standard is a return to a fully equitable system, where the net value producer keeps the unconsumed fruits of their labour until such time as they wish to consume them, or give them away. It does not allow the government to sequester privately saved value any longer, to be spent arbitrarily by those not attributed with its creation. A great deal of certainty is found by all users of such a system.

With the benefit of a shared objective reference point to gauge relative value (the utility found in a good or service), all individuals will have the opportunity to go about producing the highest value/utility they can, in accord with this new objective data, which will result in myriad new possibilities to apply existing skills, capital and knowledge far more effectively and productively than at present.

To separate self-sufficient human beings, gold has no utility; but as part of a larger interconnected human super-organism gold has the highest utility, as the heart of an equitable value circulation system.

A Freegold Standard: elegant in its simplicity.

Blondie

It's the Value, Stupid

2011-03-20T15:48:00.002+13:00

Warren Buffet recently wondered publicly at the uselessness of gold, all of which ever mined, he noted, would fit into a cube 67ft to the side. $7 trillion worth he said, which could buy seven Exxon-Mobils and half the worlds' arable land and still have $1 trillion walking around money in your pocket or somesuch. He does concede it is nice and shiny and he could use the cube as a mirror.

------

When we create something which others find to be of value to them, we often enter into an exchange of this good or service for other goods or services of value to us (self-sufficiency can be fairly austere), and as a result we find that we can all better specialize in our individual efforts, thereby increasing our productivity, efficiency and level of technology. Utilizing a medium of exchange rather than engaging in direct barter further increases these benefits manyfold.

The medium of exchange is indispensable to both human society and its continuing evolution, at least as we currently understand it. The exchange of value it facilitates brings its users together in such a way as to render the whole greater than the sum of its parts.

Everyone using this system of value exchange is likely to be wanting to accrue a surplus of value once they have acquired the goods and services they want from this flow, rather than run a deficit, no? They are aiming to have, overall, larger income than expenses, allowing the buildup of a stock of value, commonly referred to as wealth.

Some of this surplus will be redeployed into capital assets to fuel further productive growth and enhance the operating margins.

Some of this value will be saved.

So we have value, created by people (yes, some of it is arguably dug out of the ground or similar, but it must still be mined/harvested etc., in order to realize that which is otherwise only potential value), willingly exchanged between people, some of it consumed, some reinvested to create more value, and some saved.

The consumed and the reinvested values were exchanged using the medium of exchange, and in both cases the ultimate owner of these values took their payment in full in the form of an asset. The medium of exchange is simply a claim in the system, whereas the actual value, the utility the end user is after, is in the asset. The value to the asset’s ultimate owner lies in the utility the owner finds in the asset. Value is the measure of utility, subjectively assigned by each individual. The medium of exchange, in facilitating the acquirement of a useful asset, has instrumental value only. It is the means, not the ends.

What to do with the saved value?

It could be held in the medium of exchange if this medium held its buying power over time, if it could be exchanged at a later time for a comparable value with that which was initially relinquished, but this buying power is not maintained, as we know. Instead, today additional medium of exchange is created upon the signature of a borrower, as credit, by banks as a matter of course; with the Government Treasury Department's issuance of bonds; and by the Central Bank expanding its balance sheet to monetize debt, all in accord with the aim of constant monetary inflation, itself a matter of regulatory policy.

So the medium of exchange is constantly diluted, by the promise of value yet to be created. These promises of future value circulate at par with value that has already been created, in the form of the medium of exchange. All three of these methods of medium of exchange creation are based upon promises of value yet to be created.

Saving surplus value in the constantly diluted medium of exchange is a losing proposition for the saver. Value is constantly being drained from such savings, as many people are using a promise of value not yet created to acquire assets, to receive payment in full, concurrent with the ever expanding volume of the medium.

Gold historically served in the store of value function, which is why Buffet is even commenting upon it; it has been a fundamental part of the human monetary system for millennia. It served in this role as a simple physical asset, just like any other asset, but the only practical function of gold as an asset was as an excellent store of value. It rose in prominence in this role simply because it performed it better, for a long list of well documented reasons. Gold was the supreme physical wealth reserve, sheltering surplus value.

It stopped performing so well as a store of value once it was brought inside the monetary system. It was monetized.

Firstly, gold was deposited with a third party (banks, ultimately) for security and notes issued to the depositors, notes which eventually began to circulate as a medium of exchange. At this point, all the value is still intact and undiluted - a 100% reserve ratio. But this changed when gold lending began, and particularly when notes were lent in lieu of the physical metal, as there was now only a partial reserve: the quantity of gold (or at least notes that traded at par with gold, and were accepted to be “as good as gold”) had been inflated beyond the actual physical reserve. There are now more claims on value than there is value currently available. Promises priced at par with the real thing.

Secondly, in an effort to divert some of this surplus value into their own possession, the exchange rate of gold with paper currency issued by Government Treasuries was fixed by decree, giving value to said currency. The Gold Standard. A scam, utilizing the reputation of gold. Savers feel secure saving in gold-backed currency, and as such they exchange their surplus value for these notes, printed by the Treasury. The surplus value that once accrued in physical gold, now, by virtue of the fixing of the exchange rate with the currency, accrues instead to the currency. Gold has been monetized, brought inside the monetary system.

The supreme physical wealth reserve was neutered, firstly by the inflation of gold receipts higher than the actual physical reserve (unofficial monetization), and secondly by official monetization. Both are (relatively opaque) misappropriations of the value stored in it.

The banks where the savings denominated in currency are regularly held on deposit are the public’s gold exchange window, and the front for the Treasury. In the event of a run, the bank simply closes when insolvent, leaving remaining creditors with no value. Where has their value gone?

Of course over time the Gold Standard could not be maintained as it could not facilitate large-scale wars (WWI and WWII could not have been financed on the Gold Standard), and because its reach was not global; foreigners without a fixed exchange rate for gold found gold could be acquired from regions where it was fixed more cheaply than their local price, so gold gradually migrates to where it holds the most value.

The Gold Standard became the Gold Exchange Standard, with the physical gold window only open to foreign Central Banks, until finally that window too was closed to stem the flow before the stock was exhausted.

We are left with a system of unbacked fiat currencies, all floating against one another with no objective benchmark from which to ascertain their true value. This is no accident; it is the logical last stage of the surreptitious pilfering of value. Gold was this objective benchmark, historically, but in this fiat era gold has been encumbered with a plethora of derivatives, leaving no market value for physical gold. Physical gold is available instead at a massive discount: the “price” of gold in this fiat system is not found in a physical only market, but in one in which the physical is diluted with promises of future gold (all gold derivatives). The “price” is in fact a hybrid of physical and paper gold.

The value of the scarce physical metal is considerably higher than the value of the mass produced paper contracts which dilute the price but not the physical quantity.

And now we come back to the beginning, where the old becomes the new.

Buffet would feel quite differently about his theoretical cube of gold if physical and paper gold were not treated as interchangeable with regards to their value (how can they honestly be when there is a ratio of possibly 100:1 paper to physical?), and the physical were valued in a physical only market as a physical asset. The perfect vehicle for the saver’s surplus value. As demand for physical gold gold intensifies, this decoupling is inevitable.

The divisibility of that cube to absorb value is practically infinite. As value is stored in it, the exchange rate with currency rises, all else being equal. Gold is once again valuing not only the currencies, but by extension everything else too. It is the objective benchmark allowing us to ascertain the relative values of everything.

Central Banks and the very wealthy the world over hold reserves of physical gold in preparation for this inevitable change.

It is notable that Buffet valued that $7 trillion in todays assets. It is only the assets available for exchange with currency that give currency value. This is why gold was monetized at all; to eliminate it as the physical asset which openly and accurately valued currency, thereby terminating the ability to debase currency and divert a flow of value into the hands of those who expended no effort for it.

Of course when physical separates from paper gold, gold will then be accurately showing just how much value has been channelled away from savers paper savings, and where it now resides.

Freegold is unencumbered physical gold as the wealth reserve asset outside the monetary system. Gold will spontaneously reassume this function when physical separates from paper. A casual glance at the balance sheets of those Central Banks who mark-to-market their gold reserves reveals that this is not only expected, but it has been prepared for.

From this position outside the monetary system, as a simple physical asset, gold denominates everything inside the monetary system in terms of value, because accrued value is all that this asset is, accruing value is all it does. This is its function. The function of gold.

The ONLY function of gold.

Blondie

Freegold, Simply Put

2011-02-24T09:49:00.000+13:00

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

Simply put, anyone, anywhere, must be able to exchange the currency for physical gold at a floating rate, in order to assume unambiguous ownership of said gold, and vice versa.

Gold has then fully assumed the store of value monetary function, as an unencumbered physical asset outside the monetary system.

Paper/digital currency continues to be utilized as the highly-efficient medium of exchange.

These two functions are thusly harmonized: whenever a currency changes in volume or velocity its exchange rate in gold is automatically adjusted by the market, resulting in a perfectly equitable and easily understood system for everyone.

The buying power of savings is kept constant, which creates certainty; the currency’s fluctuations are stabilized; and the opportunity for complete due diligence to be undertaken arises, minimizing malinvestment and misallocation of capital.

This simple change results in a complete paradigm shift into an equitable system of integrity, with immense positive flow on effects in all spheres of human interaction and activity.

This is an emergent system which will arise spontaneously from the collapse of the current unsustainable one, as individuals the world over simultaneously attempt to preserve what liquid wealth they can in what will be their natural focal point - physical gold.

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

Some further Einstein quotes which may assist in the absorption of this simple explanation of my understanding of Freegold:

“Any intelligent fool can make things bigger and more complex... It takes a touch of genius - and a lot of courage to move in the opposite direction.”

“A man should look for what is, and not for what he thinks should be.”

“The true sign of intelligence is not knowledge but imagination.”

“To raise new questions, new possibilities, to regard old problems from a new angle, requires creative imagination and marks real advance in science.”

“You can never solve a problem on the level on which it was created.”

“All religions, arts and sciences are branches of the same tree.”

Very, very simply put:

-----------

As an unencumbered physical asset, gold is the single objective reference point from which the relative value of all else can be ascertained.

-----------

The difference with today being that gold is currently encumbered, and cannot function as said objective reference point until this changes.

h/t Ender for his recent usage of the term "unencumbered".

This post was originally a response to a demand (here) that as per an Einstein quote that if a concept could not be explained satisfactorily to one's grandmother then one did not understand it at all, hence all the Einstein references.

How Does Paper Find Value?

2011-02-20T19:15:00.003+13:00

For much of its history, society utilized a direct exchange system of goods or services for other goods or services, called barter. All physical goods involved in barter were assets, and as such constituted payment in full.

Most of these goods were eventually either consumed or decayed over time. Gold was the exception, being subject to neither of these forces. Being compact also it was ideal as a portable exchange asset, for trading over longer distances. Over time it accrued in the hands of and became associated with those who tended to produce more than they consumed: the wealthy.

Needing to be kept somewhere secure, a lot of this gold eventually came to be deposited for safekeeping on the premises of those who had continual need for a secure gold vault: those who worked the gold, the goldsmiths.

This deposited gold was accounted for in a ledger book, with the depositor receiving a corresponding note, this note being an obligation of the goldsmith to exchange it for gold upon demand.

As gold is fungible (which is to say that any weight of gold is interchangeable with any other equal weight of gold (all other things being equal)), it was often more convenient for these notes rather than the gold itself to be exchanged in transactions, with the goldsmith’s obligation to deliver gold being to the note’s bearer. These notes are the paper currency of a de facto gold standard monetary system.

Gold is a physical wealth reserve asset, thus it represents payment in full, whereas paper currency is a debt based currency that represents a claim in the system.

This is the birth of a paper currency-based monetary system, as distinct from a system of trade based upon barter. We can see that it is gold (as an asset outside this monetary system) acting as the reserve asset which supplies the paper notes (the currency) with their VALUE.

It is at this point that the goldsmith (now the banker) sees that much of the gold held in the vault never physically leaves, and decides to lend some, for a fee (interest). Since they exchange for goods at par with gold, notes for gold can also be lent, and notes held as an asset by their bearer can be held on deposit too. Thus is a synthetic supply of currency levered into existence, with multiple claims potentially issued on a given weight of actual physical gold on deposit, and this is before the advent of fractional reserve banking.

Today’s monetary system is an extension of this, where all forms of paper denominated “asset” have a counterparty (someone else for whom this asset represents a liability/obligation), and as such are claims in the system rather than payment in full, and are all derivatives of the original gold-backed notes which birthed the system.

"Despite the huge tide of paper pyramided currency and notes which are now flooding the world, at some point, every credit extension must return to be based, in however minuscule a fashion, on some deposit of gold in some bank somewhere in the world."[1]

Even more succinctly: All Paper is STILL a Short Position on Gold.

“The U.S. Treasury bond market has a sine qua non adjunct in the gold futures market. Without it, bonds would be irredeemable: they would be promises maturing into more promises, maturing into more promises, etc., ad libitum.”[2]

To which we could add that the gold futures market has a sine qua non adjunct in the physical gold market, without which futures would be irredeemable: promises maturing into more promises...

The best form of savings one could hold would be that which values the paper currency, rather than in the paper currencies themselves, or in that which is valued by the paper currency.

"In this light, the ‘preservation of wealth’ simply means - he who holds gold has already been paid."[3]

[1] http://www.cephas-library.com/federal_reserve_chapter_6.html

[2] Position Paper professorfekete #8, October 27,2010 Is There Life After Sudden Death?*

[3] Ender's Angle: The Flow of Value

h/t Golden, Ender, John Exter, FOFOA

The Physical Gold Advocate

2011-02-16T12:24:00.000+13:00

The Physical Gold Advocate is aware that the true function of gold is as the bedrock upon which the foundations of a true monetary system stand, as the objective reference point from which to assess the relative values of everything else, available without impediment to anyone who has value they wish to store in it. Gold can only function in this fashion as an unencumbered physical asset outside the monetary system: only from outside can it objectively value that inside the monetary system, and thus relativity is established.

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The PGA knows that the current monetary system can be more accurately described as the absence of any true system at all, that the inequities it creates will continue to grow, and that as a result sooner or later gold will be required to perform its function.

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The PGA acquires physical gold because s/he is aware of the absolute necessity that this said function be utilized, and is thus comfortable procuring gold while others scoff in ignorance, that just because their friends and neighbours do not comprehend the function of gold it does not follow that millions and perhaps billions of people of other cultures do not.

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The PGA has already made the change in their own thinking and actions, and is thus exerting their own quiet little pressure for the return to equilibrium. It is not necessary to change anything or anyone else; change will come when it is has to come, and as a result it will be change backed with conviction.

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The PGA thusly does not endeavour to change the world, knowing that this change will inevitably arise in and of itself, as a simple societal response to restore balance, when society itself can no longer bear the strains of inequity.

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The PGA has withdrawn their claims from the system, by exchanging them for payment in full, physical gold. In doing this the PGA knows that s/he has done what they can to withdraw their support for the system, and are satisfied to wait for the rest of the world to wake up too.

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The PGA understands that the "bird in the hand is worth two in the bush", and as such does not hold gold-related instruments in the expectation of enjoying leverage from the "revaluation" of gold, but instead enjoys the peace of mind that only holding payment in full as a physical wealth asset outside the monetary system can bring.

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The PGA knows that other participants in the gold market are traders, busy buying and selling paper gold (contracts) in an attempt to capture movements in the price, and that these are actions of people who do not understand the true function and role of gold, that they may as well be trading anything at all. The bottom line is that the contracts they deal in can and will be settled for fiat currency at the end of the day, and as such do not truly represent gold at all. These traders are not only capturing volatility profits, but they create the volatility, which itself is the antithesis of gold's true role, that of being a stable benchmark. Trading for volatility is contributing to the problem so not only are they not holding real gold, but this trading is denying the rest of us the beneficial stability of price that gold is meant to deliver.

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The PGA is expecting at some point to witness a most dramatic plunge the “price” of gold, from which it does not recover, and as such is mentally prepared for this, knowing that the drop reflects the perceived value of paper gold rather than physical gold, just as the current price does. The PGA knows that actual physical gold will not be available at this lower price, and that there is likely to be no official exchange rate or market for physical for a time, until the dust settles and a physical exchange rate mechanism established which can yield a monetary equilibrium. The PGA has prepared reserves of other assets so s/he will not need to exchange their gold during this time.

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The PGA knows that this (paper) price plunge will signal the decoupling of paper gold from physical gold, and with it the arrival of the monetary consolidation process, and the end of physical gold availability at a discount.

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The PGA recognizes that Central Banks do not hold hundreds of millions of ounces of physical gold as a reserve asset for no reason, and that it is not mere coincidence that they are currently net purchasers; that if gold’s only value was as a commodity there would have been no need for Nixon’s closing of the gold window in 1971; that foreign nations would have had no desire to exchange their $US reserves for gold in the first place.

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The PGA realizes that in order for the fiat currency experiment that has been conducted globally since August 1971 to have continued as long as it has, it has been necessary that gold be stigmatized as an unnecessary relic, and its proponents as misguided and unsophisticated.

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The PGA takes this situation as s/he finds it. One cannot change the system with reasoning, by argument, and certainly not by force. Knowing the wisdom of going with the flow, the PGA simply lives their life, steadily exchanging any excess value they may accrue for more payment in full as they go, enjoying the massive discount while it lasts.

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The PGA does not try to convince others of the need to restore gold to its true function, knowing that this will occur in due course anyway. Rather, the PGA knows that by simply asking questions of those who are already having their doubts about the integrity of the current system, they have planted seeds which will bear fruit for their owners in due course. One’s knowledge has value in direct proportion to the effort it took to obtain, and knowing this, the PGA does not want to diminish this value for another. The right question at the right moment is all that is required.

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The PGA knows that the bulk of the ailments of the world are but symptoms stemming from the current monetary system and the inequities it promotes, and subsequently s/he does not attempt to “cure” these symptoms, but instead demonstrates empathy for others while encouraging them to believe in themselves and thus be empowered to find a wider perspective themselves.

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The PGA, understanding the futility of attempting to eradicate symptoms which will eventually disappear along with the disease which causes them, now has the opportunity to consider how the value they have personally stored in their own humble way may be best utilized after the consolidation as a practical and positive example to others.

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The PGA sees that the current paradigm is compressing into a single focal point, and that it is through this point that humanity will pass, evolving into the new paradigm which then expands out the other side. This focal point is gold, and it is the decoupling of the prices of paper gold and physical gold which will act as the lens, bringing this point into focus as it is realized that a debt is simply a promise, and that there are nowhere near enough tangibles in the world to make good on all these promises, but that gold is the one asset which can expand as far as required to absorb these without impinging upon the rights of others.

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The PGA sees that this inevitable process is a grand deflation, a deflation of everything against Physical Gold, not currencies.

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The PGA eschews the owning of shares is mining companies. Gold in the ground is too valuable to be controlled by private companies, and it will be declared a public wealth reserve as these companies are nationalized, and the shareholders paid out in currency with the company assets valued at par with paper gold rather than physical.

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The PGA, having obtained gold before this time, knows that their gold will expand in relative value during this process, but that the greater benefit in the long run will be the individual sovereignty the consolidation will grant all those willing to accept responsibility for themselves, and the positive changes in human behaviour this will engender.

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The PGA sees that the monetary stability a floating physical reserve asset will provide will in turn deliver a security and peace of mind to the users of the monetary system, the value of which will be substantial, and these benefits will be enjoyed by all, whether gold holders or not.

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The PGA knows from direct personal experience the peace of mind that is found in taking their payment in full, and as a result being able to minimize their involvement with counterparty risk, inflation, fine print, worry and stress, because they are sided with the inevitable, rather than fighting it.

"Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win."

-Sun Tzu

What's the Holdup?

2011-02-12T14:33:00.000+13:00

Once a new reader has become familiar with the Thoughts of Another et al., probably the most common reaction (after "where is the nearest gold dealer?") is "why has this monetary consolidation not happened yet?" Another and Friend Of Another clearly felt it was imminent, and inferred that they were expecting this event in the early 2000s.

What's the holdup?

"Flatliner" outlined some very compelling reasoning in this article, when he stated the following:

”...why don't central banks simply buy gold? Now, I understand that currency is not a means to acquire gold, but gold is a means to empower currency. The right to print currency has value way beyond gold. Does this adequately explain why China and Russia are not running the price? Yes. Running the price of a commodity that you do not own, puts the commodity out of reach from ever being acquired. The only hope they have is to play the game of keeping the commodity tied down in the dollar system. Thus, the function for the foreign US dollar reserves is to play the role of holding down commodity prices in the Open Public Markets while a scramble for resource control takes place.”

It’s as simple as that.

1) The right to print currency has value way beyond gold.

Why would a government give it up?

Make no mistake, the current system is self destructing, but the subsequent spontaneously emergence of a “Freegold” system, for which the world’s Central Banks and “Giants” (billionaires) have long been preparing themselves will mean an end to the power which flows from the unfettered right to print currency.

These entities have positioned themselves to be recapitalized by this process, but the printing of currency will be severely curbed by physical gold being globally acknowledged as the premium wealth asset outside the monetary system.

They whom enjoy the power that comes from printing currency are in no hurry.

2) Running the price of a commodity that you do not own, puts the commodity out of reach from ever being acquired.

Those countries and giants a little late to recognize the inevitable, or whose wealth is so large as to take a long time to reallocate enough of it into bullion, needed more time to do so. As such they are in no hurry to see their opportunity to continue to quietly make this shift disappear early.

3) Change is never made willingly.

Who steps forward from the known out into the unknown? Only those who must, when there is no other choice.

Once the monetary consolidation occurs, things can never return to the way we have known them all our lives. This applies to every single one of us. Everyone, Central Bankers, Governments, businesses, individuals, savers, debtors, rich and poor alike all find this daunting.

We may not all like the way things are currently, but we all have our ways of living with it, ways which give some certainty to tomorrow, whether or not we look forward to it. If the system changes, so to must our daily lives, and almost everyone is happier with the devil they know. People prefer certainty to uncertainty, unless they have a deep belief in themselves.

Real change only comes when it must, and not a moment sooner.

Only when the average man on the street values gold will we have Freegold, but only when we have Freegold will the average man on the street value gold. Neither of these can occur until there is no other choice.

Meanwhile, the Giants who have need continue to make the most of the opportunity. Maybe you should follow their footsteps.

Another:

"Westerners should not be too upset with the CBs actions, they are buying you time!"

h/t Ender

The Price of Misunderstanding Value

2011-01-25T16:37:00.001+13:00

Price: the amount of money expected, required, or given in payment for something, normally in accord with the value the purchase represents to the buyer.

Value: the measure of utility, which is subjectively assigned based upon our individual circumstances, beliefs and biases. What is of value to one is not necessarily of value to another.

-----------------------------

The price of gold has been rising for the last decade due to the value the market intuits gold to represent, as the signs continue to emerge that the present monetary system is one of smoke and mirrors, one in which relative values are not possible to gauge as the majority of participants use price as their guide, having been conditioned by the apparent four-decade long “success” (read: still operating) of a monetary system devoid of a consistent yardstick. The market’s perceptions have been changing over this time with regard to how much value this price represents, not because of the growing value of gold, but the diminishing value of the fiat currency with which it may be purchased. Confidence is waning, and this reduces the potential utility of fiat currency by definition.

The price has risen as a function of market participants at the margin withdrawing some or all of their relative value from the monetary system whilst it is still assigned value by other participants, into the physical asset outside the system which has historically been employed as the store of value, and which can be relied upon to be the market’s focal point as the store of value in the future.

Gold.

Such a process comes to a rapid and spectacular conclusion not when the entire market joins in this practice, but when the margin evaporates. This is by definition an exponential event, but it will be complicated by the decoupling of the prices of physical and paper gold, when it is realized that only one of the two is of value. As the perceived value of the former launches into orbit, the price of the latter will plummet, for the reality is that there is currently no market price for physical gold, as posited in the last post, Storing the Stock of Value:

“...the value of the scarce physical metal is considerably higher than the [value of] mass produced paper contracts which dilute the price but not the physical quantity.

Yet they both currently sell for the price of the lesser of value.”

Those trading gold looking to capture the difference between their purchase and sale price misunderstand gold’s utility, just as they fail to see the crucial difference between price and value. Capture a profit they may, but a profit in what? Such an endeavour is bound to end with a case of buyer’s remorse: in this case the realization that one has successfully captured some price, but that it yields no value. All whilst trading paper illusions of value’s master proxy. The irony.

Storing the Stock of Value

2011-01-19T00:46:00.000+13:00

The assessment of value fluctuates in accordance with perceptions, which themselves fluctuate with the passage of time. A good may become obsolete and practically worthless, or even initially sell for a meagre sum, only to have the passing of time breathe new or further value into it, for example a car, a postage stamp, or a work of art. This is nothing more than a change in perceptions regarding the item and its relative value. The good itself has not changed, but the function one may derive from it has.

The newly acquired value is proportionate to the utility (function) potential buyers will derive from the good. This utility is not necessarily the same utility for which the item was created, in fact that function may no longer even be available, but the relative scarcity and profile of such items creates new functions such as prestige. How ironic that Vincent van Gogh sold only one painting in his lifetime, considering their relative value today.

More importantly though, such items now function also as a store of value.

In many ways the potential price paid for an extremely rare and extremely old valuable good such as a Da Vinci or the mask of an Egyptian Pharaoh is capped only by the quantity of wealth available to bid for it. As the quantity of wealth (the stock of value) available to bid upon such an item rises (ie. as, in aggregate, more value is received as income than is spent on expenses (the flow of value)), the potential market value rises (floats upon the stock of value may be a more accurate description). Thus the owner of such a good has hedged that portion of their wealth in perpetuity. The value they have stored in the good holds its relative buying power. It should be noted that the total quantity of wealth has been consistently trending upward for as long as humans have been creating value.

The storage of value is also the function of gold. Its only function. Like the other goods which function as a store of value, gold has no other useful function of consequence, so it's saving (or hoarding if you prefer) as a physical wealth asset outside the currency system deprives no one of any other use.

Gold is the store of value par excellence: fungible, divisible, portable, indestructible, recognizable, scarce and highly liquid. No other store of value has all these attributes. Try cutting up a painting to sell just a little bit, or finding a cash buyer for a Model T before the end of the day.

It is also worth noting that there is no current market price for physical gold, but it is available (in modest quantity) at the current market price for paper gold contracts. Paper gold (futures, options, ETFs, unallocated deposits, mining shares and other derivatives of gold) which unlike the real thing can and are simply created at will by banks that do not have either the physical metal to back the contracts or the need to settle the contracts with physical metal, being legally able to settle in fiat (paper) currency instead. It's all in the fine print.

Obviously, the value of the scarce physical metal is considerably higher than the mass produced paper contracts which dilute the price but not the physical quantity.

Yet they both currently sell for the price of the lesser of value.

Of course the looming consolidation of our current monetary system will end that discrepancy.

Or will it be this discrepancy that ends the system, being that this very anomaly is the thing that has been artificially sustaining it?

Either way, the result is the same.

Physical gold is currently massively underpriced.

FOA:(1/11/2001; 11:35:06MD - usagold.com msg#54)

"----Truly, as we talk, there is no known market price for physical gold! A market price for physical gold does not exist!---------

As Another tried to explain and I tried to refine,,,,, gold has historically represented it[s] value as a function of the total world wealth and economic activity. Over time, our known gold supply has grown by leaps and bounds, but our economic structure and goods creation ability has literally exploded a thousand times that gold creation.

In doing so our wealth relationship with gold has seen it's ratio degraded to a tiny fraction of where it would be in a physical only market.

...

From here, we understand why the current prices for gold do not have any bearing on the buying habits of the major players that walk this trail. As Another has said " The price you know, it be your price, not my price".

It is true, we are buying gold, not to trade for a paper value created today. Rather, to hold it beyond the paper destruction that must come tomorrow. Gamblers, traders and gold substitute players will all witness a colossal shift in world wealth that degrades their holdings. Even as their bet on half the process is proven as a folly very typical in human nature. Only unseeable as it exists."

The value a quality store of value holds fluctuates in accord with the total global value available to bid upon it, and the current utility of this function.

So the questions to be asked are will this function of storing value be of more or less use to people in the future?

And do you have excess value you'd like to save?

Gold as Pure Equity

2010-11-16T11:08:00.002+13:00

When (physical) gold is revalued by the free market, in order to give payment in full to the current surplus of claims (dollars), it will represent to its holder a pure equity position.

A pure equity position in what? In human value, no less.

A bold claim? Let's examine it a little.

The quantity of physical gold in the world is fixed. When one owns some physical gold, they own a fixed share of that quantity. It is an undilutable position, unlike currently traded equities, the supply of which is regularly inflated by their issuers to raise more capital, thus eroding the value held by existing shareholders.

Equity held in free floating physical gold is the very definition of “a hedge against inflation”, inflation of every description (except the inflation of real value). Every dilutable item in the world will depreciate against physical gold upon dilution. Gold retains its buying power.

But free floating physical gold (Freegold) actually does much better than this. It is often claimed that gold pays no dividend, no return on investment. Freegold needs no return on investment for the traditionally cited reason - the offsetting of loss to currency inflation, because it automatically offsets inflation anyway.
Freegold likewise has no need to allow for losses incurred through malinvestment or misallocation of capital - being fully hedged against inflation automatically - there is no longer a need for any capital to ever be deployed in anything other than the soundest of productive ideas. Capital written off on “speculative” investments gone sour will be almost non-existent, for two reasons: the lack of impetus for such investing as described, and the severe punishment of losing some of your golden equity in a less than sound venture.

Why will this be regarded a severe loss?

Because the vast majority of investment made will be productive, and to be productive means to be valued by the market. Thus investment will produce new value, exclusively. And the excess of this new value will be stored in the safest possible place... gold.

The owner of physical gold will experience continual capital gain through their pure equity holding for as long as humanity can continue to create value. Pretty big incentive to protect your holdings. Pretty big incentive to create some value in the world yourself, in order to buy in, no matter how meager the quantity, considering the direction of the capital gain and the fact that you can never be diluted out.

Looks a better buy than any other form of equity position currently available... and it’s currently available at pre-float valuation (for a limited time only).

In the absence of a strong dollar (absent soon for indisputable reasons), gold will find its function as the settler of those claims, as the master proxy for monetary value in the collective mind, and the current ridiculous dollar/physical gold exchange rate will be history. Literally.

What are you waiting for?

Blondie

The Butterfly Effect

2010-11-09T09:25:00.002+13:00

If you have read my last post, Synopsis: Gold Is Not Money, and have understood the concept of monetary value I have attempted to outline, then a small butterfly has just flapped its wings in your mind.

It is all about the value. That's all money is, the means with which we facilitate the flow of value.

Money has three functions; unit, medium, and store. These functions allow the account, exchange and reserve respectively of one thing only: value. All the functions are collective mental agreements, bound together by the term "money" and their utility regarding the management of value.

Nobody invented money. It spontaneously emerged, evolving through our shared history in response to the collective needs of humanity.

Money will continue to evolve, in response to our changing needs, and you are keenly aware of the need for an evolutionary response by money. Now. Money being a collective mental agreement, this response will manifest in the collective mind.

The fact that you know this ensures its manifestation. The evolution of money, and humanity, is underway, in our minds, right now.

We are becoming aware of, and witness to, our own evolution.

Synopsis: Gold is not Money

2010-11-09T08:54:00.004+13:00

Money is not a tangible “thing”, it is a concept.
These three monetary functions:

1.store of value
2.medium of exchange
3.unit of account

collectively form the abstract concept we refer to as "money".All three functions are separate mental processes to which we ascribe different mediums, depending upon circumstance. Money is not one or another of these things, nor anything else. Money is the sum total of these three functions.

--------------------------------------

A monetary system which allows borrowing sees the quantity of the medium of exchange increase when borrowing occurs. This is inflationary. The real value (buying power) of that medium is reduced. And when the same thing is used for the medium of exchange and the store of value simultaneously, the real value (buying power) of savings is constantly reduced as well.

Historically, this pressure, and the imbalance it caused in terms of real monetary value, was periodically relieved by losses of confidence in the system, causing panics and bank runs. This is deflationary, and helps return the monetary system, a system of three interdependent mental functions shared by everyone, to an equilibrium:The chart above shows clearly that the market has not corrected this loss of real monetary value for the last 80 years. Another way to visualize what this chart is demonstrating is to see that the medium of exchange is regularly required to deflate against the store of value, to bring real monetary value back into balance. In the chart this was the destruction of excess claims (gold-backed dollars) on the physical gold. Medium of exchange deflates against store of value.

Note when the rebalancing on the chart stopped... when the medium of exchange and the store of value stopped being asset-based and became debt-based.

Today, with both functions being filled by debt-backed fiat currency, this deflationary return to equilibrium is unable to occur. Why? When debt is destroyed in this way, it compromises the balance sheets of those holding debt as an asset (remember it is being used as the store of wealth too), resulting in further debt destruction, as debt enters a negative feedback loop.

Deflation of the medium of exchange against the store of value is impossible when they are both the same thing because... it results in systemic collapse.
This collapse can be postponed, and it continually has been, with the continual blowing of asset bubbles, which are fueled with new debt issuance. But the collapse cannot be cancelled, because eventually there is no remaining appetite for more debt.
This is where we are today. Look around you. Do the people you know want to borrow more, or are they seeking to reduce their debts? The mood has changed since the collapse of the housing bubble, the biggest and the last of these debt fueled asset bubbles. In aggregate, debt is being unwound.

There are two options before us: allow the collapse to happen, or the Fed, as the sole issuer of the debt instrument which underpins the entire world debt load, will buy all the debt at face value, before it defaults. This requires the printing of dollars on a continuing and accelerating basis, which inflates away the real monetary value of both the medium of exchange and the store of value. Hyperinflation. The collapse still occurs, it is just delayed a little longer.

Circumstances dictate a fundamental change in the arrangement that is causing the problem: a different medium must be assigned the store of value function, to give the dollar something to deflate against.

Voila! A third option, one which does not result in collapse.

The only feasible store of value the market can select is the same one the market had always used, because it is the only medium meeting all the criteria that the store of value requires, the one which does not share the two major defects of debt because it has no counter-party, and we are unable to create more at will.

Physical Gold.

Holders of physical gold can be spared loss when this change is made: they will be automatically recapitalized when the exchange rate between gold as the monetary store of value and paper currency as the monetary medium of exchange is left free to float. Central Banks will still hold valuable reserves, for the real value lost from their foreign currency (FX) holdings would be offset by the real value gained by their gold.

Another conceptual example:It is the self interest of all of us which will force the change of monetary function, as the only viable option. The very biggest and most influential market participants already hold gold reserves for just this eventuality, for their own recapitalization in this event. Some of the Central Banks, such as the ECB, India and Russia, already mark their gold reserves to market. For them, this recapitalizing is already underway, as the value of their gold reserves grow in response to the diminishing value of their FX reserves.

While paper currencies may have turned in a miserable performance as a store of value, they have excelled in their role as medium of exchange, in more ways than one. In digital format it has introduced new efficiency to international trade, and to its usage and management daily by billions of people. While its quantity is easily adjusted by its issuer, indiscriminate issuance of paper can be kept in check by a rising price of gold in said currency, through an international floating exchange rate with physical gold.

This new arrangement leaves us with a self-regulating monetary value equilibrium: physical gold becomes the perfect hedge against inflation. Capital now has a safe harbour, where it can be stored without loss of value while awaiting a sound investment opportunity, not being rushed into misallocation in an attempt to outperform inflation.

What of the monetary unit of account function? Which medium will it utilize?
Both. Whether one uses gold or paper currency in this role will depend entirely upon what one's intentions are for the real monetary value in your possession. If this value is to be used for current expenses, paper currency will be most adequate. On the other hand, if this value is surplus and to be “saved” then gold would be the best vehicle.

There is only one option we will take, because it is the only option that will not result in collapse, and the only one that will recapitalize the system. Physical gold as the floating store of value, a monetary system in which the monetary value equilibrium is self-regulating.

Gold is not money. Gold is the master proxy of value.
Money is the means by which we collectively facilitate the flow of value.

All three of the monetary functions that constitute money are purely mental, and a change of medium in any of them is a collective mental decision. This is a decision our elected leaders are wise to let us make for ourselves.

"There is nothing more powerful than an idea whose time has come."

- Victor Hugo

If you are still with me, you are now part of The Butterfly Effect.

Blondie

Gold is not Money

2010-11-06T00:15:00.002+13:00

These three functions:

store of value
medium of exchange
unit of account

collectively form the abstract concept we refer to as "money".
All three functions are separate mental processes to which we ascribe different mediums, depending upon circumstance. Money is not one or another of these things, nor anything else. Money is the sum total of these three functions. Period.

This is the definition which I will apply to the term “money” hereafter. Please keep this in mind.

Past Circumstance
There was a time when gold and silver coins filled all three roles, and at that time it would have been accurate to describe gold as money. Human nature put an end to that. (Technology would have inevitably intervened at some stage too, but human nature got there first.)

Human nature demands money it can borrow. I differentiate between money you can spend before (borrowed) or after (earned) you exchange some form of value for it as either easy money, or hard money, respectively.

FOFOA:

“In a gold money system with gold lending (which is always demanded by the collective will) fractional reserve banking is the inevitable result. And from there, bank failures are the inevitable result at the first sign of panic (loss of confidence). And from there, some of the savers lose their money.

In a fiat system, the fiat is lent and the savers hold the notes, one way or another. This lending and note holding always increases the money supply just like gold lending and gold-denominated notes expand the gold money supply. You lend something and then you can claim it in the form of a note while the borrower claims it in the form of the currency. Even the notes circulate as they become marketable.

So lending always expands the money supply, whether it is gold or fiat. And when the savers save in the same thing being lent, collapse ultimately comes (or at least threatens), whether gold money or paper. And then the system must undergo a fundamental change one way or another.”

Access to easy money has traditionally resulted in more coupons entering circulation than there is value backing them.

If the coupons are for gold (eg. gold backed dollars pre 1933), not everyone can receive the gold owed them. If the coupons are fiat (modern dollars), everyone can get their cash (it’s printable, after all), but its buying power shrinks.

When there was not enough gold to meet dollar-bearer demand in 1933, it was decided that to boost supply gold held by private US citizens would be confiscated, to reduce demand dollars held by private citizens would no longer be redeemable for gold, and to extend the newly consolidated reserves gold would be revalued, higher.

The exact same symptom resurfaced on an international scale less than 40 years later, and as a solution the redemption of dollars for gold was ceased altogether in 1971.

Another 40 years on, and the same situation requires a remedy once again. This time, though, it is orders of magnitude larger, compounded by the fact that no-one was forced to take their losses in 1971, as the problem was technically just papered over. Today the majority of dollars and their multitude derivatives are held digitally, and with the dollar no longer officially redeemable by the bearer for anything tangible, the solution will be different in appearance, but not in practice. This time, everyone requiring payment has agreed by their participation that they no longer need gold: they will accept cash. And this time, they will get all that is owed them. Of course, when they do, there will be so much of it that it won’t be worth anything. The result is the same as previously: savers pay with their savings. Value is lost.

So you can see that in just the last century we have tried using gold simultaneously as both the medium of transaction and store of value, and then the same with fiat, with the same result. It was the lending of the money that forced the departure from a gold money system, when it was deemed more expedient to socialize the losses than to let the banks collapse.

Left to its own devices, the market will naturally remedy the inflationary loss of the real value of money with deflation, as demonstrated by this chart:

The chart above shows clearly that the market has not corrected this loss of real monetary value for the last 80 years. This chart is presented for conceptual purposes only, as the official data used has been manipulated over the last 30 or so years to deliberately understate inflation: in real terms, there would quite likely be even more blue on the right hand end.

Present Circumstance
Deflation increases the real value of money, when measured against the real goods and services it can be exchanged for. We are now at a point where real deflation will prevail, because aggregate credit is contracting, and the global deleveraging process is destroying debt-based fiat faster than it can be created.

I refer to this deflation as real deflation because there are no longer any reliable (unmanipulated) traditionally used metrics with which to measure it (the marking to market of credit, for example, has been suspended. This does not mean that it still has value, it just means we are unable to know the degree to which it has lost value), but this does not mean deflation is not really occurring anyway, whether visible or not.

Historically, the medium of exchange deflates against the store of value to reinstate real value to money, as seen in the first 3/4 of the chart above. In a gold money system, this meant that either the physical gold rose in value, or the excess paper coupons in circulation to represent it must be destroyed, to return to a monetary value equilibrium. This process is the bank failures and loss of saver’s money FOFOA spoke of in the quote above.

This "monetary value equilibrium" can be found as a balance in the ratio of value between the store of value and the medium of exchange monetary functions.

Today though, the debt-based dollar is used in all three monetary functions, meaning that the store of value has a counterparty. The counterparty holds dollars (and derivatives thereof) as collateral assets.

How can the dollar deflate against itself?

FOA:

“Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt...”

If the debt this present monetary system utilizes for all three monetary functions is allowed to default, which would be the natural course of events, it will quickly cascade into default on the sovereign nation level and complete systemic collapse. The only way to counter this, as FOA pointed out, is the printing of more (and more...) money by the Fed to buy all this debt, until ultimately it buys it all. When debt-based fiat is used concurrently for all three monetary functions, these are the only two options when the debt load finally becomes too large.

The dollar cannot deflate against itself. It can collapse in total default, or collapse in hyperinflation. Under the current arrangement with the dollar as the "only money”, these are the only two options to restore the monetary value equilibrium.

Future Circumstance
What if, in a break with tradition, the current monetary function arrangement were altered?
With the debt-based dollar performing all three monetary functions, we face a choice between two unpalatable options, both of which culminate in collapse.

Circumstances dictate a different medium be assigned the store of value function, to give the dollar something to deflate against.

Voila! A third option, one which does not result in collapse.

The only feasible store of value the market can select is the same one the market had always used, because it is the only medium meeting all the criteria that the store of value requires, with the top of the long list being... no counterparty, and the inability to create more at will. Physical Gold.

There is a hidden (in plain sight) escape hatch from the losses this switch in store of value medium would otherwise cause: existing holders of physical gold will be automatically recapitalized when the exchange rate between gold as the monetary store of value and paper currency as the monetary medium of exchange is left free to float. Central Banks will still hold valuable reserves, for the value lost from their foreign currency (FX) holdings would be offset by the value gained by their gold.

When Adam Smith wrote “Wealth Of Nations” in 1776, he spoke of an “invisible hand”, a concept which remains a fundamental economic principle, in which the cumulative effect of individuals' actions of self interest move the market as an unseen, self-regulating force. It is this self interest which will force the change of monetary function, as the only viable option. The very biggest and most influential market participants already hold gold reserves for just this eventuality, for their own recapitalization in this event. Some of the Central Banks, such as the ECB, India and Russia, already mark their gold reserves to market. For them, this recapitalizing is already underway, as the value of their gold reserves grow in response to the diminishing value of their FX reserves.

Another conceptual example:

(note that the quantities of both FX and gold reserves do not change from one pie chart to the next, only the real monetary value changes)

This process of reinstating gold as the monetary store of value is a mental process, one already underway. As the market gradually becomes aware of the inevitable choice it faces, the trickle of value into physical gold will become a flood, and the invisible hand will uplift debt-based paper from its role as the monetary store of value, and install physical gold as replacement. Recapitalization is automatic, but only for holders of physical gold.

While paper currencies may have turned in a miserable performance as a store of value, they have excelled in their role as medium of exchange, in more ways than one. In digital format it has introduced new efficiency to international trade, and to its usage and management daily by billions of people. While its quantity is easily adjusted by its issuer, indiscriminate issuance of paper can be kept in check by a rising price of gold in said currency, through an international floating exchange rate with physical gold.

This new arrangement leaves us with a self-regulating monetary value equilibrium: physical gold becomes the perfect hedge against inflation. Capital now has a safe harbour, where it can be stored without loss of value while awaiting a sound investment opportunity, not being rushed into misallocation in an attempt to outperform inflation.

Aristotle:

“I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free.”

And what of the monetary unit of account function? Which medium will it utilize?

Both. Whether one uses gold or paper currency in this role will depend entirely upon what one's intentions are for the monetary value in your possession. If this value is to be used for current expenses, paper currency will be most adequate. On the other hand, if this value is surplus to your immediate requirements, it would fall into that category usually regarded as "savings", and for this gold would be the best vehicle.

All three of the monetary functions that constitute money are purely mental, and a change of medium in any of them is a collective mental decision. This is a decision our elected leaders are wise to let us make for ourselves.

5/26/98 ANOTHER (THOUGHTS!):

"Do you know the value of gold?

From the day of our birth we are taught to value all things using the one factor alone, currency! Can one contemplate the value of all possessions in other terms? Do you not have to think first as to "how many dollars is that worth", then "how many dollars is this worth" to compare two items? If it is deep within our mind, that we can know value only in terms of paper, to this I ask, can one know value at all?

The Western mind does focus on "what I buy today for the lowest price". Yet, in this modern world economy, the lowest price is always the function of "the currency exchange rate"? The Yen, it is compared to the dollar today, and used to purchase goods. One year later and Japan offers these goods for much less, as the Yen has fallen to the US$. The currency value of this purchase, was it "true" today, or a year ago? Understand, all value judgments today are as subject to "exchange rate competition"! It is in "this exchange rate valuations" that the private citizen does denominate all net worth! A safe way to hold the wealth for your future, yes? You should ask a Korean or an Indonesian?

One should grasp that "today, your wealth, is not what your currency say it is"!

In this world, paper currency is for trade, only! It is for the buying, selling, earning and paying, not for knowing the value of your family holdings! 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"! Again, I ask, how can we know a true value for our assets, when they are known only in currency that finds it's worth, as in the exchange rate for another currency?

Many will "think long and hard on this", but will find little reason for this position. For it is in your history to know only "things valued in paper terms". Some say, "I hold investments of great increase these past years, and am much ahead of the inflation, if it should come". I say, "your investments, worldwide, have moved little, as it has been the currencies that denominate your assets, that fall a great deal". The price inflation that comes, it is larger than your vision can see! Your past, holds little of knowing value outside of currencies, this does block the good view!"

To paraphrase Aristotle:

The flow of value- Create value to earn currency, buy what you need, save in gold, enjoy what life has to offer.

Ender: “... he who holds gold has already been paid.”

Gold is not money.

Gold is the master proxy of value.

Money is the means by which we collectively facilitate the flow of value.

Next: The Butterfly Effect

h/t all Physical Gold Advocates, everywhere, for sharing the view.

Why Tax Freegold?

2010-10-20T22:48:00.003+13:00

In a Freegold world, the imposition of taxes of any kind upon gold would serve only to drive gold away to wherever it is not taxed.

This tax-free zone would then be the beneficiary of a capital injection.

That is a capitalist free market in action, as opposed to today's marketplace, which can honestly be called neither capitalist nor free. Currently, most capital cannot be protected from the stealth tax of inflation, forcing it to be "invested" in the quest for a return with which to offset these losses. Subsequently, large amounts of this capital are misallocated/malinvested, resulting ultimately in capital loss. No growth of the tax base in that.

Freegold, as a freely available floating wealth reserve, will provide capital a risk-free refuge from these potential losses, until such time as the gold owner wishes to redeploy capital into a sound investment. The keys here are the safety from loss, and the time to choose.

The profits from this productive use of capital soundly invested would supply a tax base many orders of magnitude larger and for much longer than any possible tax on gold.

Only a fool would (try to) tax Freegold, and even then the trial would be brief.

On The Run

2010-10-16T07:21:00.002+13:00

Aragorn III said:

Prior to 1933 the U.S. was on a gold standard domestically, at which time the equivalency was 1 oz. @ $20.67 -- fixed, no questions asked. A bank would readily exchange paper currency for the equivalent gold currency on demand. There was a general confidence in the banking institutions, and people were content to use their paper dollar equivalents

In 1933, 4004 banks failed. In the following year, only 62 failed. Why? Because as you already know, it was at this point that President Roosevelt took the money (gold) out of the domestic dollar, and it should be obvious to us all that a crippling bank run is no longer a threat when a bank need not be held to deliver real money. It could easily deliver the ledger numbers endlessly in portable paper form (dollar notes). A bank run becomes meaningless because the people are not at risk of being cheated by arriving too late, they have all already been cheated 100% in full! The government knew international parties would not fall for such trickery, so the gold convertibility was maintained, but only after defaulting on the paper dollars they held by redefining their equivalency to 1 oz. @ $35.

Here is the trap we fashioned for ourselves. The U.S. dollar would easily buy overseas products, as simple math and occasional "confidence reassurances" (by testing the success of convertibility) proved that to be paid $35 was truly to be paid one ounce of gold. Foreign goods were then priced accordingly, and imports flowed to American shores in due course as we spent down our national gold savings. And what of our balance of trade...the exports?

Domestically, with higher wages and prices reflecting a paper dollar rather than a gold dollar, American goods were not a bargain to foreign shoppers. The dollar itself (gold) was the best deal they could get from America in exchange for their own goods, and this money would then be used to shop where a gold dollar was properly held in value...anywhere but America! U.S. imports rose and exports fell against each other until the risk of gold exhaustion caused President Nixon to end international convertibility in 1971. This was essentially a world-scale replay of the 1933 Roosevelt action for the same reason...too many claims had been created on the gold money, and when the confidence for convertibility eroded to bring about a "bank run"...

Anyone familiar with todays gold market knows that once again far too many paper gold claims have been issued against the underlying physical gold metal, and once again, when the confidence for convertibility erodes sufficiently to bring about a “bank run”... can you see a pattern emerging here?

The Art of (Currency) War

2010-10-13T16:56:00.002+13:00

Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.
-Sun Tzu

When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold.

-Randal Strauss PGA

h/t FOFOA

Combustible Illusions

2010-10-10T13:01:00.002+13:00

FOFOA, paraphrasing FOA:

"My friend, bonds (and all kinds of debt instruments) are the very essence of the modern money system. As bonds default, people's savings are destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of guaranteeing people's savings at all costs, even buying those darn bonds outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last MBS and dumping that cash right into your banking system! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

Ultimately, all bonds (and other kinds of debt instruments) threatened with default will end up being owned by the Federal Reserve. And ultimately, the Fed will print physical cash to meet the contractual terms of these bonds.

Everyone will get paid, but in doing so, the huge quantity of dollars printed will be practically worthless. The debts were pre-existing in this quantity, so they are not really cheating the savers at all. The savers cheated themselves, back when they chose to hold their savings as mere claims in the system.

Ender said:

"Gold is an asset based currency, thus it represents payment in full, whereas fiat currency is a debt based currency that represents a claim in the system. In this light, the ‘preservation of wealth’ simply means - he who holds gold has already been paid."

The holding of this money in debt instruments has allowed massive inflation of the money supply without the corresponding price rises in the world of tangible goods and services. This is “Credibility Inflation”: the continuing confidence in debt-based paper as a savings vehicle. It will be undone by a reversal in this confidence, a “hyperinflationary” consolidation of debt-based paper into physical assets; claims in the system seeking payment in full en masse.

As FOFOA would say, the system is primed and awaiting ignition, from that little spark in the minds of millions of savers that their confidence has been misplaced.

Freegold

2010-10-03T16:49:00.002+13:00

In practice, Freegold is a separation of the three functions of money.

Physical gold resumes its rightful position as the store of value par excellence.
Fiat paper continues in its role as the medium of exchange par excellence.
The unit of account (numeraire) function of money, would be either gold or fiat, depending upon one's time preference.

These diagrams(1) may help clarify:

This first diagram shows the present arrangement. It should be noted that currently the vast majority of entities use fiat currency as a store of value. This is a major reason why this "store of value" is always being "invested", seeking a "return on investment". Because it is not storing value, it needs a ROI to maintain its value (relative buying power). Fiat is not a good store of wealth because it is continually inflated (more of it is created) to supply easy money (credit, money created for the promise of value not yet created).

The second diagram introduces the context of time, which ultimately changes the triangle to a quadrangle, illustrated in this third diagram:

The three monetary functions are now each being performed by the best "tool" for the respective "job". Which tool is judged to be best for which job is a subjective decision, best left to the sovereign entity (whether individual, state or nation) evaluating their own money, and which "job" they are wanting it to do.

The criteria used in making this subjective assessment may be infinite, but the most important of these is time: how long does one anticipate holding this money? If the answer is short term (ie. "spending money"; used for current expenses), then the best form to hold it in is a fiat currency able to meet their medium of transaction needs. If the answer is longer term (ie. "savings"; a surplus over and above what is required as shorter term "spending money"), then the best form is physical gold, to protect one's buying power.

No matter what is used as money, if savers are saving the same thing that is used for lending, collapse is inevitable. Lending increases the money supply, diluting the savings. The savings are in effect not really there, as multiples of banked savings have been lent out, spent, and in many cases redeposited as some one else’s savings, over and over.

Freegold floats the store of value in the medium of exchange. When any currency used as a medium of exchange is diluted (inflated) through lending, physical gold used as the store of value rises proportionately, when measured in that currency. Physical gold becomes by definition the perfect inflation hedge, non-taxable, floating upon an ocean of inflatable medium of transaction currency.

Gold would value all currencies individually and the exchange value of each currency would still be relative to every other currency, using simple triangulation.

For example:

1 Gold gram = 1000 Euro

1 Gold gram = 2000 Yuan

Therefore 1 Euro = 2 Yuan

Sovereign entities (whether individual, state or nation) would have a net outflow of gold (reduction of reserves/savings) when consuming more than they produce, and vice versa. Thus every entity is required, by the free market, to live within their means. When not living within their means, they are forced to live by consuming their savings.

Currency will be backed by gold and exchangeable with gold automatically, not through the Central Bank like the old (fixed) gold standard, but rather through the free market floating (physical) goldprice.

Freegold gives the market a real point of reference, physical gold, from which to assess the relative values of everything else. This is the point of reference originally chosen by the natural evolution of money, over thousands of years. Nobody invented money. It evolved naturally from our desire to exchange goods and services.

Freegold is the next step in that continuing evolution, as the result of the world’s aggregate debt consolidating into the physical world, providing the physical gold owner with a pure equity position.

"The perfect solution for an imperfect world."

h/t costata, samix, Ender, Aristotle, and FOFOA

(1) All diagrams by FOFOA, from "It's the Debt, Stupid"

No Sale

2010-09-30T22:24:00.002+13:00

There are two sides to every transaction.

Viewed from one side, we see currency bid for physical goods. The monetary bids upon the physical. A dollar bids for a sandwich.

Looking from the other side, we see the physical bidding upon the monetary. The sandwich bids for a dollar, for example, as an exchange of perceived equal value.

Currency collapse is when the physical stops bidding on the monetary with physical goods. Not when the monetary bids up the physical with lots of paper.

Prices may appear to rise dramatically at this stage, but this is a symptom, not the cause.

The cause is the value of the currency becoming questionable.

The monetary is being consolidated into the physical.

The Consolidation

2010-09-18T22:48:00.005+12:00

Soil liquefaction is the sudden change of unconsolidated soil particles from solid to liquid, generally occurring in young (10,000 years old or less) sedimentary deposits when subjected to large amounts of energy passing through them, for example an earthquake. This can prove a most unsatisfactory occurrence for those with a vested interest in the solidity of such soil.

Obviously, it is this application of energy that consolidates such deposits, making them far less susceptible to such relative instability in the future. Complete consolidation results in rock formation, which is definitely no longer able to be liquified by such tectonic activity.

We can see in our present day monetary system similar recent deposits of unconsolidated wealth, held in debt denominated paper, whether actual paper or digital. This unconsolidated wealth is held in far larger quantities than the real, tangible assets it can supposedly lay claim to.

With the aggregate contraction of credit currently underway, the value of the debt in which this wealth is denominated is being undermined. Without the willingness of the consumer to take on more debt, this undermining is unstoppable. The debt will collapse, being that it is supported only by further debt, and ultimately nothing more than confidence in the entire system by the system’s participants (as described in The Chicken and the Egg), the confidence that the debt actually can and will be repaid. The suspension of mark to market accounting rules for the world’s largest banks is perhaps the fundamental reason this collapse has been postponed for the last year and a half.

This looming loss of confidence in the value of these debts will supply the energy in much the same fashion as an earthquake: sudden, violent, and with unpredictable consequences of a destructive nature. The previously solid appearance of this unconsolidated wealth will suddenly become extremely liquid, as it energetically rushes to stake a claim on the real, tangible world, to consolidate itself in a more robust store of value.

The basic unit of this unconsolidated wealth is the US dollar, the heart of the world financial system for the last 66 years. Never before has a consolidation of this magnitude occurred.

Gold stands alone as the ultimate wealth consolidator. This is its true function, as the bedrock of the monetary world. Gold is unique in that as its price rises, its flow diminishes, further driving up the price. Collective confidence in its ability to store wealth virtually forever makes it the perfect storage medium.

The purchase of any physical good (or service) with currency requires both a willing buyer and a willing seller. It can be viewed from either side of the transaction: as currency bidding upon the physical good, or as the good bidding upon the currency. The consolidation occurs when the physical goods cease to bid upon currency. They have lost confidence in its value. Currency rushes to find a good which will still bid upon it, before none do any longer. This energetic process is also referred to as hyperinflation, the final collapse into worthlessness which is the ultimate fate of every fiat currency. Even Alan Greenspan recently declared "Fiat money has no place to go but gold."

This consolidation will reveal and revalue the true capital of the world, whilst destroying the illusory. The physical world will remain unchanged. You may want to have some of it in your possession prior.

Blondie

The Chicken and the Egg

2010-09-12T17:32:00.002+12:00

A Friend recently illustrated how we can view the real function of a balance sheet,

Typical Balance Sheet:

when we examine it viewed in the context of the debt-based paper in which it is denominated, and simplify it somewhat with this diagram:

Of course when someone else's liabilities are held as someone else's assets, and someone else's assets are held as someone else's liabilities, it begs the question: which comes first, the chicken or the egg? Do liabilities create new assets, or do assets fund new liabilities? We can also see that it creates a credit/debt feedback loop, like this:

When we also consider that some of these "someone elses" are banks, and the assets they hold (most of which are, after all, simply the liabilities (debts) of a counterparty) can be fractionally reserved to create yet more credit, we can see that this is actually an amplified feedback loop.

The debt is, quite literally, "baked in the cake" as an inherent part of this situation. There is a presumption that the debtors, in aggregate, will always have both the will and the means to continue to make payment on their debts, as well as the market value of both the tangible assets and the "liabilities held as assets" which were secured as collateral for these debts at least holding par. The default of more debtors than the system has made contingency for, or a decline in market value of their collateralized assets, undermines the integrity of the structure, resulting in collapse, as one debtor's default due to either non-payment or insufficient collateral value causes the impairment of the ability to pay and/or maintain sufficient collateral of other debtors who hold that debtors liabilities as assets. And so on and so forth, once this process has begun.

At this point, it may be beneficial to review the following pearl of wisdom from Ender once again:

Thus the prudent person, cognizant of:

the nature of the situation as outlined above,
the fact that any of their non-tangible assets, including fiat currencies, amount to no more than a claim in the system,
the somewhat dubious reporting of the values of debt-based assets, often collateralized, by all banks,
the fact that credit issuance, in aggregate, has peaked, has been and is continuing to decline worldwide,

may find the exchange of some or all of their "claims in the system" for "payment in full" a sensible course of action.

Such a person's situation may then truly be said to be "as good as gold".

As for the question of which comes first, the chicken or the egg, that is really irrelevant. What is relevant, and incontrovertible, is that

the impairment of either will result in the loss of both.

Ender's Angle: The Flow of Value

2010-09-02T02:05:00.003+12:00

The concept of Freegold is something that means different things to different people. It is amazingly simple, yet curiously complicated. We are on the path, yet the world races at a snail’s pace.

From my point of view, Freegold is not a “solution for” but will be the “result of” the current financial mess that we are in today. To better understand what lies ahead, one must be willing to have an open mind and think objectively. More importantly, the seeker must be willing to set aside triggering emotions that prevent thinking as the "other".

As you step into the realm covered by the concept of Freegold, you will be challenged to think about:
- Central Banking
- Spoils of war
- World reserve currencies
- The Strong Dollar Policy
- The political need for fiat
- Debt slavery
- Debt based monetary systems
- Asset based monetary systems
- The process of currency creation/destruction
- The preservation of purchasing power
- Dollar imperialism
- Competitive currencies
- Big Media cooperation
- Etc.
All mixed up like a thousand intertwined strands of yarn.

Ultimately, be careful to not get caught up in the “price of gold” when the "function of gold" is what you’re looking for. [A distinction addressed in the previous post, The Price of Gold is Arbitrary]

The old saying “He who owns the gold makes the rules” is more applicable then you might think.

Lastly, the concept represented by Freegold is fundamentally in opposition to the Dollar’s position in the world today. You will find no one with ties to the dollar system interested in what Freegold represents. You will also not find any single state or organization willing to stand up against the dollar system, for that would be a critical mistake. Rather, the world has been preparing and we’re now going through the transition process. Hopefully, the world will survive.

The good news is that the way things are structured in our current financial system will force gold’s function. When this happens, the hope that Another penned for us all to see will be realized.

Your money is not what you think it is and it doesn’t work like you think it works.

Which is more valuable – gold or fiat?

Only after exploring this question will you see that the US Treasury will NOT adopt Freegold as an acceptable possible solution. The only way in which the US Treasury will consider this is if the entire world conspires against it and forces it to happen. Can this happen? Once again, after exploring the above question, you will see that other states will also NOT push this avenue in hopes of becoming the next "king of the hill." But, the eventual outcome is Freegold or "death by a thousand cuts". Ultimately, it is the people of the world that must stand for Freegold and that will take time.
Time is what we have.

Fiat is more valuable than gold to governments and bankers. Fiat is by definition, currency by decree. If a currency fails, the government will undoubtedly issue another. Bankers are slightly different in that they love gold too whereas governments hate gold.

Average Joe simply doesn’t care about gold. Joe has no real understanding of how the government and bankers take advantage of him and holds no gold. Joe works for a paycheck settled in the local currency and lives life in a currency based world. If the government were to issue a decree that changes the currency, Joe might get upset, but would adapt to the new currency.

It is only to the saver that takes a little time to understand the difference between being rich and being wealthy that they find their way into gold.

Gold is an asset based currency, thus it represents payment in full, whereas fiat currency is a debt based currency that represents a claim in the system. In this light, the ‘preservation of wealth’ simply means - he who holds gold has already been paid.

Let’s get back to the government valuing fiat over gold. Even through the government can “print it out of thin air”, it is frowned upon to do this. When a government gets to this point, the “function” of the currency will come under stress. So rather, as Another pointed out, currencies are always competing for usage. They do this so as to expand the base from which they can gather tax through inflation. Inflation is KEY. There are but a few average Joes that can figure out how inflation really works.

If you agree with this point, logic would have it that the government would do whatever it can to build confidence in their currency or increase its function so as to broaden the tax base. The more that hold the currency, the easier it is to hide the inflation.

How did the dollar increase its function in the world?

After WWII, the US Bankers designed the Open Public Markets so that not only were commodities listed in dollars, but, in case of default, settlement would occur in dollars too. The bankers took advantage of the fact that there was confidence in the dollar due to gold backing.

This is what established the key function for the dollar that has persisted up to today.

When gold was removed in 1971, oil panicked but only long enough to see that the dollar "functioned".

The Strong Dollar Policy

The bankers already knew what needed to be done before any politician stated that the US would – implement a strong dollar policy. What they’ve told everybody versus what’s played out over the decades appears to be two different things. The Strong Dollar Policy is all about making the dollar function better than any other currency in the international markets. The only way this can happen is if the dollar buys lots of commodities and it has a relatively predictable behavior over time.

If you look in the gold market like GATA has, you will see that someone with really deep pockets has created so much paper gold that the supply has skewed the markets in such a way as to make people believe they can get gold in the future with the use of a strong dollar(s). It’s pretty simple to make this trick work if you tie up physical gold straight out of production so as to make sure you meet physical demand and then sell short in the paper markets to drive down the price. As long as gold flows, the illusion works. The best part is that, as Another pointed out, speculators will not look at a commodity that’s going stagnant.

To help with the illusion, it doesn’t really take as many dollars as you might imagine. The goal is not to really control prices, but rather, keep the speculators out of the markets. If you’re in a position to do this, you would watch the physical markets to make sure product is available and monitor the speculative interests in the market. Any time the speculators start making the dollar look "weak", you milk the speculators by liquidating the markets all the while knowing that speculators don’t take delivery, they take settlement. It’s a situation you can print your way out of.

Remember that the key to the illusion is that physical supplies must still flow with the function of the dollar. Gold has not gone dry. Silver still flows – yet at a little delay. Oil still flows. Look in all the markets where the strong dollar settles the price and you’ll find examples of big footprints. It’s subtle. It makes for a good dollar “conundrum”.

Unknowingly, people just see the dollar as just functioning. It has grown into the de facto world reserve currency. People hold dollars and can’t "see" the price inflation.

Meanwhile, what started out as something that was not too bad, turned out to come with strings attached. Remember that the larger the currency base, the larger the inflation can be without being detected. The politicians love this because now their policies can stretch as far as the dollar can reach – anywhere in the world. Military bases can be built and maintained with that inflationary tax. Influence can be bought. Deals can be made off “tax payer’s money.”

Competition with other states becomes easier because you can outspend them. All the while, because the dollar has found function in THEIR country, you have reduced their political will to a size smaller then what their economy should support. Thus, in the effort to compete with the dollar – politically, other currencies look pathetically weak and price inflation runs rampant in these smaller economies.

Over the years top politicians and bankers have stated that the US has abused it’s rights with regards to how it’s used the “privilege” of being the world reserve currency. The dollar has crippled the political will in other countries because of the way it gets its strength. This is… imperialistic. It undermines the sovereignty of nations. It simply will not be tolerated any longer but no one can fight against it openly. It must be made to look like it died of it’s own causes.

Another came along to let us know that, in time, the world would not grant ANYONE – any political entity – the right to abuse others in the same way. Never again would there be a strong currency policy held over the globe. Another was around to see the "checkmate" that gold provided. We are around to see the transition and gold reintroduction into the monetary system.

The Fed makes money through the charging of interest.

Scratching on the back of the envelope will expose that the interest paid to the Fed group of banks is a phenomenal sum. What do you think they do with it?

As a side note, the Fed collection of banks is chartered with not only keeping inflation down, but keeping the economy strong.

A leap in logic would have it that it is most likely in the best interest of this collection of banks to spend a little of their profit in order to keep the rest of it… strong. Note that it’s not the government or any magical organization therein, but rather the source doing what it should logically do – keep itself strong.

I have NO proof of the above claim, it’s just what I would do to keep my currency functioning. It’s a leap of logic, an assumption, the basis of a theory, or a missing link.

The Freegold concept will provide the checks and balances to this type of behavior.

If you "earn" a hundred bucks, can you not spend it the way you want to? There is nothing better than investing in yourself or keeping your investments in top shape (new roof on house, new paint, new plumbing, cheap gold, cheap wheat).

Also, it not only benefits the Fed, but the US politician and anyone that holds the dollar. It could also be seen as “reassurance” to other large states that hold huge amounts of dollars.

As Another pointed out, as long as the dollar remains strong in gold, oil agreed to settle for dollars -future oil for future gold (see The Trinity). Because oil is essential for the modern lifestyle, the relationship with oil is critical – we must keep oil flowing.

GATA takes the stand that the gold markets do not appear to be free and they want a change. The change would be to get the shorts out of the market so the "real" price of gold can be found.

The flip side of the coin says, if gold is not cheap in dollars, oil will look for the currency that IS strong in gold. Oil needs a functioning currency and the ability to “save” some of the profits in gold for future generations. Thus, it doesn’t need gold for oil settlement directly.

Also, the oil based economies do not want to cut off the flow of oil because it’s as good as cash. If oil flows, they make LOTS of money. It’s hugely profitable.

The key is that Oil wants physical gold and as long as they can get a reasonable amount of gold for their oil they will use the currency that functions to get this gold.

Can the dollar stay strong in gold? Well, the strength of the dollar will be its downfall against gold. You can simply buy too much with it, there will be nothing left for oil. Another saw this years ago as he witnessed the cornering of the physical market (see The Cornering of Gold). We have been on a path to default ever since. Default brings loss of function. If your currency does not buy you what you want to buy it’s not functioning.

You can have the strongest currency in the room, but if it will not buy what you want it’s effectively worthless.

But what about every other currency? It’s not, can someone afford to buy gold in that currency, but rather does the currency function for acquiring gold? In other words, if I’m Oil and I take a currency in exchange for oil, will it function as a medium of exchange AND allow me to buy a little gold with the surplus?

Do you see the subtle difference?

If you do, you will see that having gold available for purchase is a very important part of the equation.

So… who has the gold?

Oil requires a functioning currency – one that is not inflating or deflating in any extremes and one that is honored just about everywhere you’d want to spend it. As long as the currency can purchase gold, it matters not where the gold comes from. For years, the obvious choice was the dollar. But due to the current crisis, you have to wonder how Oil will respond.

Now, when you look at the function of a currency does the bulk of the value come from it’s ability to buy gold or from it’s ability to function in other respects? If the dollar has the advantage of being strong with regards to gold but not functioning, will it still be supported by oil?

Does this put a new twist on the amount of gold held in Fort Knox? If they sold oil for a million dollars a barrel yet couldn’t find anyone willing to accept the currency what would they do with it, buy gold in that currency? Ha. The gold is a small part of the equation.

Ultimately, the question is, will the dollar continue to function. If not, what will Oil do for a currency?

Before you ponder on that too long remember that the right to print currency for function in an economy is more valuable than gold and if you openly bid for gold in a way to undermine this privilege, you make enemies. At that point, someone will take away your gold.

Before moving on, in the absence of the dollar being the world reserve currency and having this strong dollar advantage, how might a currency gain strength? What might the world look like after the dollar stops functioning?

A Central Bank and the associated political will can create any amount of currency as needed, or desired, in the economy controlled by the politicians.

We probably agree that one of the key roles of a Central Bank is to provide a unit of exchange in the local economy that can function as a claim against future work or goods in the same economy. The CB must also maintain the function of the currency. This requires that they do not let prices get out of hand and they make sure that there is enough currency available in the economy to service loans.

We would also probably agree that if an economy is expanding – producing more in the way of goods, the volume of currency will have to grow a little to keep the price of these new goods from falling. Likewise, if the economy is contracting, the volume of currency will have to be reduced to not overwhelm the remaining goods.

The above is pretty important. We’ll keep it in mind.

Also these economies around the world don’t exist or work in a vacuum. Rather, they all interact. Thus, we have to touch on exports and imports. Economies that produce enough to export gather the currencies that function in other economies – they become savers. Likewise, if they don’t produce enough they end up giving up claims on their currency – they become spenders. In today’s world the "savers" continually grow their claims against another economy.

Remember, function of a currency is 90-95% of its value. In normal situations, the savings that you generate are just what’s left over.

In today’s world, the bulk of the import and export trade is balanced out by eventually buying goods and services from each other. It falls into that 90-95% range. But what about what’s left over? The problem is that it remains a claim. That is a problem. At least that will become a problem. As claims build up they always get to the point where he who is in debt simply defaults. They can’t survive under the strain. It’s either war to keep what you have or you go to auction.

Is there a better way to redeem that claim? Why not just get paid in full? This is where, you guess it, gold finds function. Gold is payment in full. Gold is not a claim, it represents the opposite.

In today’s world, the claims that wait to be settled are so huge that the role that gold is currently playing while being under the influence of the strong dollar policy prevents it from functioning to settle these claims. In other words, at strong dollar prices, there is not enough gold in the world to settle claims – claims continue to build.

At some point, the claims will overwhelm the economy. At some point, the world will realize that their claim doesn’t really mean anything. At that point, they will do whatever they can to redeem their claim. That will lead to dollar craziness – which we are currently experiencing.

In the absence of the strong dollar, gold can find its rightful role as functioning to settle the surplus claims in the system.

This implies that in a local economy that effectively generates a surplus gathering claims against other economies, they will redeem their surplus claims – in that other economy where the currency functions just like they redeem ALL their other claims – for gold.

Economies that run a surplus will slowly gather gold. Economies that run a deficit will slowly give up the gold.

So, if claims are settled this way, we get back to – how does one make their currency strong in gold so as to win Oil support for using your currency?

Well, it takes care of itself (mostly). You see, economies that run a surplus settle for gold which makes extra gold available in that economies currency. As more gold becomes available, it has the tendency to drive down prices. This falling gold price over time will make the people feel that they will be able to get MORE gold for the currency in the future. Thus, a falling gold price will grow the usage of a currency – more people will hold it for future payoff. Any currency that will buy more gold in the future than today will be seen as a strong currency.

Likewise, those that run a deficit will see foreigners bid the price of their gold up as it moves into other economies. As gold gets scarce, it will have the opposite effect on the people’s feelings about holding the currency. Thus, the currency will weaken.

Does this give new meaning to the function of gold? Does it help explain why every other currency wants gold out from under the control of the dollar? Ultimately, surplus claims need settlement and economies should be judged upon their ability to produce for the world and currencies should reflect that fact.

Once people understand that gold is NOT functioning today and they can see how it SHOULD function, they start to think about the ramifications of how they might benefit.

Thus Another’s conclusion – he who follows in the footsteps of giants will be in for the windfall of a lifetime when gold starts to function FREE of its current control.

It all comes down to the functioning flow of value. As something of value flows in one direction, something of equal value needs to also flow in the opposite direction. Dollars which represent future claims are not of equal value because the inevitable conclusion must be a default on that value, one way or another (either by inflation or by bankruptcy). And at current prices, there is not enough gold in the world for gold to equal the flow of value both from Oil in the Middle East and from goods out of the Far East.

Only at a higher value will there be enough gold to cover this flow. And the cornering of gold by Oil was noticed by the Far East around the time that Another started writing. The Far East wanted in too. (ie. in 1997 it came to the attention of "Big Trader" from HK (China) that gold was being held at an artificially low price in USD to secure the flow of oil, and "Big Trader" has subsequently been buying physical, in quantity, ever since. The strength of the dollar in gold becomes its downfall, as too much gold is purchased.)

It all comes down to the functioning flow of value.

As long as people around the world accept dollars, the US should be able to maintain military influence and find enough people willing to part with their gold to support the dollar so it can maintain oil’s support. Unfortunately, people are starting to wake up to the fact that the dollar is overextended. In lots of cases, it doesn’t function. People will, over time, shun the dollar which undermines more of its ability to function.

The US may have millions of ounces of gold, but of the currency doesn’t function, oil will not back it even if it delivers a little gold.

Time will tell.

With this understanding, it may logically follow that under our current system, for all holding US Dollars, gold is at an amazing price today. Use the Strong Dollar to your advantage and acquire gold. For when or if the dollar fails to function, gold may be unobtainable with your dollars.

Buy gold and get out of debt – the world of tomorrow is upon us.

Ender

This post is compiled from a string of comments left on FOFOA's blog, beginning here, by Ender in Sept 2008.

The Price of Gold is Arbitrary

2010-08-31T00:18:00.004+12:00

The price of gold has nothing to do with gold's value, but rather the nature of the currency you are using to price it.

Currency is a thought, nothing more. An abstraction. It produces no output, but functions to lubricate the real things that do. Gold just is. A physical, tangible, real thing, with a long history of use as money. It is real.

Today, currency is backed by debt, debt being an obligation of one party to another.

What is the likelihood this obligation will be met?

Well, that is what ratings agencies would have you believe they can reliably work out, but the evaluation of debt is an impossible task, because it does not rely on entirely objective factors. Whether or not the debt can or will be repaid is vulnerable to many subjective factors on the part of both the debtor and the currency, including the perceptions of the debtor, and the perceptions of other holders of currency. Amongst those perceptions is the likelihood, or not, of other debtors paying their own debts.

In comparison, how can we evaluate gold? Simply, and objectively: gold is either physically there, or it is not.

To be entirely sure, keep it in your possession. Gold is something we can rely on, which may be a factor in its long and illustrious history.

Debt may, at any time, default, with the underlying obligation of repayment remaining partially or totally unfulfilled. The debt (and by implication any and all derivatives thereof) may go from being an asset, to vanishing altogether in terms of the value it represents, on the arbitrary whim of the counterparty. Physical gold in your possession, on the other hand, entails no such risk at all. It represents value extracted completely from the system crystalized into tangible form, ever ready to re-enter the system at its owners bidding.

If we say that gold, by definition, simply is, then we can see that this is the antithesis of arbitrary.

Currency is not fixed, not to anything real. It constantly fluctuates, in accordance with the perceptions of the market. It is backed by debt, which itself is valued by nothing more than the confidence of the creditor in the means and intentions of the debtor. This is arbitrary. This would not necessarily be a problem, except that it is treated by much of the world as a store of wealth.

So, if we wish to price gold in currency, then the price is truly arbitrary, as this is the nature of the denominator. Reasonably, we cannot price the real with the arbitrary, unless we are willing to concede that the price is also arbitrary.

These days, a very large proportion of the massive wealth generated with the inputs in particular of fossil fuels and modern technology is kept in various forms of debt-backed currency and its derivatives, whether paper or digital. The confidence of the market in receiving the full payment of this debt is all that holds this wealth there. Without this confidence, the “wealth” would have to run rapidly to another, safer location before its value dwindled quickly to nothing.

Gold is that location, as the storage of wealth is its primary function, and it can be assessed objectively. You have it, or you don’t. And when this run occurs, gold will achieve exactly whatever price in currency is required to fulfill this function. It is the performing of this function that endows gold with its value.

Gold is payment in full, whilst currency is merely a claim on payment.

From the perspective of those who currently believe their wealth to be secure in some form of currency, or derivative thereof, this price will indeed appear arbitrary.

Blondie

The Cornering of Gold

2010-08-29T11:10:00.002+12:00

This original version of this article was written in 1997 when gold was around $280/oz and oil was around $20/barrel.

Modern digital currency is nothing more than a concept. Without trade it has no use, literally. No value. As a concept, currency can be anything we imagine. Anything, because it is nothing more than a thought. Useful only as a trading unit.

To “corner”: to control enough of the supply to be able to set the price.

The cornering of a commodity, often tried, has never been done due to the use of paper currency (or debts thereof)(1) in the attempt.
Today is different. Never before has an entity used a commodity to corner another commodity. The intent is not to corner, but the result will be the same.

There is a big mismatch in value between gold and oil. Not price, but value.

Oil is an absolute necessity for modern life.

Gold has become something “we may need?”.

Within these currently held views, which is considered indispensable, oil or gold?

Consider the amount of oil consumed daily.

What future value does this place on reserves in the ground?

Consider the amount of gold consumed (not traded) daily.

Comparatively, this consumption values oil reserves much higher than gold reserves.

There is no economic replacement for oil, and no “need” for gold today.

Oil at a reasonable currency price is crucial to the modern lifestyle, and every asset is valued to reflect this ongoing lifestyle. Without this steady, affordable oil supply, all assets must lose (much) relative value. This dilemma is not lost on governments or Central Banks.

To most people outside the West, wealth is the surplus of your life to save for a rainy day, and hopefully pass on after death. Currency is short term only, for living expenses. It is not wealth. Gold is.

These are the same peoples who produce much of the oil. But oil is “so large” in comparison to gold that any attempt to convert even a relatively small amount of oil profit into wealth distorts the market. And while the West doesn’t care for gold, if they think you do they will try to profit.

So, like currencies, gold has been “digitized”. Just as “digital currencies” are for trading only, paper gold is for the trade of oil. It allows the purchase of small amounts of cheap gold in return for a full supply of oil.

Paper gold represents the future production of gold (from the ground) to balance the reserves of oil (also in the ground). Paper gold traded and outstanding is far in excess of of all gold in existence above ground. Central Banks guaranteed this paper with the selling and lending of some of their own gold reserves. As economies became addicted to cheap oil, CBs have had to service this need with paper gold.

This paper gold held by oil will be honored, or oil will bid for gold, and oil will become very cheap for those who can pay in physical gold.

A large oil producer can say: “We now value gold at $30,000/oz.. We will sell oil at $10.00us/bl. Pay in physical gold and USD/EURO as 50/50 mix to equal $10/bl..”

Oil would drop to $10/bl and every economy with gold would do well. All gold would be immediately arbitraged, thereby creating a “world oil currency” large enough to handle oil, as a result of the first “commodity corner” that ever succeeded!

The author is unknown, but it was one from whom Another learned. The full text can be found, as posted by Another, here: Another (Thoughts!): The Gold-for-Oil Deal - Page Two, about a quarter of the way down the page.

(1) With the currency used to attempt the corner being based on a concept, the terms of the concept can be changed to prevent the success of the corner, for example, see the changing of the COMEX rules which ruined the otherwise successful cornering of silver by the Hunt brothers in early 1980.

The Trinity: Gold, Black Gold & Paper Gold

2010-08-21T23:20:00.002+12:00

Black Gold

The 35,000 Gold sovereigns paid for the Saudi Arabian oil exploration concession in 1928 were reportedly counted by Sheik Abdullah Sulaiman himself. Oil was struck in 1937, and over the next thirty years Aramco discovered petroleum reserves in Saudi Arabia in excess of 180 billion barrels, a quarter of the known reserves of the planet at that time.

Co-founded by Venezuela and Saudi Arabia in 1960, the Organization of Petroleum Exporting Countries cartel was established to safeguard the members interests, ie. profiting from their oil. OPEC from the beginning maintained that oil was a depleting asset, and it had to be replaced by other assets to balance national budgets and fund developments.

The Dollar

The dollar and the world were pegged to Gold via the post-WWII Bretton Woods agreement in which $35 was convertible to one ounce--but for foreigners only, not U.S. citizens. The rate for international currency exchange was coordinated through the International Monetary Fund (IMF), with each currency pegged to each other through the dollar and Gold. The U.S. economy expanded steadily in the 1950's, producing half of the world's oil, and half of the cars that burned up this oil. By the 1960’s, America was making huge purchases overseas, and the Vietnam War was funded largely through borrowing.

Too many dollars started building up overseas, and as they did so, ever more of them were cashed in for Gold. De Gaulle summed up the sentiment, saying that Americas position as printer of the reserve currency gave it an “exorbitant privilege”, in that other nations had to produce to earn what Uncle Sam could simply print. During the late 60’s it became clear that too many claims had been issued on the US gold, and President Nixon was prompted to close the Gold exchange window in 1971 in the face of a certain run on the Treasury.

Upon this declaration, the entities in receipt of dollars for balance of trade settlements had no difficulty recognizing this as an outright default on payment contracts. The scramble was on to make sense of this new payment system in which the dollar was no longer a THING of value (a small amount of Gold), but was now reduced to a CONCEPT of value; an undefined unit with which the world would denominate the amount of value in contracts for goods and services. The problem ever since has been in coming to terms with the meaning of value for this shifting and undefined unit, and its vulnerability for mismanagement and abuse.

With the dollar no longer redeemable for gold, OPEC were able to name their terms of payment, and decide essentially what value the dollar would have in oil terms. The increased world demand for oil ensured that the price would be met (US production peaked in 1970), and the printing presses essentially ensured that there would be no lack of dollars, so to speak.

The First Oil Crisis

So in 1971, while the Texas price of oil was $3.45 per barrel, OPEC re-priced their Middle Eastern oil up from $1.80 to $2.20 only to see the market price due to demand in 1973 overtake the official posted price, at which point OPEC saw the writing on the wall, and in October raised the price per barrel to $5.12 while curbing production. By December, the Shah of Iran called a press conference to announce the official price would now be $11.65. Well, why not? It's only paper to you if you are not in NEED of this currency through a debt to someone else. And so began the First Oil Crisis of the 1970's.

By raising the price of oil $10, from $1.80 to $11.65, at those current production levels OPEC raised its annual revenues by approximately 100 billion dollars. An absolutely huge amount of money for the time.

Where did all of this money come from? Americas spending habits didn't change with the advent of the all-paper dollar. How are the poorer countries that must EARN their dollars going to fund their own oil needs? What would OPEC do with all of that cash? Would OPEC own America lock, stock, and barrel? Banks were the answer. Buy banks, fill banks, and recycle the petrodollars. Oh, and let's not forget Gold. Straight from the finance ministers of both Kuwait and Saudi Arabia, they "... were only to provide for the welfare of their citizens, and that oil in the ground is better than paper money." Thank you for that insight.

The Petrodollar (Oil into Paper)

A loan creates new money, and banks collectively may create money far in excess of what they hold on deposit. As a contract, the loan is quite real, but the dollar is not. A dollar is an undefined concept - an undefined unit of measurement for value, so to speak. You can see how such an arrangement favors those in a position to name their price.

Clearly, much more money was being created to purchase oil than could possibly be spent by the oil producers. Vast sums of it found its way into the world's largest international banks.

So much money flowed in, and so much was lent in turn to the poor countries that could scarcely afford to buy oil with their meager exports, that the financial system became a large game of musical chairs, and the biggest risk was that the music might stop. There were no chairs to sit on!

When the First Oil Crisis caused a global tightening of belts, only America, as the issuer of the key-currency, could shamelessly create new money with ease to pay its bills. Other countries had to balance their own books with productive output, or else turn to the banks to borrow the needed funds. And borrow they did! These petrodollars were recycled through the banking system. During 1974, the World Bank had drawn on OPEC for $2.2 billion, for a total at the time of $3 billion--one quarter of all World Bank debt. For Euroland banks, business was booming because lending was their business.

Some of the countries that quickly found themselves behind the eight-ball: Brazil, Korea, Yugoslavia, the Philippines, Thailand, Kenya. In a move driven more by politics than banking to ease the financial squeeze upon a nation's citizens and industry, the governments would turn to their central banks and to the international and multinational banks to secure the needed money. And the banks couldn't stop lending, because many countries relied on new loans to pay off the old loans in addition to their continued need for oil. Loans in default were simply rescheduled. There were no chairs, and the music could not be allowed to stop.

To protect themselves from the unthinkable - that the Arabs might pull their deposits out of an individual bank--the banks developed a system. This system provided for the relatively smooth inter-lending of funds. Because even though a bank can create new money "out of thin air," they have to have deposits in the bank as a starting point. If these funds were to be withdrawn, the bank must locate other deposits to cover their outstanding loans. If the money were pulled, say from a British bank, it had to go somewhere; the amount of money was too great to "hide" for long. This British bank could call around, and arrange to borrow the funds back from a Swiss bank, or German bank, by paying a nominal interest rate on this inter-bank loan. The important concept to grasp here is this: as long as the petrodollars stayed in the banking system, the banking system would survive.

If a bank were to fail, what would the Arabs do with their remaining deposits, now clearly in jeopardy? Further, the inflationary impact of all of this borrowing was also a fact not lost on the OPEC nations. Many of the OPEC members' advisors and ministers held Ph.D.'s from prominent American colleges. They did not have their heads in the sand. The inflation would lead to a new price of oil just to recapture the value that was lost, and the cycle would intensify in the next round. OPEC knew the western currencies were depreciating faster they were compensating with price hikes. They were getting less "real" money as a result.

The Second Oil Crisis

In most cases, the oil was made available at a posted price. In the 1960's, OPEC's posted price was $1.80, then it was $2.20, then $5.12, and within weeks it had been changed again to $11.65 (in late 1973). By May 14 of 1979 the posted OPEC price was $13.34 per barrel, but things were about to change. The key element to keep in mind is that oil was not priced directly by the market. It was mostly sold under long-term contracts at posted prices that were set by the producers after careful analysis of what the market could bear under self-determined production levels.

When the Ayatollah Khomeini's revolution deposed the Shah, Iran's 6 million barrel per day production fell off dramatically, and the resulting shortage sent the downstream processors scrambling for sources of oil anywhere to feed their refineries. Many turned to Rotterdam for oil, to fill their empty tanks. The deepwater port at Rotterdam was the principle harbor where huge tankers could be found to deliver oil on the spot, and hence the spot market for oil was often referred to as the Rotterdam market - but in truth, the spot market was available worldwide. This spot market was never meant to determine the price for oil, but was only supposed to supply day-to-day purchases.

Due to the stresses of low supply, the Rotterdam price sailed above the $13.34 posted OPEC price on Tuesday, May 15,1979 to $28, and two days later it reached $34. Iran immediately took what little production remained and sold on the Rotterdam market. OPEC then set a ceiling price for oil at $23.50 per barrel, but that was soon broken by Libya and Algeria. Obviously, Rotterdam was the place to sell oil at the best price, so many tankers with long-term contracts for oil stood empty waiting for delivery while ever more of OPEC-member production was diverted through Rotterdam. Countries and many companies looked at the low levels in their storage tanks, and soon they were rushing to support the Rotterdam market with their business. The "spot" price reached $40 per barrel as uncertainty about the future brought forth every empty tank or dilapidated tanker out of retirement to be filled.

Gresham's law can help explain this phenomenon - bad money is spent and good money is saved. Oil was being bought and saved as a store of value, while paper money was spent. The flames of this Rotterdam inferno were eventually cooled as the last available storage tank was filled to capacity. This display of the spot value for oil reinforced OPEC's concept of value, and they had no qualms about raising the posted price to the spot value. Please recall, "We would rather keep the oil than have the paper money." Recall that the explosion in Gold prices also occurred in 1979 to early 1980, showing us Gold priced at $850 per ounce.

So what exactly has changed in the world since 1980? How was this wild tiger tamed? Is the money better than it once was? Or are the OPEC nations now suddenly and truly beggars upon the West's doorstep? What happened? Are the multinational banks (once scrambling to hold together the System) now calling the shots with nary a care in the world?

Gold and Paper

It is not the nature of money itself to earn interest, but rather, it is the investment risk that maybe earns a reward. A modern dollar in a shoebox is as a Gold coin beside it. No interest for either. You are forced to be more aggressive (more risky) with paper because its value dies quickly, unlike Gold that stands forever even in a shoebox of no risk. The interest paid by a bank savings account is not a product of the money itself, but instead it is the rewards on the risk the bank takes with the money you have provided for their use.

In days past, the oil exporters had been poor to modest countries scraping by when two things occurred. They discovered that they owned lots and lots of oil, and they also found that the rest of the world had developed a voracious appetite for oil.

We've already discussed much of the turmoil that resulted from consumption that outpaced ability to pay. Payment in Money (Gold) was terminated, and many payment scenarios were developed in addition to the ever rising prices in paper currency. While it can be suggested that currency is a reasonable means in which to track balance of trade accounts, it should be readily admitted that paper currency is an unacceptable means in which to pocket one's profits. Book the trade balances with paper currency, but pocket the profits (savings) with Money (Gold).

Paper currency was falling fast in value when it was no longer tied to Money (Gold), and this was causing international settlement difficulties on many fronts in addition to oil. The asking price by oil - influenced by many factors - is what established the dollar's value.

Oil economist Eliyahu Kanovsky wrote in 1986: “Oil prices have been weakening almost steadily since 1981 and there has been a collapse since the end of 1985. Instead of rising 'petrodollar' surpluses, most OPEC countries, and Saudi Arabia in particular, are incurring large current account deficits in their balances of payments, and are rapidly drawing down their financial reserves."

He claims competition among producers ensures an end to price fixing, that OPEC has lost its ability to raise income through raising prices, and that oil below $20 is virtually assured. They can only pump it and sell it for whatever the market will provide. He also contends that with the current account deficits of many OPEC members, notably the Saudis, they have no option themselves but to add to the oil glut with overproduction to raise revenue.

The Saudi deficit climbed from $4.3 billion in 1990 to $25.7 billion in 1991. Oil had been selling at around $14 per barrel until June 1990 when Saddam Hussein pressured OPEC to raise the price to about $20 to help repair Iraq's national budget (which had been wiped out by their 1980-88 war on Iran).

What happened to the vast amounts of petrodollar revenue that was being pumped into international banks, and recycled as fast as the loans could be written to borrowers throughout the 1970's? Further, what happened to the oil producers profits that were surely being generated on these deposits through the activities of the lending institutions?

The System miraculously survived the Second Oil Crisis of 1979, and concurrently the skyrocketing price of Gold promptly abated in 1980. Kanovsky points out that oil prices started weakening in 1981, and then plunged in 1985. Force yourself to make the connections. You will be one step ahead of Kanovsky, who has identified the effect, but no doubt has missed the cause entirely.

Gold from Oil via Paper

After "booking" their trade balances with dollars, the House of Saud, among others, wanted to "pocket" their profits with Money (Gold), and therefore competed with everyone in the world for Gold on the spot market. As the price shot right through $700 in January 1980, it was clear that every ounce purchased made it that much more difficult to purchase the next ounce. There was little trouble raising the price of oil as needed, except the financial structure of the world was coming apart at the seams. Each dollar withdrawn from international banks to buy Money (Gold) made life ever more difficult for the banks to square their books against outstanding loans or to write new loans. There had to be a better way...

The high price of Gold brought mining companies out of the woodwork looking for the next jackpot Gold deposit. The mining companies needed capital to finance the construction of these numerous new mines.

Banks can loan gold as easily as they can loan currency, and gold mines can repay the loans in newly mined gold. Perfect. Interest rates on such loans are smaller, as the gold holds its inherent value over time, unlike paper currency. The loaned gold is turned into paper currency to finance the purchase of mining equipment and other mining expenses.

These gold loans can then be sold on to the secondary market, much like a mortgage, with the buyer purchasing the rights to the borrowers scheduled repayments of gold over the term of the loan. Perfect for the Saudis, who wanted gold for their oil profits.

Effectively, the House of Saud are financing the mining operations, not buying the metal immediately, but the rights to the Gold repayments over time, with the central bank acting as guarantor.

The price of gold fell due to the major buyer finding this new avenue through which to exchange oil profits for Gold, off-market. Much patience and commitment to Gold is displayed here, buying from the top all the way down. The big payoff is in the end.

So many Gold loans were written in this fashion that the House of Saud in our example spent down their past petrodollar surpluses. At this point, the banks simply continue as before, but now they use the Saudi oil still in the ground as collateral. They will be receiving future Gold for their future oil! As they sell oil, they will use their dollar revenue to repay their currency loans, with the miner's Gold loan repayments being directed to the Saudis' account.

Without the biggest Gold buyer, the pricing pressure has come off, and prices could very well be expected to fall. To protect against this leading to the possible bankruptcy of the miner, and hence his default on the repayment of Gold, the terms of the Loan might also require that the miner lock-in a certain amount of future production at the current Gold prices at the hedging counter (a fixed contract to sell future Gold at todays profitable price).

It should come as no surprise that the House of Saud would also step right up to purchase the delivery side of this hedged production. Enough must be hedged to ensure the mine will remain viable (even at lower prices) at least long enough to repay the Loan. If the price of gold should dip below the cost of production, the hedge keeps the miner from making a loss. The current price of Gold is not a factor on the Loan repayment...they owe x number of ounces (plus interest) regardless. Any additional production would be sold under the terms of their hedge, and they can pay their bills comfortably and stay in business.

You can see how the mechanism that has brought us temporarily cheap Gold over the years has also given us cheap oil not subject to the same shocks witnessed in the Seventies. You can also see why the economists can look at the Saudi accounts and see tremendous currency debts and budget deficits where once there were surpluses that threatened to buy up the world. They have in fact bought up a significant portion of the Gold mined well into the future...through Loans and Hedges bought all the way down from the top. So who are we to question whether to exchange our currency for Gold now or tomorrow, and to gripe over a missed opportunity of $10?

The Gold Carry Trade

Gold, borrowed at low interest rates of 1-2%, could be sold, with the currency received then reinvested in bonds yielding over 5%. With the proper Central Bank guarantees, Oil would be there to buy up the repayment contracts of these too. A temptation too profitable to resist.

This constant selling of gold by speculators (Hedge Funds) drove the price ever lower, well below the point at which mines stopped seeking these loans. Unhedged mines became unprofitable, further diminishing physical supply. With demand continuing to outstrip supply throughout the late 90’s, Central Banks were routinely dumping large quantities of their physical reserves into the market.

So we get to Y2K, the price of gold is at the cost of production, and Bullion Banks and Hedge Funds are massively short gold. Central Banks have guaranteed these loans with their own gold. For some years, only the oil producer appears to have been taking large quantities of metal off the market. But now other large players became aware of this difference between price and value, and become consistent in their physical purchases too. The price cannot realistically get lower. High cost of production mines have stopped producing. Individual demand is rising. With the tech crash carnage leading to Greenspan drastically lowering interest rates, the Gold carry trade was finished.

More than a little problematic for those on the short side. They are big enough to absorb some losses, one would hope. More Central Bank reserves to be sacrificed into the market? Or would a new avenue be found, within the fine print of yet more paper? This arrangement is supplying the West with (seemingly) affordable oil, after all. And gunning the global stock markets. All this currency, borrowed against oil collateral for the purchase of Gold has added massive liquidity to the world since the mid ‘80s. These are major contributions to the “prosperity” of the world, courtesy of Gold, the anonymous benefactor.

Gold has been supplying the liquidity, and keeping the entire modern economic show on the road.

How much do you think this arrangement is really worth to the world?

How much will the powers that be sacrifice, what magnitude of paper losses, to keep it going? Or to be more accurate, whose wealth will they sacrifice?

And how much is physical gold really worth?

This story was originally told by Aristotle, with considerably more flair and detail here, and later reposted by FOFOA here. FOFOA also wrote a synopsis of this scenario in an early post here.