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Reference Point: Gold - Update #1

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Published : January 10th, 2011
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Category : Gold and Silver





The system we have today is actually broken, only we haven't quite recognized it yet. And so we need a new one, and this is the time to do it, while the markets haven't quite figured it out yet.

The preceding were the words of a billionaire more than a year ago. The following are the words of a
Federal Reserve Bank president from just a couple days ago (emphasis mine)… Should the debate that is happening privately remain hidden from the public eye…? Is the nation somehow better served by giving the public the impression that the entire [Fed] is in agreement…? A gold standard that forces countries to back their currency reserves with bullion is a legitimate monetary system.

This being the "year of the RPG" here at FOFOA, I thought it would be a good idea to keep an eye on how gold is acting as "a key reference point to allow people to assess the relations between different currencies" (to quote
the head of the World Bank) throughout the coming year.

In order for the limited and stable quantity of above-ground physical gold to perform this important international function effectively, it will ultimately trade independent from the current network of bookkeeping derivatives that assume gold ownership through a counterparty's gold liability (receivables, futures, options, forwards, ETF shares, etc.). Such contractual obligations do not represent a stable and credible quantity like the physical gold itself does, and therefore they make a poor and distorted pricing benchmark.

More than 10 years ago FOA blew the whistle on the inevitable failure and subsequent dénouement of this distorted benchmark. From my post

FOA (05/06/00; 16:45:21MT - msg#20)
For Your Eyes Only!

By holding physical gold you are owning a super leveraged "derivative" that will be exchangeable against the value of real things at a par level lost to the minds of most investors. Today, physical gold purchased in dollar values is discounting its worth by perhaps 100 times. For us PGAs (physical gold advocates), that is a leverage worth "playing the physical game for"! (smile)

… Throw in the fact that the earth will not give up all its gold any time soon, present world gold holdings in reserve currency today must rise in value at least 100 times to match what assets now exist. On top of that add in the fact that dollar gold will go sky high just to equal past dollar creation (as the dollar fails) and one can see where physical gold is "the play" in modern times. Forget stocks, business valuations, land or currencies: physical gold is the wealth for the next generation.

FOA (10/9/01; 10:05:48MT - msg#117)

Lost in all the confusion is the distinction between investing in the price of gold and investing in gold itself. Perhaps 90% of all the investing in today's worldwide, dollar settled, gold market is done in this first way mentioned. Yes, the market is structured, contractually, to settle in gold. However, in practice, in norm, and in past legal precedent, it is accepted that paper gold trading is meant to only capture the price movements in gold while ceding, what could be, controlling physical trades and their price setting function to other market areas.

Obviously, this is the way it all started, years ago, with the physical trading and its fundamentals dominating the lesser paper trading. But the market evolved with the paper contractual trading becoming 100 or more times the size of the physical side. But everyone already knows all this, right?

From a Friend

Ref: "In other words, the current price of gold means that you are buying a slice of the world’s gold supply with a proportionately smaller slice of the world’s money. You can currently buy x% of the world’s gold with y% of the world’s money, where x is much bigger than y. When gold will become the unit of account of the world’s wealth, you will find yourself able to claim a much bigger slice of that wealth than you would have been able to do with fiat money before the collapse."

This means that CBs and gold-clearinghouse BIS must attach a much higher VALUE to the gold they exchange (redistribute) than the public (visible) goldprice(s).

Note the difference between Value and price. The price is for bookkeeping purposes. The Value is for wealth reserve purposes.

That's why a private person cannot buy goldmetal directly from any CB (or BIS/IMF) ! We are not allowed to know how CB gold " flows " (and is valued in the inner circle). We have no idea how bullion banks intermediaries let goldmetal circulate from goldmine to state and private entities.

We are not allowed to know how the CB/IMF gold auctions really happen. How can we possibly verify the goldprices that are publicised ? Who are the receivers of the WAG gold redistribution ?

So much CB gold-Action and so little transparency. WHY !?
Because of Big difference between price and Value !?


Of course today this is not yet the case. When we say "the gold market" today we mean all of the above paper contracts plus the gold itself. But that doesn't mean that everyone in the world views gold in this same way. They don't. It is really only us in the West, encouraged by the cheerleaders on CNBC, that carry this laughably optimistic view of counterparty trustworthiness when it comes to gold. Other more "giant" and less "Western thinking" entities around the world have quietly taken steps to prepare for the future.

Certain "giant entities" are, and have been for more than a decade, marking their physical-only gold assets to the market price of "paper gold" the whole time it has been rising from its low of around $250 per ounce. This doesn't seem like a very big deal to the Western mindset that can't see the difference between "counterparty gold" and "counterparty-free gold," but it is actually quite significant given the history of metal used as currency.

In the past, whenever any metal has been used in a monetary function during the presence of a government or monetary authority, the metal itself has endured a trade-value distortion that is always in conflict with the market forces present at that time. This market distortion is what has melded metal into money during these past systems. Not its free market floating value, but just the opposite; the suppression of free market forces on that specific monetary metal.

For example, you can stamp a metal into coins and declare that your coin form of the metal is of higher value than uncoined metal in payments you make and those made back to you. This is a way to overvalue a portion of a commodity metal's above-ground supply to your advantage. You are marking your specially stamped metal above the rest of the market metal, or "marking it to your model."

But over time, this method of monetizing a metal has always run into the same problem. The market for uncoined commodity metal always seems to catch up and overtake the face value of your coined metal and you are forced to dilute your currency into ultimate collapse, occasionally on a civilizational scale.

So then you might declare that all of a certain metal, coined or uncoined, is the monetary base or standardized unit of another money that you can print very easily. This method becomes more of a confidence trick because you are attempting to undervalue that metal (the entire quantity of it) out in the free market, relative to the easy money that you can print.

In order to support this confidence trick you must become both the buyer and seller of last resort of both your metal and your easy money. You must buy your easy money back with your metal and vice versa. This trick can last until you run out of one or the other. Of course, you need never run out of the easy money you can print, so that's not the real danger in this con.

In a sense, or perhaps in essence, today's paper gold market is not very different from this second monetary scheme. The banks that create paper contracts for "counterparty gold" by simply writing them become the buyer and seller of last resort for both their own paper promises and real physical gold. This can continue until one or the other runs out. But again, you are marking a metal to your model of a marketplace that includes both the metal and your paper creation, be it dollars or "counterparty gold."

There are many variations of these schemes in which the value of various metals had to be distorted by authorities in order for them to fulfill any useful monetary function. And there are also many examples where monetary authorities were forced to adjust or abandon their preferred money to avoid drowning in the unstoppable tide that is the market force. Like France in the 1870s abandoning its planned return to bimetallism in order to avoid having to spend its gold buying up all the excess silver in the world. [1] Or Sweden's successful move in 1916, closing its mint to the previously free coinage of all gold in order to levitate the value of Sweden's coined gold back above the market price of uncoined gold. [2]

All of these market/monetary shenanigans of the past stand in stark contrast to what is being performed today in broad daylight, once every three months, on the Consolidated Financial Statement of the youngest major monetary authority in the world. Once per quarter, the ECB openly marks the Eurosystem's monetary reserve assets, including the physical gold asset, to the last market price of the previous quarter. This is marked to market (MTM) monetary authority gold in the specific role of reserve asset, aka store of value. And while the implications of this 180 degree shift in any major monetary authority's regard for gold is not widely discussed, it is immensely significant. (See:

So without further ado, let's get to the latest Eurosystem reserve revaluation, just released Wednesday, and see how our RPG (Reference Point Gold) is holding up. First, I will show you how you can follow this on your own, or even go back and check past statements for analysis, or just for fun.

If you click on the following link to the ECB website you will see a description of the "Weekly financial statements" they publish every week:

It reads: "As a general rule, the consolidated weekly financial statements of the Eurosystem are published on a Tuesday, and they relate to the preceding Friday. There are two exceptions to this general rule.

"Firstly, the publication day for the first financial statement of each quarter will normally be a Wednesday (instead of Tuesday) in order to allow more time to complete the quarterly revaluation of assets and liabilities, which is reflected in these statements."

Note the use of the word "consolidated." This means that every line on the statement relates to the entire Eurosystem, not just the ECB. So the gold listed on this form is the consolidated total of the official gold reserves of all its member states. Same for other itemized assets and liabilities. Also note that they only perform the market-based revaluation of assets on every 13th statement (once a quarter). And for these, they allow an extra day, publishing on Wednesday instead of Tuesday. And this being the first week in January, we got the new numbers on Wednesday.

Below the description you'll see a list of the actual publication dates for the quarterly revaluations this year:

To the left you can click on any year going back to the launch of the ECB on Jan. 1, 1999 and review the weekly and quarterly reports from each year:

And down at the bottom, you can click on the language of your choice for today's quarterly statement, "en" for English:

So let's click "en" for English and check out the latest ECB press release, the "Consolidated financial statement of the Eurosystem as at 31 December 2010" or ConFinStat for short. If we scroll down a little we'll come to the actual balance sheet. This lists out all of the Eurosystem's official assets and liabilities, listed in their euro value, the official unit of account in Euroland.

Quantitative changes to this sheet are published every week, but qualitative changes, the line items signifying foreign currency assets and gold, are only revalued into the euro unit of account once per quarter. Just above the balance sheet you'll see the only section that differentiates this quarterly statement from any other weekly statement, the "Quarter-end revaluation of the Eurosystem’s assets and liabilities."

Notice the black arrow pointing to the following:

Gold: EUR 1055.418 per fine oz.

USD: 1.3362 per EUR

JPY: 108.65 per EUR

Special drawing rights: EUR 1.1572 per SDR

These four lines are the "market snapshot" that is taken once every three months, mentioned in my last post. It is a snapshot of the euro's market price as it floats against four different benchmarks or reference points. It is used to calculate the weight of those most valuable line items to any Central Banker, the reserves that cannot be printed and are therefore used to defend and evaluate that which can be printed. This snapshot will be used for the next 90 days.

For comparison, here's the last "snapshot" taken on Oct. 1, 2010:

Gold: EUR 960.580 per fine oz.

USD: 1.3648 per EUR

JPY: 113.68 per EUR

Special drawing rights: EUR 1.1399 per SDR

Right off the bat you should notice an interesting thing. Look at the percentage of the euro's change against the other fiat currencies. 2.1% change against the dollar. 4.6% against the yen. And only 1.5% against the SDR. They are all falling in tandem! Yet there's a 9.9% change against gold over the same time period. What you are witnessing here is the emergence of a true leader, the benchmark or Reference Point par excellence, from the rest of the pack of potential "reference point contenders."

Now let's take a look at the actual balance sheet to see how this Reference Point snapshot is applied. In the image below I have placed the asset side of the previous statement released on Dec. 28 side by side with Wednesday's release.

One distinction I want you to notice is the two columns on the quarterly statement, which I circled. Column "i" is for transactions or quantitative changes from the week before (this is the column that is reported every week), and column "ii" is for the "snapshot-based" adjustments or qualitative changes from the previous week/quarter.

You'll see from the previous statement that there was a net increase of approximately €1 million worth of gold (only around 1,000 ounces) to the Eurosystem stockpile during the week ending on Christmas Eve (possibly delivered by Santa). And in column "i" you'll also see that there was no change to quantity of gold during the week between Christmas and New Year. There was only a "qualitative" change (revaluation) which was reported in column "ii." And that change was +€33 billion for the Eurosystem's 348.1 million ounces (10,827 tonnes) of gold.

The other important thing to note on these ConFinStats is the gradually changing relationship between gold reserves and foreign currency reserves. These are both "hard money" reserves to the ECB because they must be acquired "the old fashioned way," or the "hard" way; they cannot be printed. This is what makes them valuable to any Central Bank. They are what is sometimes used to defend the value of the "easy money" that can be printed. And the qualitative relationship between these two fundamentally different kinds of reserves has been changing for the past 12 years!

As Randy Strauss of USAGold fame so eloquently points out
here, "gold’s role has gained musculature from a mere 30.5% proportion to its current dominance now at 67.1%." That means that at the beginning, in 1999, Eurosystem reserves were made up of 69.5% foreign fiat paper and 30.5% gold. Today that has shifted qualitatively to a net foreign paper position of only 32.9% to gold's 67.1%, a virtual flip flop!

And what makes this so significant (and unique) for the euro is the way the ECB measures itself nakedly, transparently, against all competing benchmarks. The ECB valiantly reports ALL foreign holdings in its own unit of account, displaying itself confidently against any and all reference points. Second only to the ECB MTM concept, this is the revolutionary CB practice that other major CBs have yet to adopt. Most CBs still report their dollar holdings in Ben Bernanke's favorite benchmark, the dollar itself, master at the confidence art of self-reference.

Speaking of the dollar, it is difficult to maintain yourself as the global reference point if you are seen to be losing your youthful posture. So let's take a quick look at how an aged major monetary authority (preparing for its 100th birthday party in 2013) deals with this conundrum. It's not as pretty as the spry ECB statement, but here is the Fed's asset report from its latest release, "
Factors Affecting Reserve Balances" (just released yesterday):

The salient point here (circled) is what Randy Strauss expounded on in his previously linked piece:

"Meanwhile, due to the woefully outdated paradigm established by the U.S. Congress for gold held by the Treasury Department, the gold reserves of the United States are effectively anemic and bedridden upon the books of The Federal Reserve System, where they exist only in certificate form — valued at a static $42.22/oz., forming a paltry $11 billion stake."

That's right! The Fed doesn't even have actual gold on its balance sheet that can be used as a reference point. It has "gold certificates" issued to it by the U.S. Treasury from the past monetization of U.S. Treasury gold at $42.22/oz. I suppose, technically, if the U.S. Treasury wanted to revalue its gold to the market price today, the proper yet antiquated process would be for the Fed to credit the Treasury's spending account with new dollars representing the difference in price. Today that would be about $355 billion fresh dollars for Congress to spend. Yet there would still be no existing mechanism to automatically account for the new and emerging Reference Point: Gold. Something technical is going to have to change!

But that's not really my concern. That is something for Congress, the Treasury and the Fed to collectively figure out. My concern is simply how this shifting, changing and adjusting international monetary system will affect my balance sheet. And that's why I have put myself on
my own personal RPG. I have consolidated my assets. And in doing so, I have favored the genuine article over its lesser reproductions.

What makes me sad, though, is that some of the most studious and longstanding gold bugs, some of the most ardent "honest money" advocates, will apparently be slower to grasp this unfolding system of "RPG/Freegold" than the flocks of Sheeple, or even the Chartalists. Sometimes you've just got to "unlearn" a little past dogma in order to comprehend present reality.

The "silver lining" for them is that, at least, hopefully, they will have some physical gold in their immediate possession so as to participate in the RPG party train. If not, well, hopefully the commodities they invested in will at least rise with inflation and not succumb to the global economy resetting as it adjusts to its newfound lack of a 300 million-strong group of net consumers.

FOA (8/22/01; 05:18:54MT - msg#98)

The war between gold and the dollar has been over for a while now. The action, today, is between the dollar and the euro arena and this is what will break the price lock on gold.


FOA (07/27/01; 15:20:44MT - msg#85)
"The Wind Will Blow"

Circulating cash dollars, official metal coinage and other previous fiats, themselves thought of as a final hard payment, were never any more than a known tradable value. A trade credit owed to you as long as one held the money unit. Even with gold backing the dollar unit, money's value was always in its exchange for something else we wanted. Gold values behind these fiats was used to represent some fixed tradable value the money unit stood for; not to be the money unit itself.


The immovable past structure the dollar is built upon demands its values be defended with complete hyperinflation if necessary. Prior to EMU, there was no other reserve currency that the world could run to. Now, the dollar cannot deflate and take the rest of the world into deflation with it. The tables are turned; deflationary policy will not defend the dollar. Only inflationary policy will. Make no mistake, we are not calling for price inflation to end the dollar's reserve rein! We are calling for "inflationary policy" to dethrone it while said hyperinflation follows.


The next step will be an orderly exit from dollar use; a somewhat destruction of all dollar gold pricing; and a super price inflation for US dollar assets. We are not at the end my friends, we have just come to the beginning. For physical gold advocates that understand the difference between real wealth and leveraged real wealth, the time arrives when values are reflected with the speed of the wind. Truly, in our time, "The Wind Will Blow".


Having evolved a dollar reserve money system into a straight debt fiat currency, without gold involvement, the entire dollar function became locked into one basic premise: for the system to survive, its core reserves of debt values had to remain somewhat price stable as the currency inflated relative to GDP. Over the next 30+ years their dollar controllers, the fed and treasury, thought they had a fairly good handle on the system as they managed banking reserve requirements. To their amazement, it turns out today, that digital use demand was the best function that supported their efforts all the while; by increasing the world's use and need for currency. Had they understood this modern economic function early on, they could have somewhat printed the currency outright with almost the same result while arriving at today's destination. They could have let gold float, not to mention they could have skipped a large portion of the debt build up that will now end the dollars timeline.

Most, if not all, of this perspective is only now coming to light as the Euro builds pressure on the dollar. The better architecture of the Euro system is leaving little room to adjust as the US fed must singularly act to inflate their local currency in a historically new and unprecedented fashion. The actual debt machine that built much of America's lifestyle is now going into reverse as it destroys its own currency; one built upon a stable debt system with locked down gold prices.


Without an international floating gold reserve pricing, to balance against their devaluing debt reserve, the entire dollar banking system can only rely upon extreme dollar inflation to float its accounts. Price inflation will have to be ignored. To this end the group of dollar supporting countries, we refer to as the dollar faction, has locked itself into a box. It must find a way to float gold prices with a gold reserve that only drains away if world gold price rise.


How far will gold rise? At first blush, foreign dollar assets will not, in any way, return home! They will circulate offshore; either from lack of understanding of the issues, a thought that things will be worked out or from foreign exchange controls aimed at protecting the failing US economy!...


Exogenous (or exogeneous) (from the Greek words "exo" and "genis", meaning "outside" and "generated") refers to an action or object coming from outside a system. It is the opposite of endogenous, something generated from within the system.

In an economic model, an exogenous change is one that comes from outside the model and is unexplained by the model. For example, in the simple supply and demand model, a change in consumer tastes or preferences is unexplained by the model and also leads to endogenous changes in demand that lead to changes in the equilibrium price. Similarly, a change in the consumer's income is given outside the model. Put another way, an exogenous change involves an alteration of a variable that is autonomous, i.e., unaffected by the workings of the model.

...These reserves will circulate until their gross exchange value simulates a figure that can be reasonably expected to "buy something" within the US; ten cents on the dollar could be a guess? However, keep in mind that the fed will be printing like mad, local prices will be soaring and no one will be chasing dollars like they do today. I expect that physical gold trading, within the US, will follow far behind foreign trading for a time. Perhaps a $5,000 to $15,000 ratio will be a thought as dollars within the US will be worth more than outside. Still, the relative value of physical gold will eventually converge as a trading standard is reached.



[1] Mundell -
The International Monetary System in the 21st Century: Could Gold Make a Comeback?
[2] Hayek - A Free-Market Monetary System




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