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Category : Today's Editorial

I can hardly believe it's been eleven years since I started this blog. To put it in perspective, it's been 22 years since the beginning of ANOTHER (THOUGHTS!), so the beginning of my blog marks the halfway point between then and now.

The hit counter here is about to roll over to 10 million, and the counter at the Speakeasy is almost to a million, so, combined, that's 11 million views in 11 years!

There's a different post at the Speakeasy celebrating eleven years, but here, as I usually do, I'm giving you a recent sample. This one is titled "The End of an Era."

The End of an Era



Today the ECB announced that the Central Bank Gold Agreement (CBGA), also known as the Washington Agreement on Gold (WAG) will not be renewed. The current agreement expires Sept. 26.

From the ECB:

PRESS RELEASE

As market matures central banks conclude that a formal gold agreement is no longer necessary

26 July 2019

  • Signatories of the fourth Central Bank Gold Agreement no longer see need for formal agreement as market has developed and matured
  • Signatory central banks confirm gold remains an important element of global monetary reserves and none of them currently has plans to sell significant amounts of gold
The European Central Bank (ECB) and 21 other central banks that are signatories of the Central Bank Gold Agreement (CBGA) have decided not to renew the Agreement upon its expiry in September 2019.

The first CBGA was signed in 1999 to coordinate the planned gold sales by the various central banks. When it was introduced, the Agreement contributed to balanced conditions in the gold market by providing transparency regarding the intentions of the signatories. It was renewed three times in 2004, 2009 and 2014, gradually moving towards less stringent terms.

Since 1999 the global gold market has developed considerably in terms of maturity, liquidity and investor base. The gold price has increased around five-fold over the same period. The signatories have not sold significant amounts of gold for nearly a decade, and central banks and other official institutions in general have become net buyers of gold.

The signatories confirm that gold remains an important element of global monetary reserves, as it continues to provide asset diversification benefits and none of them currently has plans to sell significant amounts of gold.

The fourth CBGA, which expires on 26 September 2019, was signed by the ECB, the Nationale Bank van België/Banque Nationale de Belgique, the Deutsche Bundesbank, Eesti Pank, the Central Bank of Ireland, the Bank of Greece, the Banco de España, the Banque de France, the Banca d’Italia, the Central Bank of Cyprus, Latvijas Banka, Lietuvos bankas, the Banque centrale du Luxembourg, the Central Bank of Malta, De Nederlandsche Bank, the Oesterreichische Nationalbank, the Banco de Portugal, Banka Slovenije, Národná banka Slovenska, Suomen Pankki – Finlands Bank, Sveriges Riksbank and the Swiss National Bank.

Gold sales within central bank gold agreements
(tonnes)


/END OF PRESS RELEASE



Last month, there was a little bit about the CBGA in my From the Mail Bag 4 post. Here's a selection from that post:
4½ months after “Brown’s Bottom”, the CBs got together and signed the Washington Agreement on Gold, the WAG/CBGA. That was on 9/26/99, and I think it was in response to the Brown’s Bottom/BOE auctions as well as being a warning to the LBMA bullion banks that the BOE auctions were all they were getting, and beyond that, the European CBs would no longer be their lenders of last resort for gold. The WAG did limit sales, but it also (more importantly) ended CB gold leasing.

Three days later, on 9/29/99, gold went into backwardation and the price spiked. That’s when Edward George, the governor of the BOE from 1993-2003, reportedly said:

“We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K."
I think that may be the “rumors” the author is referring to in the article. The Brown’s Bottom announcement was on May 7, 1999, and the WAG and backwardation were in September. The Brown’s Bottom gold auctions began in July of ’99, and continued until March of 2002. Here’s something FOA wrote about it in December of ’99:
FOA (12/04/99; 21:34:03MDT - Msg ID:20282)

Earlier this year, old bullion supply dried up and it looked like the last of the private "old stocks of gold" had finally run out. [Me: The Brown’s Bottom announcement and auctions were a result of that. And the WAG was a result of the BOE auctions.] Then the price shock from the Washington Agreement flushed out some more. I've written on this before (and ORO told it better than I), but the more the old holders sell out in return for holding "unallocated gold accounts" the worse the shortage will be when the marketplace fails. Slowly, over many years, the people that now hold the real bullion that was sold to create a lot of paper gold, have literally locked up the ownership. The old liquid gold market we used to know in years past functioned because of all the private physical holders that traded it. Now, it's all paper being shuffled around.

This gets back to your LBMA item. The old, deep private bullion pool has been replaced with a paper commitment pool. In the past, if someone defaulted, we just grabbed their bullion. Today, if they default, they just default! Again, if that big African mine does tell them to take a hike, the whole modern gold market could just collapse. This is why I smile when I hear someone question why the big funds and traders don't just take delivery against OTC paper. The question is just exactly what are they going to take delivery of?

All the gold movement is just for show. Same for Comex. Sock a little gold in there and complete a few deliveries so it all looks right. It's all the same game we played with the dollar before 1971. Only when everyone asked for delivery did we find out that the world was awash in paper gold,,,,,I mean dollars!

But what about the Euro CB leasing and sales? How did they differ from each other and from the BOE sales?


One thing that Ari taught me, which I always try to keep in mind regarding the CBGA, is that it was more about gold leasing than gold sales. On the surface, it appears to be about Central Banks selling gold, and that's always the headline. But it also mentioned leasing, and what Ari told me has always resonated, that the CBGA was a warning to the LBMA bullion banks that the CBs would no longer be their gold lender of last resort. Here's the very first CBGA. Notice the wording:

PRESS RELEASE

Joint statement on gold

26 September 1999

European Central Bank

Oesterreichische Nationalbank

Banque Nationale de Belgique

Suomen Pankki

Banque de France

Deutsche Bundesbank

Central Bank of Ireland

Banca d´Italia

Banque centrale du Luxembourg

De Nederlandsche Bank

Banco de Portugal

Banco de España

Sveriges Riksbank

Schweizerische Nationalbank

Bank of England

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:
  1. Gold will remain an important element of global monetary reserves.
  2. The undersigned institutions will not enter the market as sellers, with the exception of already decided sales.
  3. The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tons and total sales over this period will not exceed 2,000 tons.
  4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.
  5. This agreement will be reviewed after five years.
/END OF PRESS RELEASE



The part about gold sales referred to the Bank of England (BOE) sales known as Brown's Bottom, which were announced, planned, and executed from July of 1999 through March of 2002, encompassing the entire period of the lowest price of gold in the last 40 years. Thus the name: Brown's Bottom. The part about leasing, on the other hand, had implications directed at the LBMA bullion banks. It was a message, as Ari said, to back off on the volume. In fact, if you look at the LBMA clearing volume, the first column, you'll see a drop in the volume of as much as 60% during the three years following the first CBGA.

The leasing paragraph changed to this in the 2004 2nd CBGA:

"Over this period, the signatories to this agreement have agreed that the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the date of the signature of the previous agreement."

There was no paragraph on leasing in the 3rd and 4th CBGAs, in 2009 and 2014. It wasn't even mentioned.

I'm now going to give you a long section from my 2013 post Legs, because it contains a lot of great posts by Another which relate to this subject.

What he's talking about here, is what the Central Banks did during the last era, in the 80s and 90s, to bring down the price of gold, which was leasing! Remember, that was Phase 1, which ended with the WAG, aka the first CBGA:

Legs (Excerpt)


Date: Fri Nov 28 1997 23:29
ANOTHER (THOUGHTS!) ID#60253:


The BIS set up a plan where gold would be slowly brought down to production price. To do this required some oil states to take the long side of much leased/forward gold deals even as they "bid for physical under a falling market". Using a small amount of in ground oil as backing they could hold huge positions without being visible. For a long time they were the only ones holding much of this paper.

Date: Sun Nov 16 1997 10:20
ANOTHER (THOUGHTS!) ID#60253:

It is not only important to understand this question, but also to ask it in context!

Date: Sat Nov 15 1997 20:14
Crunch ( Question for Another ) ID#344290:
Another, a question, please: When gold is borrowed from CBs, what collateral is required by the CB to be assured the loan will be repaid in full?
Crunch,
If you will allow, I will add to your thinking. In todays time the CBs do not sell physical gold with a purpose to drive the price down. They sell to cover open orders to buy what cannot be filled from existing stocks. Look to the US treasury sales in the late 70s. They sold 1 million a month using open bid proposals with much fanfare. If the CBs wanted physical sales to drive the price they would sell in the same way.

The sales today are done quietly with purpose. The gold must go to the correct location. That is why these sales do not impact price as they occur, there is a waiting buyer on the other side. As all of these transactions are done thru certain merchant banks, not direct CB contact, the buy side does hold hedges.

When actual delivery takes place, months later ( and usually at the same time as the CB sale statement ) these hedges come off and affect the market price.

[…]

[Central] Banks do lend gold with a reason to control price. If gold rises above its commodity price it loses value in discount trade. They admit now to lending much where they would admit nothing before! They do this now because of the trouble ahead. Does a CB have collateral to lend its gold? Understand, they only lend their good name on paper, not the gold itself. The gold that is put on the market in these deals belongs to someone else! The question is not "Are the CBs worried for the return of gold?" but, "Has our paper been lent to the wrong people?".

Date: Wed Nov 12 1997 14:08
ANOTHER (THOUGHTS!) ID#60253:

All CBs will now slowly stop all leasing operations and allow the market to size itself. The important players, the oil states, will have their paper covered without question! But, for all others, the great scramble is about to begin!

With this statement, ANOTHER explained the implication of a recent Bundesbank statement following a BIS meeting that would materialize two years later as the Central Bank Gold Agreement (CBGA), which read: "4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period."

Date: Sat Nov 29 1997 15:53
ANOTHER (THOUGHTS!) ID#60253:


Something interesting happened just ago that will, in time impact the price of gold in US$. A proposal was offered to borrow in broken lots, 3.5 and 5.5 million ozs for resale. It was turned down. The owner offered to sell only, no lease. What turned heads was that someone else stepped in and took it all, at a premium!

Date: Fri Dec 12 1997 21:06
ANOTHER (THOUGHTS!) ID#60253:

The paper gold market controlled by the BIS/LBMA system is, alone equal to more than all the gold in existence. This market works like a hybrid currency using approximately twenty to forty percent of all CB gold in leased form as backing. The paper behind the lease is a form of CB/gold and is used as a "fractional reserve" that has built this huge market. This system has worked and does work well. You have but to look at the good value that is received when dollar debt ( digital currency ) is purchased with oil. The world works! But this system cannot continue. There is a limit to how far gold can be inflated in quantity using "fractional reserve leasing" as backing. The fatal flaw was found in the "forward sales" of unmined gold. The whole system counted on the expansion of cheap mining techniques to supply much more gold at a cheaper price far into the future. This happened to a degree for a few years but then just leveled off.

Now the LBMA continues to flood the market with paper gold as if nothing has changed! But it has, we reached production cost! That wasn't supposed to happen until the mining industry had raised supply many times what it is today.

[…]

Will the BIS try to settle this unbalanced market by destroying LBMA? Or will they drive the CBs to lease another 20% in an effort to inflate this "paper gold currency". Just like the fiat dollar, if inflated it loses value. This is not lost to the oil states.

Here's what the WGC survey found two years later, immediately following the Washington Agreement (CBGA):

"On average, the official sector lends 14% of its declared gold holdings. However the proportion varies substantially from country to country. If the USA, Japan, IMF and major European countries that do not lend are excluded the proportion rises to 25%.

[…]

The mining industry is thus the greatest user of lent gold. Short speculative positions exist but appear to be of lesser size.

[…]

Hedging has enabled producers to realise higher than spot prices in recent years. However the mining industry is facing a number of derivative-related challenges:

- the total costs of marginal producers in North America and Australia are not being fully covered by average realised hedge prices. South African producers are faring better but their position may not be sustainable in the longer term;

- the Washington Agreement has precipitated a review of hedging practices by both mining companies and bullion banks. Well publicised difficulties with two hedge books have prompted a swing away from the more complex products. However since the more complex products have facilitated the achievement of higher realised prices, this could render hedging more expensive;

- the majority of producers have not been subject to margin calls on their hedging agreements. However the events of September 1999 have caused bullion banks to review the issue with the possibility that additional hedging premiums may be levied on mining companies that are deemed less creditworthy;

- the sharp decline in exploration expenditure implies that the reserve base is not being replenished. This has implications for existing credit lines and the ability to hedge reserves in the ground;

- the introduction of the FAS133 accounting system will also influence the choice of hedging products in the future.

• The bullion-banking industry has been subject to extensive restructuring in recent years. This has had a substantial effect on available credit. Banks’ trading limits have declined in recent years and are currently collectively likely to total some 2.5-3.5m oz (75 to 110 tonnes) of combined short-term net exposure.

• No evidence was found of any collusive behaviour on the part of market participants to manipulate the price." [1]

Date: Fri Mar 20 1998 22:12
ANOTHER (THOUGHTS!) ID#60253:


I hope all persons could see the "new" true nature of the Central Banks this week. I call it "The change that did happen"! If you read the post of Sat. Mar 07 1998 13:08 Another, that was written for me, it speaks of it all. The [central] banks do want gold to rise now, and they will pull in physical gold to replace leases, even if they must "pay high on the market". They do not rollover these loans now.

Here's the post that ANOTHER said someone else wrote for him:

Date: Sat Mar 07 1998 13:08
ANOTHER (THOUGHTS!) ID#60253:


The Management of Gold, A Simple Tool for the 90s

For any currency to maintain a "reserve" status, it must be, in some fashion, convertible into gold! In the past, the US$ was freely exchanged for a "fixed" amount of gold. $20 dollars was equal to one ounce. If the country wanted to make its money stronger, it would lower the amount of currency units fixed to one ounce. $10 dollars per ounce made the currency more valuable in the market and it would buy more things. Also, a country could decrease the value of its currency by raising the number of units to the ounce of gold, say $40. The problem with the "fixed" gold system is found in matching the amount of gold in the treasury to the "fix"! To make the money stronger, one had to bring in gold, as it took twice as many ounces to back a currency "in circulation" at $10 as it did at $20! The reverse is true when lowering the money value to $40. Then, one half the treasury gold backing had to be removed as only half was now needed to back the dollar.

You have probably not read this "slant" on the past gold standard because it was never quoted in quite that way, nor looked at in that fashion. If you allow your mind to perceive the above, one will clearly see that it was gold that gave the currency value. In that time one did not look to see how many dollars gold was valued with, rather, how much gold was bid for each unit in circulation!

Today, the world reserve currency is not on a "fixed" gold standard, it is on a "freely convertible" gold standard. One may, anywhere in the world, convert US$s into gold. This new "freely convertible" standard does still allow the dollar to be backed by gold for those who still demand a gold "fixing". That requirement is enforced by a certain commodity, oil. Yet, there is a price for the benefit of having all oil sales settled in US$. Yes, even in this modern era, for the US$ to remain on an "oil standard" it must be on some form of "gold standard"! Regain the perception in the top paragraph. Then understand that for oil to back the dollar, the dollar must find value in gold. And the dollar finds more value if it is fixed by the "freely convertible" gold standard, to buy more gold!

This convertible gold market is old from the mid 70s but is new from the early 90s. It is old by the 70s because it is "freely convertible", but it is new by the 90s as it "is not" "freely tradable"! The US$ price of physical gold is no longer "fixed" from supply and demand, rather it is "created" through the market action of "paper gold". Truly, it is the US$ has become the "item traded" in the "paper gold" market, not physical gold. Participants have yet to realize that the gold futures, gold options and gold forward markets, worldwide, have become little more than currency trading arenas. The percentage of gold delivered against these markets has grown so small as to be nonexistence when compared to actual metal settled at closing. Physical gold does still move, and in size, but this is little or nothing compared to the "paper gold" traded.

We are brought to this point for a purpose, but how did we get here? The largest producers of gold were introduced to the use of large scale "forward contracts" by the Bullion Banks. Once the process started, good business required it to expand. Shareholders want maximum profits at all price levels and "forward deals" were good at any price of gold. Once hooked on "hedge profits" during the good times of a high gold price, the mines now "must have at all cost" "forward deals", just to survive. Some say the mines will not forward sell at these, break even prices. However, the shareholders say it's better to hedge now, for a lower price will bring doom! With the US$ price of gold holding at just above average break even levels, and the ensuing virtual bankruptcy of several well known companies, it appears that the mine owners are correct.

Understand, that many entities lend gold, but it is the CBs that started and do most of it. Their purpose was to create a "paper gold" market that would allow them to manage the "freely convertible" price of gold. The CB lends the gold to a bank that sells it on the open market. (Usually, the gold is placed privately as it must go to the correct destination.) Then the bank holds the money and draws interest as incremental payments are made to the mine for new gold delivered against the contract. Over the long period that a mine takes to produce and repay the gold, this money grows. To grasp the fact that the CBs had a plan, is to know that they lend the gold for only 1% or 2% while the proceeds set in a Bullion Bank and grow with interest for the benefit of the BB and the mine! And further, the lenders allow the return of the gold to be extended out for many years, as in "spot deferred". The CBs allow public opinion to think of this as "typical government stupid", it's not!

Now that the gold price in US$ is around production cost, most mines must use "paper gold" to survive. The gold industry is coming under bank domination, without signing away any sovereignty! Slowly, the CBs are gaining the ability to manage production and price with this simple tool.

"If they want new mine supply on the market, they roll over the contract to the BB. If they want new supply off the market, they allow the BB to pay for and take delivery of the gold and return it to the CB vault." "Also, by offering ( or withholding ) vault gold from lease, they affect the lease rate and thereby control private lending as well"

Understand that the second sentence action is used because gold lending is done by many different entities. Many times a mine isn't even involved. Sometimes, gold isn't even involved, just paper. But, it's still based on the gold price! The paper price, that is.

thank you

Date: Sun Apr 19 1998 15:49
ANOTHER (THOUGHTS!) ID#60253:

Date: Sun Apr 19 1998 14:31
mozel ( @ANOTHER ) ID#153102:
"Was Gold Leasing by CB's an accidental mistake or an intentional mistake do you think?"

Mr. Mozel,
This world of money, it is a fierce one! I ask all, does anyone know a money manager with money for loan at 2%? No? Does not even the bank of Canada sell gold outright and receive "high" interest on cash? Is a CB that sells/leases gold dumb? NEVER!

If they sell gold, a way is clear to "bring gold back" for the nation! Canada has local mines, Australia has local mines, Belgium has South African mines! If they lease gold, it is for a purpose to buy "something" for the new supply to the market! The interest on the loan is for public view, as a "free gold loan" is not acceptable!

It truly started with Barrick, in Canada in the 80s. It was a "thin market", but grew big in oil. I think "intentional mistake" that was, as is said, "trial balloon"?

Thank You

8/10/98 Friend of ANOTHER

The Euro has, in effect already been dispersed in the form of Gold Leases not gold sales. One has only to look at the official gold holdings of most central banks to see that physical gold sales are little more than the average, with a good amount of that coming from nonEuro countries. Gold is a funny thing, it can be sold many times and pass through many countries and still remain in a CB vault. Truth Be told, some 14,000 metric/ton have been sold this way. Far more than the street thinks. Using this amount it's easy to see how certain entities have moved off the dollar standard in the last few years. If we use a future price of $6,000+US, the move is about complete.

The process: An oil country (or others) goes to London and purchases one tonne of gold from a Bullion Bank. The BB borrowed this gold from the CB (leased). The one tonne gold certificate is transferred to the new owner. The gold stays in the CB vault and the owner goes home. The CB leased this gold to the BB and expects it to be returned plus interest. The BB financed the Actual Purchase of this gold mortgaging assets of the buyer. The BB, who created the loan, then uses the cash arranged in this venture to contract with a mining company (or anyone wanting a gold/cross financing deal) to purchase production gold, using this cash to pay for it. In the eyes of the mining company, the BB just sold gold on the open market, for cash, and will purchase future production at the contracted price. The mine does not know where the gold came from, only that it was sold and a fixed cash price is waiting. Of course, most of this made more sense when gold was higher. There were thousands of these deals, structured in every possible fashion. Look to the volume on LBMA and you see where the future reserve currency is traded today!

9/3/98 Friend of ANOTHER

Poland and China are good customers for the BIS. This is real physical gold they are taking out of circulation, not the pay me back when you have a chance lease deals. They really do have the IMF/Dollar countries over the barrel. Under these conditions it's easy for them to drain the Canadian gold reserves. Soon, these goldless countries will be left with nothing but high yield US dollar treasury notes.

[…]

My understanding is that whatever collateral was freed up from the USSR , the BIS picked it up for others. It left the brokers selling leases for almost nothing or 1/2% or so. No one was buying them so the rate just fell on no volume. This was a lucky move for them as the perception was that massive sales were taking place. I don't think the BIS wants to be seen as a currency destroyer so they are doing the buying quietly.

8/19/98 ANOTHER (THOUGHTS!)

I think, now it comes time to sell the dollar. As the Belgian gold was purchased to replace dollars, it did announced the end of EMCB leases. Now the BIS transactions do create a gold market that is "not as before"!

We watch this new gold market together, yes?

Thank You

Another

Then and Now – Two very different paper gold eras

Before we move on to 2001 and beyond (i.e., this), let's recap the 90s. From the beginning of the 90s until that last comment by ANOTHER, about nine long years, the $PoG declined from $400 to $280. To put that in perspective, it would be like gold falling from today's price [of $1,680] down to $1,150 by 2022. In terms of the long timeframe and the absolute price decline, that would be pretty discouraging for Western goldbugs, wouldn't it? Yet this discouraging era didn't faze those in the East who already knew physical gold as tradable wealth in the least.

What we have here are two very different eras in the "gold" market. The turning point may appear to be 2001 (if we simply look at the gold chart), or the CBGA in late 1999, but the turning point was actually January 1, 1999 with the successful launch of the euro. And from the excerpts above we get a clear picture of the "official support" which helped keep the physical gold market of the East attached (or fixed) to the paper gold market of the West during an era of a declining price.

Official (CB) gold sales were all done off-market so as not to affect the price. (The BOE "Brown's Bottom" auctions were different, but they were also after the launch of the euro.) In fact, we will never know the price or details of these official sales. All we know is that ANOTHER said that physical gold did continue to move "in size" during this era. He even mentioned one CB-sized sale that, presumably, was not by a CB because of the way he told the story.

Someone had 280 tonnes for sale in 1997. Someone else, presumably a bullion bank, offered to lease that gold from the owner in two lots of 110t and 170t, but the owner wasn't interested in a lease. He only wanted to sell. And the interesting part of the story is that when he insisted on selling, "someone" (presumably a proxy for the BIS or a buyer arranged by the BIS) stepped in and bought the whole lot "at a premium" (presumably to keep the sale "off market").

So here we can imagine CBs both buying and selling "at a premium" in order to keep physical gold "in size" moving to wherever it needed to go without affecting the paper gold market price. What was the premium? I can only imagine it was a bit different for the guy dumping 280 tonnes than it was for someone seeking to buy a similar amount. And ANOTHER did give us a hint at the latter.

Leasing was a different story. Most of the leased gold came from official sources, and that did not include the US, the IMF or Japan. The CBs participating in this leasing practice during the 90s lent between 14% and 25% of their reserves per the WGC, and between 20% and 40% according to ANOTHER. CB lending grew from about 900 tonnes in 1990 to at least 4,710 tonnes in 1999 (other estimates take it as high as 7,000 tonnes). The CBs finally admitted to this practice and then a couple of years later announced that it would be curtailed.

The standard explanation for CB gold leasing is that the CBs wanted to earn some interest on an idle asset. ANOTHER said that this explanation was nonsense. He said it didn't even make logical sense unless you thought central bankers were dumb. He said they were not dumb, that they had a plan and a good reason for leasing gold. He also said that the low lease rate was merely for "public view" because "a free gold loan would not be acceptable." The WGC and the MSM all bought the "CBs want to earn interest on their idle asset" story. I guess you can decide for yourself if it makes more sense than ANOTHER's explanation.

That was Then, This is Now

In the 1990s, the supply of leased gold came mostly (~90%) from the CBs. The majority of the demand for this leased gold came from gold mine hedging operations (~60%). Another small portion of the demand (~8%) came from hedge fund short selling. As I said above, both of these "uses" for borrowed gold made sense while the price was falling. They don't make much sense in an era where the price is rising like it has been since 2001.

So, of course, as you would expect, the mining operations have closed out most of their hedge books that were carried over from the 90s. Also, the CBs announced that they had agreed as a group not to expand their gold leasing operations beyond 1999. And any hedge funds that have been shorting gold for the last decade have surely gone out of business. So, most of the supply and demand for gold leasing is gone. The remaining demand (~25-30% of the leased gold back in 1999) is truly physical. It is the inventory leased to businesses that use gold as a raw material for fabrication (e.g. jewelry etc…).

/END OF LEGS EXCERPT



Remember, we are talking about two distinct eras or phases here, with a phase change in the middle, marked by the first CBGA on Sept. 26, 1999. Here's a graphic representation of the two phases, from my 2018 post, Comex is a Side Show. If you look closely, you'll see that I actually should have placed the red line denoting the phase change in Sept. of '99:




I want to take this opportunity to repost one of my most obscure posts, from 2011, titled More Freegold Fodder. It was really just a post to keep the discussion going at the time, and it almost seems more fitting here than it was there. It's a few comments from FOA, Ari and a few others that I threw together because they occurred just prior to the signing of the first CBGA. That was really a turning point in the gold market, because gold was at its 20-year low, and in less than two weeks it would jump more than 25% following the CBGA. These posts were part of a discussion that occurred right at the tail end of an era, just like where we are today! So enjoy:

More Freegold Fodder


This is a continuation of the last post. Freegold fodder for a lively and relevant discussion! Part of what makes the following comments so interesting (aside from their mind-bending, perspective-altering content) is that they were all posted in the 48 hours leading up to the Washington Agreement on Gold, the first CBGA which took place at the IMF annual meeting in Washington DC on Sunday, Sept. 26, 1999. In fact, the last few comments in this post were probably right around the time of the actual WAG signing!

FOA (9/25/99; 12:15:48MDT - Msg ID:14354)
HOF
TownCrier,
I see where I.V. Holtzman has reworked his "Street Gold" post so as to make it more on point and in context. It is a remarkably clear description of how the dynamics of a market can distort "real price reality". I think it will be a major reference item as our gold markets evolve. Therefore, (I don't often do this) I, FOA nominate it for HOF. Also consider that Another seconds that nomination (I'll ask him to make that official when here). Can someone else also second this, please? Thanks FOA


Note: for the Holtzman article see: USAGOLD (09/24/99; 13:03:31MDT - Msg ID:14297)

USAGOLD (09/24/99; 13:03:31MDT - Msg ID:14297)
Latest from Holtzman...
Holtzman here,


--------------
More than one POG
--------------

There are many different prices for gold. Or, more accurately, there are many different ways in which gold is formed and stored, and those differences cause prices to differ between the resulting products.

A one-ounce gold JM bar, a Krugerrand, a 1999 U.S. gold Eagle, a slabbed 1908 MS-65 St. Gaudens (ignoring for the moment that it's not precisely one ounce of fine gold), a one-ounce portion of a London Good Delivery bar, a one-ounce portion of a vault claim ticket for same, a one-ounce portion of a futures contract, a one-ounce portion of a derivative contract for same, and one ounce of fine gold formed into a piece of jewellery, all have prices which are somewhat independent of one another.

True, at their core, they all centre around what the market currently feels an ounce of gold is worth, but each has its own additional factors (premiums, risks and quantities) which cause its price to differ, often substantially, from the others.

The U.S. gold Eagle differs in price from both the JM bar and the Krugerrand because of a Patriotism premium. The St. Gaudens differs in price from similarly sized bullion coins because of a Numismatic Rarity premium.

The officially quoted Spot POG differs from the price of one JM bar bought at a coin shop because Spot POG is the price per-ounce at which very large quantities of physical gold trade. By large quantities I mean hundreds-to-thousands of ounces and upwards. Some of these sales are between mining companies and refiners or mints or jewellery manufacturers, where the buyer intends to reshape the metal into some new form, be it ingots, coins, or next month's necklace special at Marks & Spencer.

But in many cases, the purchaser has no plans to remanufacture the gold. Rather, he simply wants to own it. In such cases, the gold itself typically remains in a third-party repository in forms such as London Good Delivery bars (400 ounces), with only the Right to Claim those bars being transferred from buyer to seller.

Since these rights can be transferred electronically, this allows Spot market participants to make brief forays into the market, then retreat, with minimal overhead expense. Money centre banks are better known for their similar operations between paper currencies (buy Swiss Franc sell Yen this morning, then reverse that this afternoon, etc.), but no doubt a great deal of daily Spot POG setting is the result of trading rather than buying to own. Regrettably, I do not have detailed information on the various global Spot markets, so I have no way to discern the proportion of speculators to commercial traders.

In any event, this speculative access to Spot POG makes it susceptible to the same sorts of "professional" day trading which is usually associated with paper markets.

In addition, most of the gold sold at Spot POG has yet another factor influencing it, one which can easily place it more in alignment with the various paper forms of gold when market conditions become abnormal: the risk that the gold is not entirely under the supposed owner's control.

If you have a few gold coins buried in your back yard, and if you bought those coins anonymously with cash, you control that gold. If you have a claim ticket for a few hundred kilograms of gold held at the Federal Reserve Bank of New York, or a few hundred tonnes of proven reserves in a mine whose location is known to tax assessors, or even a few dozen U.S. gold Eagles in a unit trust, don't be so sure you're the one in control of that gold.

If or when a breakdown in the paper gold market occurs, it's quite possible we may see the officially quoted Spot POG remain in lockstep with paper prices, very possibly plummeting even in the face of blatant shortages of physical metal. But all this would mean is that a make-believe price is being impressed on market participants who are large enough to be easily identified and coerced.

If a private citizen holds the claim ticket to a London Good Delivery bar stored at the Fed, guess who has the power to insist on knowing details of any sale of said bar. Even if a private citizen takes possession of the bar and buries it in his back yard, Uncle Sam will be very keen to periodically bother him about its whereabouts. Although Spot POG is a measure of physical gold, it adheres to the paper world more so than to the physical world because of this one point: the risk of governmental intervention.

This ties in with points about gold mining shares made by Another and FOA: mining companies theoretically are at liberty to sell to the highest bidder, but governments have a way of convincing their subjects to accept less and be happy with it. If during an emergency the U.S. government were to declare Spot POG to be $50, and if Homestake Mining were to begin selling gold privately at a higher Street POG, the U.S. government could very easily make life unpleasant for Homestake.

By contrast, the government would have a much more difficult time coming after you and the handful of gold coins you've anonymously buried in your back yard. Most likely, they simply wouldn't attempt it. A wise politician never frightens his citizens too much, most particularly during emergencies. A government can achieve its goals by oppressing the majority owners (few in number) of a desired commodity while graciously allowing the minority owners (vast in number) to retain their property.

The confiscation in the U.S. in 1933 was along such lines: the government's intent was to take direct possession of the vast majority of gold within U.S. borders (common gold coins) by pulling them out of circulation, yet not overtly injure citizens who had sentimental or numismatic attachments to specific coins. There weren't any jack-booted thugs banging on Americans' doors after midnight in search of every last gold coin, and I can't imagine any present or future administration doing so either. It's far too expensive to be worthwhile... not to mention that it's far too likely to start a revolution (or in your case, re-start one :-).

And yet, despite the very convincing scenario of complete meltdown painted by FOA and Another, I still find myself clinging to the hope that the supply/demand cycle will re-assert itself as has happened in other industries (the recent history of the airline industry being my beacon in the darkness).

I would never touch futures or their derivatives even under normal market conditions, but a small stock investment in the most efficient, best established global mining companies seems to me still to be worth the risk (note again my use of the word "small"). Whether those shares are ultimately sold for Euros instead of dollars, I still am optimistic enough to wager that they will indeed trade on some market for some price in some currency. In any event, though, I plan to keep an eye on potential warning signs that such optimism may be about to be dashed.

So where will we find a "real" price of gold amidst the make-believe? Clearly neither Spot POG nor futures POG will be realistic during a full-blown emergency, nor will the share prices of gold mining stocks. Of course, if I find myself still in possession of such papers during an emergency, their official resale value will be all too real to me.

Even under normal market conditions, the paper price of gold is not the perfect guide because it is determined by constant repetitions of FOA's analogy of the two neighbours betting over the fence. Perhaps one in a thousand participants in the daily setting of the official prices of gold plans to acquire or deliver physical gold. The other 999 participants are merely there to bet on it and claim their winnings in some other currency.

Put another way, how many people at a racetrack are attempting to buy a horse? If you want to know the going price of a physical horse, don't look to a racetrack for answers. And don't assume that being a partial owner in a horse farm (thanks FOA) in any way assures you of being able to own a physical horse at some future date.

Likewise, if you want to know the going price of physical gold, don't look to the paper chase, most especially during any sort of financial emergency when paper-related numbers will become very distorted. Frankly, even though the emergency has yet to be publicly declared, things in that arena are already becoming increasingly distorted.

Most of us here at the USAGOLD Forum do not buy and sell thousands of ounces at once, and most of us take immediate possession of our purchases. From that, it's clear where we should look to find the price of physical gold which is most appropriate for our activities: in fact, our very conversations here are being hosted by someone who spends most of his waking hours discovering that price.

--------------
Street POG
--------------

The Cash or Street price of gold is the number of dollars (or pounds, or euros) you take out of your wallet and hand to your friendly, neighbourhood coin dealer in return for a one-ounce Krugerrand.

Why a Krugerrand? Because it's the least numismatic, most commonly encountered, least lovely form of gold. It has no numismatic premium and no jewellery premium and no patriotic premium. It's even less attractive than a one-ounce JM bar.

That makes the Krugerrand the perfect unit of measure for Street POG. Its only special quality is that it contains exactly one ounce of gold (mixed with much too much copper).

The only circumstance which would disqualify the Krugerrand would be if suddenly coin dealers were willing to sell Maple Leaves or Eagles for less than Krugerrands. But to deal with that case, let us define Street POG as the price of the cheapest one-ounce coin or wafer available for sale at that moment.

You will know that the governmentally influenced markets are becoming highly distorted when you see a Krugerrand selling on the street for significantly more dollars than the Spot POG quoted by the paper markets that day.

A Krugerrand will always have a little premium built into its price (hi, I just bought these coins and I'd like to sell them to you without making any profit at all on the sale... my, that would be daft).

At some point in August 1999 when Spot POG was quoted at $260, I bought a single Krugerrand for $268. That's within the range of normality. We're not in uncharted waters yet.

But let's say that Spot POG drops to $200 (sadly still not out of the question even with the September 1999 rise in POG towards $270). What will a Krugerrand cost on the street then? If Spot POG drops no more abruptly than has been its wont in recent months, there's a decent chance Michael and his fellow coin dealers might then be able to profitably sell Krugerrands for $205 each. In that case, the shorts and the financial ministers are still in control.

But if you see Spot POG drop below $200 while a Krugerrand selling on the street never falls below $230-$240 ... or if you see Spot POG remain at $256 yet Krugerrands leap to $300 and Eagles to $310 ... hello new gold market. That would be a clarion call that things are starting to become seriously distorted. [FOFOA: Note that things did get spooky just four days after this post. You can see it graphically in the large spike here, here and here. The price of gold jumped more than 25% in nine days, from $257 on Sept. 22 to $325 on Oct. 5. That would be like gold rocketing from $1,420 today up to $1,795 by March 24. Imagine what that was like!]

--------------
The American Civil War
--------------


I think maybe the hardest mental hurdle for people to clear in understanding Another and FOA is this notion of two gold markets occurring simultaneously. There's an historical example (and it's Western :-) in which very much the same thing transpired...

In 1864, the USA and the CSA were reaching something of a stalemate in their war. Contrary to what most Americans learn today in (the winner's) school system, had but a very few decisions been made differently, the Confederacy would have won.

This, by the way, is why we see so many Americans (descended from both sides) re-enact Civil War battles over and over. How often (except on Monty Python) have you seen re-enactments of Pearl Harbour? The only battles worth replaying are the ones that could have gone either way.

In any event, to the average person living in Either the USA or CSA in 1864, the near term future was incredibly unclear and terrifying.

In the pre-war USA, national government funding was handled by the levying of import/export duties. The IRS was not yet a glimmer in politicians' eyes. For a nation at peace, duties provided sufficient income to run a minimalist national government.

In time of war, however, expenses magnify dramatically. Both the remnant USA and the new CSA needed to acquire vast funding very rapidly to raise an effective military. The both of them did so in the time honoured way: they borrowed the money. Have a peek at Lincoln greenbacks and Confederate paper money sometime. They are promises to pay the bearer with gold and/or silver at some significant time following the cessation of hostilities.

These documents were by no means the equivalent of today's Federal Reserve Notes (try redeeming a $20 FRN for a St. Gaudens sometime). No, Civil War paper banknotes were the equivalent of today's Gold Futures Contracts.

Oh, Lincoln greenbacks and Confederate dollars passed from wallet to wallet during the Civil War years as if they were currency, and in the first year or so they were regarded as 1-for-1 equivalents of coin. But as 1864 drew nearer, something odd began to happen.

"Howdy, I'd like to hand you this crisp $1 greenback in return for ten silver dimes change."

"I'll give you 8 silver dimes for a paper dollar, not a penny more."

Realise that this happened in the North, in the remnant USA. It happened too in the Confederacy, but modern people remember it there only in association with the final default on paper which happened when the CSA government was extinguished.

But the sole difference between a Confederate dollar and a Lincoln greenback was that one paper issuer was still in existence in 1866 and one was not. In 1864, no one could confidently say that either government would still be there a mere two years hence.

Notice that, in this regard, not much has changed since then. In 1933 for US citizens, then in 1971 for the rest of us, the USA government voided its obligation to pay gold for paper dollars.

If you hand me silver or gold, I won't care whether the symbols impressed on it are from a reliable government, an unreliable one, or a defunct one. But if you hand me paper, I'd better be firmly assured the issuer will live long enough (and be inclined) to pay off this debt to me. Even if you hand me a paper claim ticket to silver or gold stored in a vault somewhere, I'd better be firmly assured the vault keeper is of a mind to let me take possession of that metal without the slightest hesitation.

Another and FOA, by saying wise people should avoid paper and only hold physical, are indicating that they expect the LBMA and Comex Gold Contract documents will go the way of the Confederate Dollar (or maybe more appropriately, the way of the pre-1933 paper dollar: "Yes, a dollar is still a dollar, we just won't live up to it in quite the way we used to.").

At the very least, they're saying the risk of such a systemic change is so substantial that one should not be standing too near the fault line should the quake come sooner than predicted.

What the both of them are describing is an official Spot POG (and its kindred future months' POGs) which may well plummet to $200 or even, as Another allowed some time ago, perhaps $10. Realise, though, that Another is by no means predicting that Michael will be able to profitably sell Krugerrands at $10 each. Far from it.

What Another and FOA are anticipating is a situation much like the paper money situation in both the USA and the CSA in 1864: how likely is it that the paper contract you're handing me today will be redeemable for any amount of gold by this time next year?

Tell you what, I've got a spare ten bob I feel no desperate attachment to. I'll buy your one-ounce IOU just for kicks. If LBMA completely expires, I'm out only a small amount. If LBMA unaccountably fails to expire, I've struck it rich. Of course, I may still not receive a physical ounce of gold on settlement day. I may find I've become the proud owner of a 1/400th part of a London Good Delivery bar, which I'm then told may not be removed from the vault. If I'm lucky, I might be able to sell my claim ticket for some amount of whatever paper currency is still worth accepting.

Meanwhile, those of us with less of a gambling inclination will sleep more soundly holding physical. After all, a silver or gold coin firmly in your possession remains silver or gold even after its issuer expires.

Yours,
I.V. Holtzman

FOA (9/25/99; 12:28:42MDT - Msg ID:14356)
Question?
Goldspoon (9/25/99; 12:08:04MDT - Msg ID:14353)
One reason $ilver may do better than gold in the late stages is because $ilver is also known a Poor Man's Gold... There is alot more poor people than ritch ones...Poor people generally come late to the party and buy what they can afford ($ilver) so $ilver will be a late bloomer but Oh what a flower....


Hello Goldspoon,
Could you please elaborate. Your above comment that "silver is more affordable than gold", brings my question.
Which is more affordable $100 of gold or $100 of silver? Even if gold was $1,000 an ounce, why then, at that time would $1,000 in silver be more desirable as a "poor man's gold"?

I'll be back with more. thanks FOA

FOA (9/25/99; 14:29:40MDT - Msg ID:14367)
Comment
To ALL:
When a person tries to protect their assets against the effects of fiat money, what are they really fighting against? The first inclination is to say "rising prices". Yet, it's much more than that! Most everyone agrees that interest in the bank never covers the loss of buying power brought on by price inflation. Especially the "after tax" return. It's the same old story, played out decade after decade. We must "invest our savings" (or become a day trader?) because the money will erode in value! Even at 3%, price inflation can eat away at any cash equivalents.

But, price inflation isn't the only story that impacts us. Rising prices come and go, but money inflation continues to affect us without fail. So why do people feel better when price increases slow or stop, even as money inflation runs ever upward? The good feelings usually evolve from the effects that money inflation (increases in the money supply) has on financial instruments. These assets take on the very same characteristic that the rising prices of goods once exhibited. They run up in currency price.

During these periods of "less goods inflation" another sinister form of mind set lurks in the shadows. Credibility inflation! Yes, it has been here many times before as every fiat currency alternates it's effects upon the feelings of the populous.

Fiat currencies must, by definition always expand in quantity. Their continued usage and acceptance is always obtained with the bribe of "more wealth to come"! Without that bribe, humans would never fall for holding a debt to receive the same goods in the future if they could get the real thing today. Human nature has always dictated that we buy what we need now instead of holding someone's IOU to receive it later. That nature is only changed through the "greed to obtain more". Like this: "I'll hold my wealth in dollars currency if my assets are going up. Later those increased assets will buy me a better lifestyle as I purchase more goods and services than I could buy before".

This is the hidden dynamic we see today and the exact antithesis of the past price inflation's. Just as destructive as "goods price increases", "credibility inflation" impacts our emotions to "hold on for the future", more is coming! In every way, "credibility inflation" is just as much a product of an increase in the money stock as "regular price inflation is. As cash money streams out to cover any and all financial failures, we begin to attach an ever high credibility to the continued function of the fiat system. In effect, the more money that is printed, the higher we price the credibility factor.

Onward:

ORO, the GDP is one of the great deceivers in the Fiat money world. During the last century (??) or so, some form of GDP has always been used to measure the great mass of human endeavours. Yet, throughout this time, some form of fiat currency has always been in effect. Even during the Gold standard, fractional reserve banking expanded "gold note money" more so than the "gold money in existence. Prior to 1929 this effect, if not creating outright "price inflation" during a time of Gold standard policy, was creating "credibility inflation" in the minds of investors. Using the backdrop of a growing GDP, people bought into inflating financial assets and ignored these signals as evidence that the fractional currency system was failing. Even though the dollar contained a policy statement to supply gold, back then a gold loan was still only good until everyone asked for gold.

The same thing is happening today. People destroy the currency structure by thinking it can deliver more than reality will allow. Instead of all debt failing slowly with each upward march of price inflation, prolonged "credibility inflation" snaps all at once as investors try to suddenly revert to a "buy now mentality". The inability of government authorities to contain the fiction of "good debt" is usually the feature behind the investor mood change. A currency run induced by an IMF stalemate would qualify as just such a function change. The "snap back" into a sudden "real price inflation situation" caused during this stage by a currency failure always breaks the whole structure. We approach this end today!

Further:
The GDP has been the relative gauge to mark all other measurements against. Even so it's numbers reflect little more that the result of an "expanding fiat money supply". Yes, there have been recorded downturns in GDP, but these contractions would have been worse if measured in real (gold) money. In opposite fashion, expansions paint a much brighter picture as all financial liabilities seem less a threat if held against a rising GDP. I submit that the GDP figures offer little more than a way to entice investors to increase their "credibility image" of our monetary system. Fiat moneys are always on a long term upward expansion, and they can hardly do less than bloat the picture.

Someone I know said; "your wealth is not what your money say it is"!

What should we be looking at to see the real picture? Be back a few hours from now.

Thanks FOA

FOA (9/25/99; 19:11:59MDT - Msg ID:14375)
Comment
ALL:
When it comes to silver, I agree with all of you. But then "along comes reality"! Many of the current analysts persist with their analogy that "silver is used to make change and small transactions". A concept I completely agree with, only if we sink to that point? The valuations placed on silver will mostly be established by the kind of "currency turmoil" we experience.

Look at today's US paper currency. It's all dollars and yet $100 bills are used readily right alongside $1.00 bills. It seems that we found a way to create ever smaller denominations of dollars to satisfy the demand for making change. I don't see anyone carrying around Canadian currency for the small purchases a US $100 would not work for.

My point is that gold has in the past and will again in the future be broken down, "if needed", into alloyed coins for the very smallest of transactions. One can easily carry a one gram gold coin that is made the size of a quarter. Even a 1/10 gram will do the trick. As Mr. Gresham points out, someone will always be around to create money change. Be it in silver or gold, the most efficient money will rule the day. In the worst of war like conditions, paper money is traded. German marks were spent as the booms fell!

My question of which is more affordable $100 in gold or $100 in silver? A poor man will accept and use either that is offered, no contest.

Again, the future demand for "Metal money" will be established by "how the currency markets evolve". I believe (and have written on this before) that throughout all that is to come, US dollars will continue to circulate as will most all the established currencies today. "Come what may", we will use them for whatever value and efficiency they will offer. Just as the much lesser moneys of the world presently circulate, while their citizens hold dollars, gold and silver, so too will we act in a similar fashion.

The question for our immediate future is in what form will you hold metal money to represent the "bulk" of your tradable wealth? As all the currency and economic turmoil swirl around us, the pressure will be to not only hold reserves that will not be at risk, but hold them in the largest "tradable form". Gold and it's high future price will certainly fit that bill. Again, contrary to what many think, when the dollar falls off the reserve currency tower, most everyone will still be getting paid in dollars. Yes, they will be greatly devalued from price inflation, but buying your gas with dollars will still be a weekly chore.

The future will see the Euro currency as the value reserve all other currencies will trade off of. Beside it will trade a "free gold" market denominated in Euros. The implications of this will be for US nationals to continue using dollars while holding gold (or Euros?) for a bulk, risk free tradable reserve. One can see that in this picture, the purpose for silver is greatly diminished, no?

Got silver? Don't need it, cause I got gold!

We shall see, back in an hour or so. FOA

FOA (9/25/99; 20:31:48MDT - Msg ID:14388)
Comment
Gold Dancer (9/25/99; 18:36:32MDT - Msg ID:14373)
Silver/Gold/


Hello Gold Dancer,
I think I paralleled some parts of your thinking. Thanks for offering your reasoning.

Goldspoon (9/25/99; 15:37:33MDT - Msg ID:14370)
Some have suggested confiscation....possibly. --


Goldspoon,
I think the confiscation item has always been blown completely out of proportion. Some even go as far as saying that there is no use in holding gold if it gains a lot because it will be taken away from you. Then in the same context, it's offered to buy gold stocks to gain from a more reasonable increase in the gold price! In addition, for the same reasons they see silver as an item that will not be touched. One has but to review "Holtzman's "More Than One POG" #14297" to get what is his beautiful rational and reasonable retake on what confiscation would really mean:

--------If during an emergency the U.S. government were to declare Spot POG to be $50, and if Homestake Mining were to begin selling gold privately at a higher Street POG, the U.S. government could very easily make life unpleasant for Homestake.

By contrast, the government would have a much more difficult time coming after you and the handful of gold coins you've anonymously buried in your back yard. Most likely, they simply wouldn't attempt it. A wise politician never frightens his citizens too much, most particularly during emergencies. A government can achieve its goals by oppressing the majority owners (few in number) of a desired commodity while graciously allowing the minority owners (vast in number) to retain their property.

The confiscation in the U.S. in 1933 was along such lines: the government's intent was to take direct possession of the vast majority of gold within U.S. borders (common gold coins) by pulling them out of circulation, yet not overtly injure citizens who had sentimental or numismatic attachments to specific coins. There weren't any jack-booted thugs banging on Americans' doors after midnight in search of every last gold coin, and I can't imagine any present or future administration doing so either. It's far too expensive to be worthwhile... not to mention that it's far too likely to start a revolution (or in your case, re-start one :-).-------------------

Thanks Holtzman, incredible job!

Again, if you think silver is going up because of currency turmoil, is it reasonable to believe it will increase as it did during the 70s style Hunt fiasco? I'm not sure that event wasn't but a one of a kind move. Everyone considers that performance (the only one we have had ) as an example of how silver moves when gold goes up. However, it's entirely possible that that gold move was but a minor side show and in the future gold will dwarf any percentage rise in silver. We didn't know silver could move like that until it happened and we may find that few will understand how gold can outperform everything in the future. As I offered earlier, the coming currency transition may render the "many present reasons" for holding more silver than gold useless. Especially if currency stays in circulation as the demand for industrial silver falls from a economic contraction. If such is the case, the percentage move will fail to match gold.

I know many own silver. I offer this as a balance observation. Good luck to all of us, may we all win! FOA

FOA (9/25/99; 21:11:01MDT - Msg ID:14392)
Reply
Leigh (9/25/99; 19:36:56MDT - Msg ID:14378)
Do you think silver is worth holding as a commodity, the way you would hold platinum? Don't you think the prices will go very high as silver reserves as depleted? Or do you think gold will rise the highest?


Hello Leigh,
All of the investment attributes for these metals are conflicting. On a commodity basis, silver would be the best. Warren B. bought it in his company name expressly for its industrial prospects. He views it in the same light as a stock investment. I doubt he took it for any of its monetary reasons.

Again, invest to make a return. Take your best shot. But for today buy gold to preserve what you have during a global dislocation of currency systems. Because the future may play out as I have outlined, gold will out-perform (on a real basis) most any past investment made during the last 30 years. Not because it's a good investment with great prospect demand, but because it will again perform its ages old function as the world's money. Something it hasn't done in stand-alone fashion for perhaps 60 years?????? That return to money use in this modern world is the attraction that drew in the Giants, in whose footsteps physical gold owners now walk. The rise will make most people feel very foolish not to have purchased at $1,000 while it was cheap (smile)! We shall see.

Thank you and good day FOA

[FOFOA: Next is a short excerpt from Twice D that is relevant to FOA's reply below. It is similar to complaints I hear all the time. "You don't know the future. No one but God can know the future." I like FOA's reply.]

Twice Discipled (9/25/99; 20:40:54MDT - Msg ID:14390)
FOA - Dollars/Gold/Silver


I try not to understand your perspective to hold all knowledge of the future (only One in the universe can make that claim), but to gain an understanding of how we may be required to manage and use that which we have put away for future use.

FOA (9/25/99; 21:12:34MDT - Msg ID:14393)
Reply
Twice Discipled (9/25/99; 20:40:54MDT - Msg ID:14390)

Point 1)
If my above interpretation of your suggestions is correct and the events play out as you see them then with further thought I may come to agree with your remarks regarding silver.


Hello Twice D,
There is actually quite a large group of people that see things this way. Nothing is written because they are very private. [FOFOA: "quite a large group of people (Giants) that see things the A/FOA way!"]

--Point 2) If we move to an environment where bartering becomes the standard, then I would still think silver would be appropriate in some degree because of the smaller value associated with it. I would also ask who I would trust to take my .1867 oz Napolean III and melt it down into a 1 gram gold coin – definitely not the government, I would never see it again. I would also be skeptical of any other organization given that history shows us examples of "shaving" whereby the gold content of coins was reduced.------

----Of course, when the time arrives we will no longer speculate, but participate in what transpires.----

Twice,
I agree! Indeed, if history is any guide, we are walking a well-worn trail. After this weekend, Another may have to update his view of current events. Things are moving now! [FOFOA: "Moving now!" –the WAG was signed the very next day! What did FOA know when he wrote this?]

Sorry for the short reply as I must go now...........thanks FOA

Aristotle (9/25/99; 21:28:58MDT - Msg ID:14394)
Hi FOA
I just finished reading the posts of today and your latest. On this debate about Gold and silver you might want to consider one thing that you might be seeing past in your discussion.

First of all, I am in nearly total agreement with you in regard to Gold and its use for currency, with no need for silver. Your Canadian dollar as change for US $100 was brilliant in its clear simplicity.

But here's where you might not be seeing eye-to-eye with some of the others and their silver comments (though not all, because some are interested in silver for yet other reasons too varied for my limited imagination). When they are talking about using silver to make change for small purchases, it seems to me their primary focus must be on some kind of infrastructure collapse as would be a worst-case post-Y2K situation. Only if there were no means to use modern conventional transactional tools such as checks and plastic would anyone be floating the idea of paying with coins. In such an environment (which makes me shudder) silver would certainly be handy as they describe for short term trading. But all roads lead to Gold, and as things got back on their wheels, we will all discover that the same small amount of Gold will be able to buy ever-increasing amounts of silver as time goes on.

Barring any Y2K problems as described above, you've got it nailed down. Gold will outperform silver many times over, and it's easy to see why it would even be in the governments' best interest to support higher values for Gold--they all hold Gold, but no silver. Their Gold stockpiles (savings) could last forever with a high enough valuation. The key, as you well know, is Gold's new VALUE. Its currency price doesn't mean a damn thing. Instead of talking about the future dollar **price** of Gold versus a future price of silver (to see where one's dollar "profits" would be greater), we should be talking about their future **value**. This could be expressed in terms of something like loaves of bread. Here's the example:

Let's say we had four equal stacks of dollars and we today took one stack to buy a year's supply of bread, and then spent two of the remaining three stacks to acquire a pile each of Gold (small pile) and silver (large pile). Right now they are all equivalent values...the dollars, the bread, the Gold, and the silver. Roll the clock forward, well beyond any Y2K mess, or lacking that, simply past the day of reckoning when the dollar folds, and let's re-examine our pile of equivalents.

Ok, our year supply of bread is gone, because we ate it. The remaining stack of dollars will now only buy us a two-week supply of bread, the large silver pile will buy us a year supply of bread, and the small Gold pile will buy us enough bread to last for twenty years.

Certainly, these numbers (two weeks and twenty weeks) could be something else, but I hope I've at least expressed my point clearly for any future discussion on the matter. If we quoted prices in terms of loaves, we would actually be talking about value. A dollar price is somewhat meaningless, wouldn't you agree?

Gotta meet a friend for a brew. Hey you guys out a Peter's place--I'll be thinking about you!

Gold. Get you some. ---Aristotle

Aragorn III (9/26/99; 2:53:37MDT - Msg ID:14408)
Mr. koan, perhaps you might elaborate, or else reconsider?
I shall speak only with the universal language of mathematics...

You said in your post "Silver only has to go to $10 to double. Gold has to go to $500 to double."

Good Sir, my scale is broken this day, and therefore my currency knows nothing of weights and measures. I am told that the silver held in my left hand was purchased for 10 dollars, while the gold in my right hand was purchased for 10 dollars. To "double" (to equate with your example) they must each "go" to $20. How is it that this silver knows the shorter path and may travel the faster, easier road? Consider when you answer that at my feet is also $10 scrap iron. Per ounce, the price of scrap iron is quite low...is this then the "gold" for the most wretchedly poorest of poor men, as you say silver is "gold" for the wealthier version of poor men? Does scrap iron therefore know the shortest path to double and beyond?

To be sure, Black Blade makes a point of psychology that must fit into an equation to be considered. Is this also your unstated rule of mathematics, or do you contend simply that the dollar will lose one-half purchasing power against silver more quickly than against gold because the purchased silver load is heavier to bear? Surely then scrap iron is the best investment of all? Or must we ignore the weight, as often it does not apply as we see here: does the low salary of a blacksmith double more quickly than the high salary of an engineer? I look around, but I see little demand for blacksmithing these days. When did you last read of silver in the national or international news?

You will likely agree that all things are subject to changes with changing times. Perhaps we will need blacksmithing again, and the few that do work for museums will then command a high price on such a day, indeed.

It holds true today, and perhaps always will, the modern use will define the value. Consider that the IMF and BIS, the ECB, and yes...the BOE (even as a seller-in-distress), and frequently our good Federal Reserve Chairman; they all speak only of gold, but never silver. Please be aware they can move the gold price further with a small finger than you or I could ever move silver with a crane. The path has become increasingly clear with the IMF moving to mark to market a portion of gold holdings...an easy addiction with more to follow??? I would say we might hold our breath on this one and yet not risk turning too blue.

Pursue silver if you must do so for your own appeasement. It will certainly serve you better than dollars in a dollar currency crisis. I believe the picture painted by Aristotle on this issue in his recent post was quite reasonable, and worthy of consideration for the two sides. I say only two sides because if you extend the prevailing rationale of our many posters, platinum is right out of a role.

got choices?
got gold?

FOA (9/26/99; 9:54:32MDT - Msg ID:14425)
Comment
Aragorn III (9/26/99; 2:53:37MDT - Msg ID:14408)

Hello Aragorn,
Nice application of clear logic! Let me see it I have this right for a future context:

"Get your scrap iron now because gold and silver have already run up in price. Iron is the only affordable metal for late buyers. You get many more ounces per purchase because the gold / silver / iron ratio is so far in the favour of iron. When the teaming masses can no longer afford "real money" they will most certainly buy iron in 1/10 ounce form to use for small purchases"

I expanded your post with my slanted view to drive home a point to others. From the time that silver ran in the 70s, no one ever had any historical precedent that it could move so much. Yet, from 1980 on, every silver promoter has used the Hunt squeeze as the basis that it will rise again in just such a fashion. It has been the ideal "leveraged sell" for every boiler room to sucker in paper traders. I bet there are many who have lost the most money by taking on silver as a leveraged play.

I say all of this as the proud owner of some silver! Just as Aristotle (and yourself at other times) pointed out, in a complete "currency: breakdown, silver will be needed and used. Yet, in this modern day and age, ironically, inflated fiat currencies will most likely continue to be used for most purchases. I bet CMAX could add some light on this as he is in an "inflating country"!

Further: During the run-up in gold during the late 70s, the governments were selling gold all the way up. In the same light as we look at the YEN today, gold buyers were always afraid of the "next" intervention. Yet, even with the official gold sales, gold soared. During that time silver was never the application of any widespread major sales. Today, we must consider the effects on gold that a major 'Official" policy change would do. While everyone is waiting for the next big sale, others are anticipating the total withdrawal of government selling/ leasing from the markets. Indeed, if the ECB or oil or china start buying official stocks through the BIS, the results will be the reverse of the 70s markets. "Street gold" will be the percentage out performer!

We must bear in mind that there will be a big difference between Official BIS buying through the CBs as opposed to them buying paper gold on the LBMA. I think Mr. Holtsmans "More Than One POG" #14297 will be a hated factor for many current gold mine owners for years to come. With BIS buying from all CBs, the supply of gold will collapse, forcing the "street price" through the roof. Falling demand (buying) for paper gold will drive those securities to the floor because of their inability to secure and deliver enough physical gold. This dynamic will absolutely force the IMF/ dollar governments to lock the trading price of paper gold at below most production costs until new mine supplies can work off some of the paper commitments. Even though cash settlement (at the locked price) will be used, it will cover but a fraction of the outstanding paper. Counter party default will rule the day. No doubt, the majority of the mines in operation today will close, thereby forcing an extended workout period.

It's a simple choice of what is more important to the majority of people? Save the major portion of the banking system whose menders are the who's who of the LBMA, OR save the worlds gold mines? No contest!!

This is where we will see competitive revaluation's upward of IMF and existing CB gold stocks. These source of new equity will be needed to cover aid to failing countries (some from shut down gold mines) and back the massive loses a collapse of the dollar reserve currency will bring.

For years everyone looked for the nations to block any large rise in gold, so they invested in assets that would benefit from what would be perceived as a reasonable gold increase. One that the governments would begrudgingly allow. Of course we think of Gold stocks. Yet few considered the true ramifications if countries suddenly revalue gold not as money, but as a world reserve asset! We approach this dynamic today as world dollar debt has reached its limit. Exciting times for those that "walk in the footsteps of giants", awful times for those that have invested in the gold industry. It's not too late to change course and sail with the wind. With the direction of someone that understands, I have done just that!

With the wind...........we are on the road now!!! FOA

FOA (9/26/99; 11:22:32MDT - Msg ID:14430)
Reply
Leigh (9/26/99; 9:50:43MDT - Msg ID:14424)
Questions for FOA


------------When you and Mr. Holtzman talk about a black market for gold, do you mean an illegal black market? ----

Hello Leigh,
If I answer for both Mr. H and myself, it may get him riled up enough for him to post more of those great works. So I'm going to do it this one time! (smile) Also, it will be best to stay in close contact with Michael Kosares, as he will know the very first changes in the markets (if they occur).

However, in my view: I bet we end up with a very strong "dealer market" with companies like Centennial Precious Metals in the forefront. The difference will be in that they will price their product based on the real investor supply and demand as these dealers trade among themselves. Yes, an official gold market will be in effect, but "street gold" will carry a huge premium over the official "trading price". A premium that will not be profit for the dealers, rather a reflection of the true price of gold.

(TownCrier, you had a great explanation of this somewhere, no?)

Over time most dealers will slowly disregard all paper trading. The present major banking houses that trade bullion and paper will most likely drift far away from the gold business if their loses in that arena build. So; It won't be a black market like in the movies. That will only come about if things "really get out of hand". Something I doubt will happen, even during a Y2K breakdown.

----Do you think it is possible transactions in gold will be outlawed? That wouldn't do our government any good, would it? -----

Outlawed? No possible way! The thing everyone forgets is that during the 1930 gold call in, the governments were trying to place gold in a tight price range. They still had a good dollar system and wanted to keep it for the world's sake. Today, the problem is different in that they have created so much dollar based debt that it can't be serviced any more without blowing up the world reserve money supply and hence the system. The US knows it's over and must accept a partial defeat. To accomplish this, in opposite fashion from the 30s they must raise the price of gold, not keep it down.

It works like this: To keep the gold price stable you have to get your hands on more of it. Then use that physical to balance existing dollar claims (as in the thirties) or sell it into the marketplace (as in the last 20+ years). For today; To make the price rise, you don't need more physical to use as supply, you simply withdraw supply from the marketplace and revalue what you have. [FOFOA: Note that the WAG was being signed right as FOA was writing this. Curious coincidence.]

The US treasury has some 8,000 tonnes ++/--. They can't back the same dollar with gold that they removed from the gold standard in 71. Major legal problems there (BIS???). Nor can they create a new dollar with the Euro on their backs. They can follow the ECB and the IMF lead and begin to revalue the existing US gold stock to use as equity against the massive reserve loses that are coming. No it won't cover even half the liability (even if it's over $10,000), but it's the only fallback asset any nation has. It will prevent a total World and US contraction.

The trading and owning of "street gold" by the US public will be encouraged, not outlawed. Any demand that raises the gold price further will be welcomed as a "new concept" to save a contracting economy. This was the real reason the Gold Eagle program was started in the first place! Political bases covered when the time comes.

---Wouldn't they want us to spend our gold so that eventually they could get their paws on it?---

No Leigh, in the future they will ask you to spend "your" gold, but not for their accumulation. They have plenty of gold and will just devalue the dollar further by raising the gold price in stair step fashion. Your spending will be to build the economy again. In reality, you will be selling some gold to a dealer for depreciated dollars. Then spend those dollars internally, within the country.

Gold coin sales will be a hard act to follow as we cross this valley of money transition. Mine owners will be screaming for controls of the street price so they can sell into the defunct LBMA at a higher price. It won't happen. Later, everyone will be glad they bought physical while the going seemed rough. Needless it's going to be interesting as this all unfolds. Eventually, paper gold will be out of the way (covered) and a real "mining boom will ensue". That's when we sell some of our gold to buy gold mine stocks! (big smile)

Get ready for that time............buy gold now!

Thank You FOA

FOA (9/26/99; 16:16:08MDT - Msg ID:14449)
Comment
Leigh (9/26/99; 11:58:37MDT - Msg ID:14432)

---- One more question: Will the government tax us gold owners to death, since we'll be among the few who have any money?---

Ha, Ha,,,,,,, Leigh, what do you think?

FOA (9/26/99; 16:18:59MDT - Msg ID:14450)
Comment
koan (9/26/99; 12:32:58MDT - Msg ID:14433)
Silver and gold - relative appreciation - a theory


-----If silver goes to $10 per oz you just doubled your money i.e. now you have $10,000 (1,000 oz times $10). That other $5,000 you put into gold for 20 oz will need to go $500 per oz i.e. 20 times $500 = $10,000.) Elementary my dear Watson.-----------

Mr. Koan,
Watson wants to know why gold can't double at the same time that silver doubles?

He still wants to know why a poor man will buy $100 worth of silver before he'll buy $100 worth of gold?

Does that also mean he will buy ten pounds of dirt for a $1.00 first, if one pound of sand is also selling for a $1.00? Hmmmmm!

I have a few dumb friends but they are not stupid. Seems the most "dumb" among them always understand the relative worth theory better than most any PHD scientist. I also know I'm smarter than they are, even if they have more money than me? (smile)

It's going to take a whole world of "special people" buying silver to make this work out. I'll watch here with everyone to see how this works out. Thanks FOA

FOA (9/26/99; 16:59:38MDT - Msg ID:14456)
Comment
Chicken man (9/26/99; 15:30:12MDT - Msg ID:14446)
FOA @ The Tale of the Golden Egg..


C Man,
That was a good one!
One of the reasons I advocated buying Goldfield stock was to support their actions. I Know most didn't understand, but burning a property deed (or stock certificate) in some cultures is synonymous with stating "you will never sell the investment".

Here, this company does an industry supporting move and no one (even GATA) advocates investing in that company for their strong anti-gold selling stance. Instead people see what happened and went out and bought ABX (or as much)? This Goldfield action was the major catalyst that sparked new interest in the gold arena. It called into attention the delicate nature of the paper gold position if physical is taken out. If everyone starts charging the auctions, this paper gold market will close in a hurry!

Goldfield buys and everyone comes out of the woodwork to proclaim a new bull market for reasons other than what happened. Then they direct new buyers into more paper gold investments, regardless of whether they are controlled "shorters" for the BBs. The Goldfield action clearly stated that they alone (along with Anglo) are independent from the paper control. I support management that take "right minded stands" whether my investment will pay off or not!

Chicken Man, watch this market run for another ten or twenty and see what happens to it! With the G7 fiasco concluded, we may get a blow-out this week! [FOFOA: Oh, boy, did they ever!]

Thanks for your reasoning....... FOA

FOA (9/26/99; 17:11:30MDT - Msg ID:14458)
Reply
Golden Truth (9/26/99; 16:56:35MDT - Msg ID:14455)
TO F.O.A, TIME TO CHANGE SILVER INTO GOLD!!!!!!!!!!!!!!!!!!
Hello F.O.A tomorrow i will be taking all my SILVER Maple Leaf coins and exchanging them for GOLD.


Golden truth,
Don't forget the iron bullion! (SMILE)

-----One question i do have is, could you please explain the comment you made about the "massive reserve loses that are coming" what will cause this? and possibly when? I,am sorry, i know this is a basic question but i have some trouble with figuring this one through Thanks as always G.T -----------

GT,
One of many examples. You are a foreign CB that is holding 100 billion in US treasury debt. The dollar loses half of its value. Treasuries now worth 50% less! The US declared "foreign exchange controls". Good thing you held gold that has now more than ?????? gone up! Throw the treasuries in the trash and forget about them. Now the ECB is offering to buy gold with Euro treasuries, if anyone wants a "special relationship" with europe. You know the rest!!!

I have to go now..........This week will be something..... FOA

Sincerely,
FOFOA

PS. I only posted the comments by FOA and a few others here, but there are many more on that page. Bear in mind that there is a lot of chaff mixed in with the wheat, but I suspect that a few of you will agree more with the chaff than FOA and Aristotle. Here's the link: Sept. 25 & 26.

It's also fun to read the comments from the following three days after the markets opened post-WAG and gold went into extreme backwardation while the price rocketed.

/END OF MORE FREEGOLD FODDER


Those were some classic posts, weren't they? And FOA almost seemed to know something big was about to happen, didn't he?

So what does it mean now that they're not renewing the CBGA two months from today? What does it signify? To me, I think it signifies the end of an era. We could call it the end of Phase 2, which began a day after those posts. Or we could just call it the end of the CBGA era, and the beginning of the ___________ era! ;D


Sincerely,
FOFOA


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