It has been fun
to stumble across a number of sites where readers are attempting to explain
my writings to others. It feels a little weird, yet pleasing. Some of you are
amazingly apt at this difficult undertaking. While others I have seen fall a
little short of the mark that I strive to hit. It's tough. Freegold is a deep
subject with new angles each new way you look at it. I am constantly
discovering this myself. And I know that a few of you know exactly what I'm
talking about, while others are wondering whether old FOFOA has slipped off
his rocker and scrambled his noodle.
So I thought it would be helpful to both me and you if we explore a few of
the more fundamental angles (for lack of a better term) on Freegold. I am the
originator of none of the conceptual perspectives I will
present in this post. They all come from a few others, primarily FOA, but
also Aristotle and others.
Someone wrote in the comments that I use "woolly language" (smile),
meaning, I suppose, that I am unclear at times. I can only respond that I
teach this thing just as I understand it. If it is not simple enough for you,
then perhaps that's a reflection of your own special needs more than of the
subject or presentation.
That said, in this post I will attempt to develop precise definitions where
possible. But do not confuse precision with universality. If you find
yourself emotionally in conflict with my words, I would point out that they
are being delivered in a cold (whilst warm and inviting) calculated manner.
Emotions – and/or pretentious moral judgment – have no place in
this discussion. Check your ego and your dogma at the door, for none of these
concepts carry a universal definition. My definitions offered here are for
the purpose of this post, which is to help you understand Freegold. It could
be said that my definitions are the proper ones for understanding what
is actually unfolding right in front of us. If said, I would probably have to
agree with that statement.
I will also tackle the term Freegold itself. What does the "free"
in Freegold portend? This is an important question. More on it in a moment.
I'm not going to go into great detail on the concept of capital, other than
to give you a mental exercise. Because the term "capital" can be
quite confusing in our modern paper/electronic world, I want you to imagine a
much simpler human civilization. Imagine an ancient Greek city. All the
buildings made of stone and mud, the horse carts and agricultural tools, the
linens and skins worn as clothing, the knowledge base passed down through
generations; all these creations of man's intellect were the capital of the
Now imagine the destruction of capital. Imagine an earthquake or volcano that
destroys the fruits of many generations. Or a plague or war, perhaps, that
destroys the knowledge base. That's the loss of real wealth you are
imagining. And it is this cycle of capital creation and destruction that
tells the story of mankind throughout many civilizations.
In modern economics, the word "capital" accounts for many specific
things. But I think it is helpful to consider this word in a more basic,
fundamental way. Think of it in terms of capital creation, capital employment
and capital consumption or destruction. Modern economics would not call
consumables capital, which is why I am suggesting a different approach to the
word. When we are productive, imagine we are creating this thing called
capital. We may figure out a way to turn someone else's capital, combined
with our own prowess, into more capital. This would be the employment of
capital. And sometimes we simply consume it, or use it up.
If I build a house I have created capital. By owning and living in a home, I
am consuming that capital slowly. If I were to buy a specialized tool and use
it to make something new, then I have employed capital to create more
capital. Is this view of "capital" clear, or woolly?
Savings are the result of one's production being greater than his consumption.
Saving is the convention for deferring the fruits of capital
creation—earned consumption—until later. Savings is also the way
we hand off capital to the next person who will use it to create more
capital. And when it is done right, saving results in the accumulation of
capital throughout society at large. When it is done poorly, saving results
in the aggregate destruction of capital through frivolous consumption and
mal(bad)investment (the misguided employment of capital) resulting in unsustainable
infrastructures built on unstable levered foundations.
Here's where it may get a bit counterintuitive. You might, if you were
Charlie Munger, think that the best way to pass your earned capital on to
another producer is through paper. If you save in paper notes then you are
loaning your earned capital to the next producer in line, right? And if you
buy gold Charlie says you're a jerk,
even if it works, because he thinks you are pulling capital out of the
system. But are you really? I bring this up (and please watch a minute or so
of that video starting at 1:04:05) because it is the key to this discussion
We should think about the global economy in terms of production and
consumption in the physical realm as opposed to the financial or monetary
realm, what I like to call the physical plane versus the monetary plane. A
"net producer" produces more capital than he consumes. Likewise, a
"net consumer" consumes more than he produces. The global aggregate
is generally net-neutral on this production-consumption continuum. I say
"generally" because there are times of expansion and times of
contraction, so taking time into account, we are "generally" net-neutral
(or close to it) as a planet. At least that's the way it is under the global
dollar reserve standard.
On the national scale, however, we are all both blessed and cursed by the
presence of government. Governments are always net consumers, as it is their
very job to redistribute part of our private savings into the infrastructure
and secure environment that enables us to produce capital in the way that we
do. Government's job is not to produce capital, but to enable and
support the private production (and accumulation) of capital!
Being such that human society has evolved in this way, we private citizens
must, in aggregate, be net producers so that government can net consume. And
we become net producers by saving. Therefore we enable and support our own
future net productivity by saving some of our past production of capital
today, in the form of savings.
The financial system is really just the monetary plane's record-keeper of
this vital process that actually takes place on the physical plane. In its
modern incarnation, the global financial system has allowed for a strange
international balancing act whereby (literally) one whole side of the
planet's net production has allowed the other side to net-consume for decades
on end. But this is an unsustainable anomaly, and it is beside the point of
this discussion. So please push this giant, global imbalance-elephant in the
room over to the corner while we continue this discussion about savings.
The question we must answer here is: Is Charlie Munger right? Are you a good
person only if you put your savings into paper where it can be easily
redistributed, and a jerk if you buy gold, depriving the paper whores of your
savings? Is this the way it works in reality? Or is this simply the sales
pitch of one with great bets riding on the continued popularity of paper
The government confiscates a portion of the physical capital created in the
private sector through several means. Taxation is one way, forcing you to
keep a portion of your earnings in paper so that it can be easily transferred
to the government and then used to buy up capital from the marketplace. This
forces you to leave some of your production in the marketplace to be taken by
the government, preventing you from consuming an amount equal to your
Printing money, or its modern equivalent, quantitative easing, is another way
the government can confiscate real capital from the marketplace without first
producing a commensurate amount. This method inflicts what we call "the
inflation tax." The "victims" of this confiscation are anyone
and everyone holding (and saving) the currency or any paper asset fixed to
it, and the damages are relative to the amount of currency each
"victim" is holding. Because this form of confiscation is spread so
wide and thin, it is mostly not even noticed by the private sector.
The last way the government confiscates capital is by borrowing it directly
from the net producers in the private sector. When you buy US bonds, it is
you that are loaning your earned claims on capital to the government. So we
can see that the government has plenty of ways to create its own claims on
capital in the marketplace without first producing a commensurate market
contribution (because governments are always net consumers).
In fact, the modern financial system has bestowed these same powers, creating
market claims without contribution, upon the private sector as well. I'm not
talking about private banks loaning money into existence, for this process
has no market contribution from which to feed. It is directly price
inflationary until the debtor makes a market contribution to work it off.
What I'm talking about is the private sector's ability to sell unlimited
amounts of this debt to the savers, funding the marketplace claims to
consumers/debtors with real marketplace capital (contributed by the savers).
Private banks that would normally be constrained by their balance sheets for
their own survival can now offload that constraint onto the net producers,
making themselves—the banks—totally unconstrained.
The banking system sells all kinds of packaged debt to net producers, the
savers. It creates this stuff at will to meet demand. And if necessary, it
drums up new debtors one way or another to keep this stuff financially
funded. Even corporations can dilute their paper shares to take in new claims
from the savers without giving up a commensurate marketplace contribution.
This is the process of paper savings hyperinflation. It is a self-feeding,
self-fulfilling, self-sustaining, self-propelling system that will ultimately
lead to real price hyperinflation. When you produce capital and decide to
leave it in the marketplace, postponing your earned consumption until later,
and you do so in any paper investment, you are feeding this process of capital
destruction through paper savings hyperinflation.
If you buy government debt you are feeding, enabling the growth of government
beyond its most basic mandate, providing the infrastructure and secure
environment that enables us to produce capital. And if you think an expanding
government is good, just beware that all governments are stupid!
"The institution of government was invented to escape the burden of
being smart. Its fundamental purpose is to take money by force to evade the
market's guidance to have the privilege of being stupid." Richard
Maybury goes on (in the linked video) to say that private organizations that
petition government for special protections, subsidies and incentives are
asking for the same privilege. They want to be relieved of the burden of
(Not since the Agriculture Adjustment Act of 1933 that paid farmers to
destroy crops during the Great Depression in an attempt to raise the price of
crops, has there been a more obvious example of government's propensity for
destroying real world capital than the 2009 "Cash for Clunkers"
program, whereby government literally paid private car dealerships to pour
sugar into running car engines ensuring their permanent destruction.)
This is why, when you save in government paper, you are enabling
malinvestment and the destruction of capital that goes along with it. And
it's the destruction of the capital that you just contributed to the
marketplace that you are feeding. The same goes for the private sector. When
you save in private paper you are enabling the expansion of frivolous
consumption (beyond natural market constraint) and the destruction of your
capital contribution to the marketplace that goes along with it.
So what's the alternative? If both public and private paper savings
contribute to the expansion of malinvestment, net-consumption and systemic
capital destruction, what is a net producer to do? If one wants to produce
more capital than he consumes—for the good of the economy—yet he
doesn't want to work for free, what is he to do? Or if one wants to produce
more than she consumes—for the good of her retirement years and her
family's future—what is she to do?
The monetary plane, the modern dollar-based global financial system, has
failed these individuals. So what is left? The physical plane? If these
individuals trade their earned marketplace credits in for physical capital
without employing that capital in productive enterprise, then they are either
consuming that capital (capital destruction) or denying other producers the
use of it (hoarding, also destructive to the capital creation process). This
is not only detrimental for society at large, but also for the future value
of your savings that depends on new capital being plentiful in the
marketplace when you deploy your savings in the future.
But of course there is one item, one physical asset, that stands out above
all the rest. And this isn't some new discovery by FOFOA. Man discovered that
this was gold's highest and best use thousands of years ago. Once you've
produced capital for the marketplace, whatever asset class you choose to
deploy your earned credits into will feel the economic pressure to rise in
price. If the monetary plane was volume-fixed (or even constrained), it too
would rise in price as real capital is added to the economy. But it has
become a system that expands in volume rather than rising in price.
This is hyperinflation: quantitative expansion of savings! If the pool of
savings rose only in value and not quantity, then each new net producer would
have to bid "savings" away from an old net producer, and
"savings" would retain their proper relationship to the pool of
real marketplace capital available for purchase.
If you choose to deploy your credits into the everyday physical plane, the
tangible goods plane, prices will rise. If all the savers chose oil for
example, we'd all pay very high prices at the gas pump. Or choose agriculture
for your savings and we'll all have to work an extra hour to feed ourselves.
No, you want to choose something that both rises in price (rather than
expanding in volume) and also something that does not infringe on others or
economically impede the capital creation process that feeds value to your savings.
And as an added bonus, if everyone chooses the same thing, it works extra
well. This is called the focal point.
But for gold to fulfill this vital function in the capital creation process,
it needs to trade in a fixed (or at least constrained) quantity that will
allow its price to rise every time a new capital net-increase is contributed
to the marketplace. And, unfortunately, paper gold and fractional reserve
bullion banking doesn't allow this process to work properly. In fact, it
makes paper appear generally competitive, even to gold.
So what about Charlie Munger? Is he right? Are you a jerk if you buy gold?
Well, yes and no. If he's talking about paper gold, then yes! But likewise,
it seems you are jerk if you buy Charlie's paper as well! And you're
an even bigger jerk if you buy physical commodities and tangible goods
without the intention of employing them in real economic activity. It
seems—and correct me if I'm wrong here—that physical gold (along
with a few other discreet collectible items like real estate, fine art,
antique furniture, ancient artifacts, fine gemstones, fine jewelry and rare
classic cars) may be the only true wealth holdings in which you are
not a jerk. What do you think?
The Money Concept
Use of the term "money" in these discussions seems to be the root
of most of the confusion we encounter. Especially for those of us who have
spent our entire lives immersed in the last several decades of monetary
confusion and change. And that would be all of us. I think it is therefore
perfectly rational to define money as a concept rather than a physical thing.
So if money is a concept, then by definition it is an abstract idea or a
mental symbol, sometimes defined as a "unit of knowledge," built
from other units which act as its characteristics or elements. Currency is
but one element of this concept. And the main characteristic of money is that
it is a shared idea that enables economic activity and commerce.
Some of you like to imagine a utopian world without money (presumably to get
rid of the bankers), where people freely exchange their goods and services
with others and everyone sings cumbaya. I see this a lot. A beautiful,
peaceful barter world! But what you are imagining is actually a world without
currency, not one without money.
In this fantasy paradise you might exchange a service for a good, right? Or
perhaps you would part with a good in exchange for a service from someone
else. But how do you think the relative value would be determined in this
world without currency? Of course "prices" would be abstract ideas
or mental symbols, but surely you wouldn't pay someone for a car wash with
the title to your car. So what would determine the relative value of a car wash
versus a car in this Xanadu?
The answer is the concept of money. This is the ability, unique to humans, to
use numbers, mental constructs, to relatively value the goods and services of
barter in a way that enables economic activity and commerce. It is the
enabler of economic activity and commerce. It is a primeval instinct.
you think we have come a long way from the ancient barter system; where
uneducated peoples simply traded different items of value for what they
thought they were worth? Crude, slow and demanding, these forms of commerce
would never work today because we are just too busy?
Lean back and think of all the items you can remember the dollar price for.
Quite a few, yes? Now, run through your mind every item in your house; wall
pictures, clothes, pots and pans, furniture, TVs, etc. Mechanics can think
about all the things in the garage: tools, oil, mowers. If one thinks hard
enough they can remember quite well what they paid for each of these. Even
think of things you used at work. Now try harder; think of every item you can
remember and try to guess the dollar value of it within, say, 30%. Wow, that
is a bunch to remember, but we do do it!
I have seen studies where, on average, a person can associate the value of
over 1,000 items between unlike kinds by simply equating the dollar price per
unit. Some people could even do two or three thousand items. The very best
were some construction cost estimators that could reach 10,000 or more price
Still think we have come a long way from trading a gallon of milk for two
loaves of bread? In function, yes; in thought no! Aside from the saving /
investing aspects of money, our process of buying and selling daily use items
hasn't changed all that much. You use the currency as a unit to
value-associate the worth of everything. Not far from rating everything
between a value of one to ten; only our currency numbers are infinite. Now,
those numbers between one and ten have no value, do they? That's right, the
value is in your association abilities. This is the money concept, my
This is the concept of money. It is our shared, primeval ability to associate
relative values of barter able goods and services. It cannot be destroyed by
eliminating currency any more successfully than it can be bottled up and sold. It
is an abstract unit of shared knowledge, not a thing. You can dispute this
section based on your favorite writer's opinion about the term
"money" or "honest money" all you want, but this is the
proper way to view the concept of money in its original context and in order
to understand Freegold.
So the "thing" in our modern monetary and financial system that is
closest to the concept of "money," the holistic (largely mental and
lately derivatized) concept, is the system of institutional bookkeeping
accounts of credits and debts. The currency element, alternatively, provides
you the "in your hand," "on the run," "money to
go" element, so that discrete (and discreet!) "amounts"
("amount" being a truly strange concept as applied to such a
non-dimensional item) of said money-system can be transferred among
individuals conveniently while operating temporarily outside of the institutional
monetary ledgers. (I realize I'm getting a little woolly here, but bear with
Hence, gold was never "the money." It was only ever a barter item,
or else a currency item. Similarly, the term "fiat money" seems
somehow bogus. Money is a commercial and economic enterprise. It exists even
in the absence of a functioning currency. The term "fiat" ought to
apply only to the system of "currency" that the government has
organized as a suitable non-dimensional yet unitized and standarized "on
the go" representative hand(/wallet)-friendly form of "the money
"fiat money" = NO
"fiat currency" = YES
And for all the many reasons discussed on this blog, a worthless token fiat
currency is a better systemic component than a precious gold currency. Gold
is too precious to capital creation and accumulation in the savings function
to be squandered in the currency role. And the CBs now know this too!
F A Hayek:
I do believe that if today all the legal obstacles were removed… people
would from their own experience be led to rush for the only thing they know
and understand, and start using gold. But this very fact would after a while
make it very doubtful whether gold was for the purpose of money really a good
standard. It would turn out to be a very good investment, for the reason
that because of the increased demand for gold the value of gold would go up;
but that very fact would make it very unsuitable as money. You do not
want to incur debts in terms of a unit which constantly goes up in value as
it would in this case, so people would begin to look for another kind of
money: if they were free to choose the money, in terms of which they kept
their books, made their calculations, incurred debts or lent money, they
would prefer a standard which remains stable in purchasing power.
I have not got time here to describe in detail what I mean by being stable in
purchasing power, but briefly, I mean a kind of money in terms which it is
equally likely that the price of any commodity picked out at random will rise
as that it will fall. Such a stable standard reduces the risk of unforeseen
changes in the prices of particular commodities to a minimum, because with
such a standard it is just as likely that any one commodity will rise in
price or will fall in price and the mistakes which people at large will make
in their anticipations of future prices will just cancel each other because
there will be as many mistakes in overestimating as in underestimating.
So, the point about currency is, and mainly for those of you that fret over a
NWO currency, or "whatever currency," an Amero or SDR or
euro-whatzit... chill TF out! Currency is no big deal. Currency is not the
issue that matters here. What matters is what we, as a planet, choose to
RS Comment: So
often in commentaries of this sort that propose a “solution”, the
author is strangely obsessed with the notion of replacing the dollar (as a
reserve currency unit) with simply another institutional emission of similar
ilk (such as currencies of other nations, SDRs, bancors and whatnot). Their
avoidance of any meaningful discussion of the most obvious remedy is almost
pathological in the extreme. To be sure, we don’t need to invent
any manner of universal reserve currency to fill the role of a unit of
account because that role is already served in a fully functional capacity
for any given country by its own monetary unit.
What IS desperately needed, however, is a universally respected
reserve asset capable of filling our current void with a reliable presence
that serves as a store of value. And far from needing to be conjured
or created by complex international committees, that asset is already in
existence and held in goodly store by central bankers and prudent individuals
around the world — it’s known as gold. From amid the ruins of
a chaotic financial crisis that was brought about by its own complexity, a
degree of sanity will prevail, and gold as a freely floating asset will arise
in stature as THE important element of global monetary reserves. The floating
aspect is the vital evolutionary improvement over all previous structural
monetary failures which tried to use a gold standard at a fixed price (i.e.,
unit of account) perversely joined to the very elastic money supply of any
given country’s banking system.
Gold as a Barter Item
Hard money advocates, or as FOA and Aristotle dubbed them in jest, "Hard
Money Socialists," will readily explain to you how gold naturally
emerged as money in antiquity. But as FOA argued—in great
detail—this is not really the case.
In antiquity, gold was merely a barter item, a physical good for trade. In some
cases it was the best, most efficient barter item and in others it was not.
For instance, within the locality of one's home, oil might be a more common
barter item. Gold was reserved for "on the road" trade, because it
carried the most exchange value in a portable item. But at home, you'd be
more inclined to perform the labor required to create some of your own
capital for trade rather than to part with some of your precious gold.
Eventually gold emerged as a common unit of account. But the physical stuff
still wasn't money, or even currency. It was still just a (somewhat
standardized) barter item and a physical store of value, an
"asset," a "tradable wealth item." It is this role that
gold is returning to today, believe it or not.
were first alerted to the "gold is money" flaw years ago. When
considering the many references to gold being money, in ancient texts,
several things stood out. We began to suspect that those translations were
somewhat slanted. I saw many areas, in old text, where gold was actually more
in a context of; his money was in account of gold or; the money account was
gold or; traded his money in gold. The more one searches the more one finds
that in ancient times gold was simply one item that could account for your
money values. To expand the reality of the thought; everything we trade is in
account of associated money values; nothing we trade is money!
The original actual term of money was often in a different concept. In those
times barter, and their crude accounts of the same, were marked down or
remembered as so many pots, furs, corn, tools traded. Gold became the best
accepted tradable wealth of the lot and soon many accountings used gold more
than other items to denominate those trades. Still, money was the account, the
rating system for value, the worth association in your head. Gold, itself,
became the main wealth object used in that bookkeeping.
This all worked well for hundreds and perhaps thousands of years as fiat was
never so well used or considered. Over time, society became accustomed to
speaking of gold in the context of money accounting. Translations became all
the more relaxed as gold and money accounting terms were mingled as one in
the same. It was a subtle difference, then, but has become a major conflict in
the money affairs of modern mankind; as gold receipts became fiat gold and
bankers combined fiat money accounting with gold backing.
(Read more of FOA's historical account starting with "The Gold Of
Troy!" found on Gold Trail III
– The Scenic Overview.)
Gold as Currency
At some point along the evolutionary trail of the money concept, gold was
employed by the power of government fiat and stamped into currency. As I have
written before, this was done for the purpose of profit (for the government).
The official stamp on these coins designated the overvaluing of the
underlying metal. Otherwise there would be no profit in it. And sooner or
later, that profit ran out and the gold content had to be debased.
These gold coins were the first fiat currency! Not fiat money; such a thing
doesn't exist. The money concept is the creation of private enterprise and
finance. Government can only create currency, the portable "on the
go" element of the concept.
In the more recent past, while gold shared the currency role along with many
national paper fiats, and before we had a globally integrated, computerized,
efficient and trusted system of payments (notice I said
"payments" and not store of value) gold was the go-to currency for
certain payments, especially among less trusting trading partners. And among
these, certain "super-producers" accumulated quite a lot of this
Do you realize that somewhere out there, there is perhaps four billion (with
a b) ounces of gold in private hands (in many forms, including coins, bars
and jewelry)? A lot of this gold was accumulated by families over many
generations. It is only in modern times (and in the West) that we think of
our "nest egg" as something that should be deployed into the
marketplace in search of a yield. That we must trust it to a
"manager" who we pay to churn us an ROI. This is a very modern and
Western view. The rest of the world (the rest of time for that matter) views
wealth a little differently.
This brings us back full circle, to the problem of "digital
currencies" and the "mind set" of much of the simple ( and
rich ) third world persons. To many of these people, wealth is the surplus of
life's work that you pass on after death. Currency is something you, spend,
trade or hold for a few years. It isn't wealth.
When Another spoke of "rich third world persons" and "old
world giants," what quantities of gold do you think he was talking
about? Mr. Gresham asked him once:
"We who read here generally buy the coins, one ounce and less. The
"Giants" you speak of are usually buying the large bars (100
"I ask you, how many of your bars in tonne? This is the small
Good question. How many 100 ounce bars are in a tonne? The answer is 321 and
a half. Or 32,150 ounces. And this is a "small" giant! 4 billion
ounces in private hands. Let's take just half of that and wonder how many of
these "small giants" there might be in the world. 2 billion divided
by 32,150 = 62,208. So I'm going to go out on a limb and say, conservatively,
that there are probably "tens of thousands" of these so-called
"giants" in the world. That 4 billion ounces is out there
somewhere, in private hands, and that kind of family wealth doesn't
necessarily show up on things like the Forbes list.
So what is my point? My point is that today is not just the sum of the last
10, 20 or 30 years, like it probably seems to most Westerners. To the giants,
to the world outside of the West, today is the net sum of centuries of
production minus consumption.
Some in the West might argue that the overweight value of Western "paper
capital" is justified by the overweight capital contribution from the
West for the last half century, reflected in the high development of the
developed world, the West. But Another observer might point to that same high
level of development and call it capital consumption from the effort to use
debt to rebuild the West following WWII. And he might point to Wall Street
and suggest that the accumulation of "paper capital" represents
real capital consumption, destruction and malinvestment.
The West believes it has much wealth stored in paper promises of never ending
debt service, but it hasn't actually been paid yet. The West is hoping to be
paid someday. But there is a whole other world out there that, for centuries,
has already been paid in full, in gold.
Gold in Modern Bullion
In the not-so-distant past, gold shared the currency role with various
national fiats. Gold was a currency, more or less, right alongside this
paper. And because the two traded at a fixed parity within the banking
system, there was no such distinction as a Bullion Bank.
Modern bullion banking is a carryover from this past. When Nixon abruptly
took the dollar off the gold standard in 1971, the billions of ounces in
private ownership didn't just disappear. They weren't cast into the streets
in disgust. And these giants with 100,000 ounces or more didn't take those
tonnes home to the basement. No, they stayed right there in the bank vaults
and literally JUMPED in value.
In fact, the banking system never really stopped "banking" with all
that gold, even though Nixon demonetized it. While gold was currency,
deposits of gold generally went into unallocated accounts just like your
deposits of physical dollars do today. Putting gold in an allocated account
in the past would be akin to putting cash in a safety deposit box today.
Sure, it happens, but it is not common because it has a cost associated with
And what is it that banks do with unallocated accounts? They make loans to
generate income for the bank, and they use fractional reserve accounting to
juggle the deposits and (hopefully) keep everyone happy. And in the rare situation
where they come up short on reserves, the Central Bank stands ready to
backstop their fractional reserves with a loan of extra reserves.
Even today, a few of the biggest banks still have bullion departments where
they can take deposits in physical gold. These banks are what we now call the
Bullion Banks. This bullion banking practice seems very foreign to us shrimps
with a little gold in the family safe. But yes, just like the billions of
ounces that existed during the gold standard era, this practice of bullion
banking still exists.
And today the bullion banks still operate with fractionally reserved
unallocated gold. Some reports put the remaining amount of unallocated gold
being juggled within the banking system at about half a billion ounces, or
15,000 tonnes. But so far, this is apparently enough to support the meager
delivery demands on the spot gold trade as well as the allocation needs of
the bullion bank-operated ETFs. (More on this in a moment.)
Things have changed in the last decade. The Bullion Banks no longer have the
same income-producing uses for this unallocated gold on deposit that they did
in the 80s and 90s. Back then they lent it out to hedge funds and mining
operations. For mines, a gold loan made great sense because it carried a
lower interest rate than a dollar loan and could be paid back with just what
they pulled out of the ground. For hedge funds, it also made sense with the
low gold interest rate. Funds would just sell the gold into the market for
cash and buy it back later, called the gold carry trade. But today, with the
rising price of gold, gold loans no longer make sense for anyone. And in 1999
the WAG ended the CB backstop for this Bullion Bank lending practice.
So guess what income-producing activity the banks found to do with some of
this unallocated gold today? As the mutually reinforcing factors of rising
prices and termination of mine company hedging and waning carry trade
activities in the wake of the 1999 CBGA left bullion banks with their full
store of unallocated gold deposits but a shrinking base of usual customers
for their gold lending services, the ETF mechanism provided the ideal means
to relatively safely put these deposits back into play. By delivering them
into an allocated account with the ETF in exchange for ETF shares that could
be lent or sold for cash, these same Bullion Banks found a new path to
dollars that could then be used to churn an income.
I don't think the issue is whether or not the gold in the ETFs actually
exists, but rather, how many claims exist on that gold and who (of the
claimants) has an actual pathway to take possession of it?
Where do you think the 40 million ounces allocated to GLD came from? Were
they purchased on the spot market? And who can withdraw actual physical from
the ETF? Here's a hint: Authorized Participants can exchange shares for
physical. And who are these "authorized participants?" You guessed
it, other Bullion Banks that allocated gold to the ETF.
And it seems that some of these authorized participants are doing just
Jan 14th, 2011 08:27
"… large bullion-backed exchange-traded funds continued to see
RS View: Silly
reporters. Instead of calling these “outflows” from the ETFs, it
should be called what it is — a redemption of a basket of shares for
physical gold by the Authorized Participants (e.g. bullion banks). Such share
redemptions would actually be a bullish sign because it entails a reduction
in the global supply of paper gold while at the same time signifying a
preference by the redeeming party for having the metal over the ETF shares.
That is, of course, unless the drawdown in physical gold merely represented
the routine sales of the gold inventory that occur to cover the ETF’s
And why do they do this? Because more and more of those "small
giants" are converting their unallocated accounts into allocated
accounts. This very act stretches the Bullion Bank's fractional reserves ever
thinner. So there is a sort of tug-of-war on those scarce gold bars in the
Bullion Bank's vault, between the unallocated account holders and the ETF
shareholders. And the unallocated accounts outnumber the shareholders by a
large margin. Furthermore, they have an actual pathway to physical redemption
while the shareholders do not.
And as this fractional reserve rubber band is stretched thinner and thinner,
how confident are you that all of the "authorized participants" are
following the rules to a T? And since you have no recourse to the actual
physical, as an ETF shareholder, how sure are you of the ETF denouement come
Freegold, which will be a physical-only market for gold? Will shares still
trade at par with physical when that comes? I don't know, but it is a valid
Bullion banking is no different than regular banking. They do what all banks
do. They take unallocated deposits and loan them out for profit. Then they
juggle their fractional reserves to keep everyone happy. And if they ever get
in trouble, the central bank comes to the rescue. But no longer for physical
gold. Only for fiat currency. That will likely be the denouement of this
fractional reserve conundrum, and it is what Another and FOA both predicted.
You will ultimately be settled out in cash and told to source your own
physical in the physical marketplace.
And for those of you that think all bankers, by nature, are anti-gold, guess
again. A better way to view banking versus gold is that "the past"
was anti-gold, but "the future" is pro-gold. The first
Central Bank Gold Agreement in 1999 (the CBGA, aka the WAG) signaled this
The Washington Agreement is most well-known for its cap on central bank gold sales.
But much more important than the sales cap was the cap on gold lending!
From the Joint statement
on gold (the Washington Agreement):
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
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.
And from ANOTHER:
Date: Sun Nov 16 1997 10:20
ANOTHER (THOUGHTS!) ID#60253:
In today's 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
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…
… Banks do lend gold with a reason to control price.
Date: Sun Apr 19 1998 15:49
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…
This is the real significance of the Washington Agreement! The end of the
CB's backing (through lending reserves to the BBs) of the fractional reserve
gold practices of the Bullion Banks.
My purpose here is not to pick on the gold ETFs. Admittedly, all gold ETFs
are not created equally. But they are all a reasonable current example of
"paper gold" in that they are (for the most part) just claims on
gold held by Bullion Banks, not gold itself. The paper markets exist because
the public believes gold is a commodity like any other. And I say, paper
markets schmaper markets, it's not really about the paper markets, it's about
gold being a fractional reserve in the banks.
It is much less important to Freegold that the investing public believes gold
is a commodity. Those that really matter already know it's not. And the paper
markets and the public's misunderstanding of gold simply help the banks
manage their fractional reserves to keep everyone happy.
Yes, the paper markets by their very nature, and only because gold has the
highest stock to flow ratio, automatically act in harmony to suppress the
price of the actual product. And yes, they do provide a means for the banks
to occasionally control the price of paper gold in an effort to manage where
their fractional reserves of the real thing actually go.
But the actual physical portion of the paper markets is tiny compared to
global gold. COMEX does not project its price discovery globally because it
is so powerful. That price is accepted, not projected, because the Bullion
Banks choose to use it in their fractional reserve gold banking. The paper
markets are a markets for claims on gold held by the BBs, not for gold
To put it another way, if the Bullion Banks and their fractional reserve gold
banking is a dog, then the COMEX (or "the paper markets") is its
tail, not its heart. And the tail doesn't wag the dog. Paper markets will be
the price discovery mechanism for gold as long as fractional reserve gold
banking exists. Simple as that. Will beating on the tail of a dying dog kill
it faster? I don't know the answer to that question. Never tried it.
Also, I'm not here to ask you to avoid "paper gold" on moral
grounds. Buy paper gold or ETFs if that's what works for you, by all means.
I'm only saying that when you hold "paper gold" you are the same as
those that held (external) dollars from 1970 right through until 1972.
Dollars were once paper gold too.
There may be a very high price to be paid in the future for the high
liquidity of paper claims on gold held by the Bullion Banks today.
Somehow, the BIS and the major private gold holders know the total claims, as
does Another. The Euro group is going to force those claims into real bids
instead of just claims!
(The illustrations are from my post Relativity: What
is Physical Gold REALLY Worth?)
The Gold in Freegold
One question I see over and over and over and over again is this, presented
in its most recent email incarnation:
stated, as have you, that behind the scene, gold trades between the giants
for many times what the posted price is. If this is so, then when the phase
change comes, and gold is used to recapitalize the central banks and to
redress trade imbalances, could it not continue to be used for those purposes
behind the scene at inflated values, with the “posted price”
remaining at much lower prices?
The Central Bankers NEED gold to be precious in the hands of the people, fiat
currency NEEDS Freegold, just as much as gold needs fiat currency in order to
be set free from the fractional reserve practices of the bullion bankers, a
carryover from the gold standard. Let the bankers play their fractional
reserve games with fiat currency, backed by the CBs as their fiat lenders of
last resort, just not with precious gold, and certainly not with the backing
of the most precious CB asset.
This isn't about anyone financially screwing anyone else. That stuff happens
regardless. This is about the emergence of a stable foundation on which the
global economy (and central banks) can operate. To date, there isn't one,
only the U.S. dollar.
The same thing that has given the dollar exorbitant privilege all these years
is now bringing it down. And that thing is the self-referential foundation on
which it is built. It is the mountain of debt, highlighted by China's pile of
Treasuries, but also including every dollar denominated savings in the world.
That pile of "implied dollars" no longer has a recoverable relation
to reality. Freegold provides this base, this stable foundation, for the fiat
currency system of the future.
Gold trading behind the scenes at a much higher price was never the CBs way
of excluding us from the fun. It was their way of protecting their assets
from what is inevitably coming. For the CBs to redistribute their gold among
themselves in preparation, it made sense that gold's value (future price) was
more than its present price. What Another described was never a parallel
trading universe. It was merely preparation for what is coming to everyone.
Nothing is gained for the masters of fiat (the CBs) by having gold trade at a
suppressed price, fractionally reserved by bullion bankers, except systemic
instability. This is why Another told us that in the future your government
will ENCOURAGE you to save in gold. That's because this will bring monetary
stability back to a world that has just experienced (past tense used for a
future event) the worst INSTABILITY ever.
It's not a gold standard. It is saving your earned credits by buying a
physical asset, outside of the currency. Buying a currency asset provides a
temporary privilege to the currency issuer, but it ends in collapse. Buying a
physical item transfers that purchasing power to the physical plane by
exerting upward pressure on physical things and downward pressure on the
currency. Buying gold isolates, contains and focuses that pressure on one
point for the benefit of all.
The Free in Freegold
Okay, here it is. What you've been waiting for patiently, I presume. This is
what gold will be freed from: The fractional reserve banking practice, which
is a carryover from the gold standard.
This is the free in Freegold.
A Final Word
As you can probably tell from this post, I believe that understanding
Freegold requires a slight shift in your perspective. It is not sufficient
for me to simply describe it in terms as they exist within our present
financial and monetary paradigm. I know that some of you think I should be
presenting a simple, fully articulated scenario. But I have tried this
before. It does not work. It doesn't do a lick of good. It's not an easy task
to explain something that requires a totally different point of view (before
it actually happens; after it happens, of course, everyone gets it… but
too late to act on it). My grandfather once taught me that anything in life
that is really worthwhile will not be easy. This applies to Freegold.
Some of you have wondered why I am the only one talking about this. Why are
none of the other well-known gold analysts acknowledging Freegold? Well, the
reason should be self-evident. I am anonymously trying to share that
which is easily ridiculed from within the current paradigm. But I will share
with you this. Some big names in the gold analyst community have let me know
(indirectly) that they are fans of this blog. Take that for what it is worth.
But if I told you the names, you'd probably say, "no way!" Way.
Others of you are here looking for "concrete, actionable advice."
Fine. Here it is: Buy. Physical. Gold. Now. Simple is as simple does.
FOFOA is A
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