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As someone here wrote in the comments, it sure seems like I kicked the
hornet's nest on Friday.
That wasn't my intention. Clearly the post was a message to "my
readers," that is, to those with a little more background on the
esoteric nature of this blog and the foundation on which it builds (i.e., the
writings of Another and FOA). But it was a pleasant surprise for me to feel
all the warmth and love in the superb comments over at ZH. Some of the silverbugs even posted thoughtful counterpoints to my
post, like this one from the author of the ZH piece I quoted.
Perhaps this little episode will dispel the notion that Freegold
can be distilled into an easily digestible pill for mass consumption. Of
course that's not to say it is not accessible. It is accessible to anyone and
everyone with the time and inclination to put in the effort. Just start here:
ANOTHER (THOUGHTS!)
FOA's The Gold Trail
A more complete list can be found at the bottom of Freegold in the Proper Perspective.
The point is not which metal is going to give you a better return on your
investment at any given time in the future or the past. The point is, given a
choice between silver and gold, which physical metal should you buy
now… today? And this is where Freegold comes
in. Because the more you learn about Freegold, the
more you will want to buy physical gold only. Dismiss this notion if you want.
I don't care. I'm here to help those that want help understanding Freegold.
If you are here reading this blog, then you deserve to know my position on
silver in the midst of all this silver hype. That's why I wrote the post.
In our Freegold future, gold will not provide a
yield or a return. Instead, it will protect the purchasing power you have
earned through hard effort. The idea of a risk free yield is an illusion
propagated by the $IMFS.
A real yield can only come from risk taken in the pursuit of economic
expansion. The "risk free yields" of today may well be nominally
risk free in today's system, but that risk of nominal loss has been replaced
with currency risk, the risk of value loss. The risk that your "lines in
the sand" might become worth less, or even
worthless. And just when nominal yields are reaching their nadir of zero,
currency risk is reaching its apex. It is a systemic conundrum.
The purpose of a nominally "risk free" yield in the $IMFS is to try
to keep up with inflation. Inflation is always with us, even when it is
disguised by the financial system. It is the storage of value in dollar
denominated paper assets that disguises the inflation. This slows dollar
velocity and masks the systematic expansion. In other words, the Chinese letting
their wealth reserves "lie very still" in dollar bonds gives the
dollar value.
In Freegold, gold will simply float on the currency
and represent the expansion or contraction of the economy. Scepticus was correct that after the Freegold
transition, if the economy contracts because of an aging population, or
simply from too many Lazy Bens, then gold's purchasing power at that time
will fall. It will track the economy, not the currency. It will float on the
currency, unlike anything today. But it will also perform better than any
supposedly risk free paper investments today as well.
The problem today is that, like Chen on the beach, the Chinese are
accumulating a whole lot of worthless "lines in the sand" that they
know can never be spent. These lines hold perceived value as long as you
don't spend them, but they lose value as soon as you do. And in the case of
"non-floating" bonds that accumulate even more of the same thing,
the "lines in the sand," the math is simply untenable. And what
makes the situation even worse is that these lines are only legal tender in
one place, on Ben's beach. So clearly, the necessary hyper-devaluation of
Ben's lines will wipe out the stored value of all your past efforts.
On the other hand, in a real world with hundreds of Bens and Chens and
millions of people (both lazy and not) behind each money, the floating gold
solution works quite well. It can be spent anywhere. It doesn't lose
value with the issue of more lines, because it is not denominated in lines
like bonds are, but instead it floats and rises priced in that
currency. And all the competing Bens will find that they can control the
exchange value of their currency with gold. Selling gold will raise the value
of your currency, and buying gold will lower it. And because all currencies
will be judged relative to their gold price, even if Ben has no more official
gold to sell, gold can still be purchased with his currency from other
sources at the floating price of gold in that currency, which will be a
reflection of management of the currency relative to the domestic economy
behind it.
If this works for you, you can think of it as a multilateral floating gold
standard. And in this gold standard, the money printer doesn't even
need a hoard of gold if he has a strong economy and a well managed currency.
Without those, you'd probably want some gold.
Okay, I have to post this video, because Davincij
has me laughing hysterically. I watched this at least three times. Every time
he laughs, I laugh. I just can't help it. I love this guy! He obviously
doesn't get the point of my post, but he sure is fun to watch...
Here's
the thing about silver and Freegold. If you really
think about it, Freegold is the pure embodiment of
Gresham's law. The masses are never going to demand silver money, only the
modern Silverites are. The masses always want easy
money. And that's because the masses use money mostly to pay expenses and
service debt (in case you haven't noticed). And also, if you haven't noticed,
there is a big overlap between the silver movement and the various easy money
movements like Bill Still and The Secret of Oz.
But the easy money camp has a newer and better easy
money in fiat currency today. Silver was out of that job a long time ago.
Perhaps that is why it re-trained and found a new job in industry. I doubt
that silver will voluntarily go back on "benefits" to please the silverbugs. It may not feel inclined to "lie very
still" under a bridge drinking moonshine.
In Gresham's law there is good money and bad money. There are two moneys, not
three. Good and bad, not good, so-so, and bad. The bad money drives the good
money out of circulation. In other words, the bad money circulates (and
becomes the medium of exchange) and the good money lies very still (becoming
the store of value). Look at this latest Eurosystem
quarterly report again:
You see, the international monetary and financial system
(the IMFS) is in transition today. It is transitioning from the old $IMFS
into the new IMFS. And through this transition gold is going to replace
dollar assets as the monetary reserve asset, and in so doing, will
recapitalize the failing system of today. This is the esoteric part, where
you need to put in a little effort to understand why I say this with such
confidence. Without that effort you will most likely dismiss my words when I
say that gold's value will soar during this transition and deliver a one-time
gain to physical gold holders in a sort of "punctuated
equilibrium."
This means that one day gold is cruising along with its known
relationship/ratio to things like silver, oil and bread, and then the next
day (or over a brief, one-time period) it gaps up ~40x and then reestablishes
a new equilibrium with the aforementioned commodities. And the gain of this
transition is only afforded to the physical quantities of gold in the world,
which is why the chain of paper promises (of gold) floating throughout the
financial system is so dangerous.
Yes, silver will run with inflation just like all physical assets. But it
will not have the additional boost of being the new system's official reserve
asset. This probably doesn't seem so significant to the silverbugs,
but then again, most of you who have taken the time to understand Freegold now call yourselves ex-silverbugs.
The majority of the silverbug articles I read today
seem to boil down to the "scarcity = value" argument. This is a
weak argument because stock stability is much more important in a monetary
metal than scarcity. And stock instability is definitely NOT a plus for a
monetary store of value. It is pretty good, however, for the volatility where
JPM makes outrageous profits churning, front running and sheering the
traders. But it's not what makes for a monetary paradigm shift.
Someone wrote, "Is silver money? I have a bag of 1964 coins that says it
is." Good point. But as I said in the post, silver's commodity value
overran its monetary face value that year and it has run (just like a
commodity) with inflation ever since. Does that make it money? Not in the
sense that I am talking about, which is the role of global
reserve asset par excellence riding out a systemic phase transition.
Someone else said that I had money all wrong because I wrote that gold is
debt. Perhaps I should have said that gold is "a credit" for future
goods and services instead of using the loaded word "debt." (But,
actually, I did that on purpose.)
All of these are fine arguments. But they are also all completely missing the
point of the post.
Yes I still have some physical silver. But I am a seller today and have been
for a year now. And I was only a buyer before I discovered the
wonderful archives linked above. And for the record, I am not playing the
GSR. And I won't sell ALL of my silver. I plan to keep a little bit of it.
And if I didn't have any silver, I would probably buy an amount equal in
weight to my gold position, as Desperado said in his comment. That means, if
I had 100 ounces of gold, I'd also buy 100 ounces of silver. But that's just
me (and Desperado).
Randy Strauss, who has been the sitemaster and an
active forum participant at USAGOLD.com since the very beginning, is probably
the finest Freegold observer there is (other than a
couple of great guys that stopped posting back in 2001). He doesn't write
much anymore, but what little he does write is worth following every day. It
can be found here following the notation RS View.
He has been on the trail for about 10 years longer than I have. And when the
systemic phase transition didn't happen as expected (and thank goodness it
didn’t, otherwise I wouldn't be here nor would I have any gold), he
started looking for signs in the international monetary realm as to any kind
of a sweeping plan. And he found the signs he was looking for! Much has been
evolving in the IMFS over the last decade. The signs are everywhere! (I think
Costata has been working up a list.)
Anyway, starting around 2005, many international policy stirrings gave Randy
every indication that 2010 was to be the targeted year for assertively
rolling forth the Freegold paradigm. But the
ongoing financial crisis that began with the subprime fiasco has caused
instability of such magnitude that the central bankers have been forced to
delay briefly and "play it safe" – one does not dare rock the
boat (if there remains any choice in the matter) when the financial waters
have become so turbulent and choppy.
As for a new timeframe, Randy is seeing good indications of a mid-2013
benchmark. Of course he is also cognizant, as are the central bankers, that
any number of potential and unplanned events could force the transition at
literally any moment. Luckily, for the most part, things are already in
place. Which begs the question, is your gold already in place? And with this
background, here is Randy's week ending post from last Friday.
[News & Views -- main page]
The beginning of the End of Dollar
Hegemony
by Randall Forsyth
Friday December 17, 2010 (Barron’s) — When the monetary history
of the year coming to an end is written decades from now, the headlines of
European debt crisis and Federal Reserve’s adoption of QE2 may turn out
to be mere footnotes to the bigger story: 2010 could be a watershed
marking the beginning of the end of the dollar-based, Western-centric
monetary system.
… This year, the idea of reform was advanced by World Bank President
Robert Zoellick, who proposed in a widely read and
commented-upon Financial Times op-ed piece “a cooperative monetary
system that reflects emerging economic conditions.” That would include
the dollar, the euro, the yen, the pound and the renminbi
— plus gold “as an international reference point of market
expectations about inflation, deflation and future currency values.”
Zoellick’s November commentary followed the
outbreak of the so-called “currency wars,” as Brazil’s
finance minister dubbed the tensions in the foreign-exchange markets
resulting from Fed’s liquidity expansion through the purchase of $600
billion of Treasury securities, dubbed QE2, for the second phase of
quantitative easing. The downward pressure on the dollar from the surfeit of
greenbacks was viewed by finance officials abroad from Asia to Europe as well
as Latin America as tantamount to a competitive devaluation to boost the U.S.
economy while beggaring its neighbors.
… Dissatisfied with the options of the dollar or the euro, the
ascendant economic powers are essentially cutting out these middlemen. Just
Wednesday, Micex, Russia’s largest securities
exchange, began trading in the ruble vs. the Chinese renminbi.
It was largely symbolic given the volume traded was equal to about $700,000.
More importantly, Russia and China have agreed to settle their bilateral
trade of about $50 billion in their respective currencies.
That means Chinese importers don’t need to obtain dollars to buy oil
from Russia. Nor does Russia need greenbacks to buy Chinese goods.
[RS Note: Think about this for a good long
while...]
… Because the rest of the world uses the
dollar for transactions and a store of value, the U.S. has been able to take advantage
of that. Indeed, the greenback is America’s most successful export.
So, Americans get the goods, allowing us to consume more than we produce,
simply because the rest of the world wants our paper. …… American
ingenuity produced triple-A mortgage-backed out of subprime loans, which
dollar holders around the globe eagerly scooped up.
These foreign dollar holders are funneling their funds into Treasury
securities, effectively funding the U.S. budget deficit. But they’re
not doing it as willingly as before.
… None of this suggests that the dollar is about to be toppled from its
perch as the premier global currency in 2011. Strains in the original Bretton Woods system were evident long before President
Nixon abrogated the promise to redeem dollars for gold at $35 an ounce for
foreign monetary authorities on Aug. 15, 1971. Even then, the floating
exchange-rate system didn’t come into being fully until 1973.
… How long this process goes on depends on the availability of
alternatives to the dollar.
… The demand for dollars from the rest of the world has been of
inestimable benefit to the U.S. economy. It quite simply allows Americans to
consume more than they produce and save less than they invest; in other
words, to live beyond our means. The dollar’s dominance will not be
toppled in 2011 but will wane over the coming decade and beyond. And America
will have to start picking up the tab for what had been a free lunch.
[source]
RS View: For the wealth-preservation minded individual, the important
question centers upon this comment made in the article: “How long
this process goes on depends on the availability of alternatives to the
dollar.”
Frankly, the answer is surprisingly simple, and the preparatory timeline is
surprisingly short.
As evidenced in the commentary about the new trade arrangements between
Russia and China, it should be obvious and intuitive that bilateral trade
between any two given countries could be similarly invoiced in their
respective currencies. The timeline is effectively zero given that these
currencies already exist and are in local use. At issue, mostly, is the
simple matter of breaking with mere tradition — the habit of invoicing/contracting
in this third party currency, the dollar. Given the suitable functionality of
most national currencies for the invoicing/payment of their bilateral trade,
there is no need for the world to spend time and effort conjuring up a new
supra-national currency unit to replace the dollar as a universal invoicing
agent.
With invoicing/payment alternatives ready and waiting, the only other
aspect of usage in the dollar’s international role is that as a reserve
currency — that is, as a store of value.
Store of value is a significant element because at the end of any given trade
cycle (monthly or annually for example) a nation actively trading with its
international peers as described above will inevitably end up with a net
position in various foreign currencies. It becomes a matter of national
importance to consolidate those paper positions into a more reliable form
that is not dependent upon the fiscal policies and monetary management skills
of your international trading partners. It is the form of asset chosen for
this consolidation of the net position that embodies the “store of
value” function from one trade cycle to the next and beyond.
But as this article points out [see the article link to read more than the
few excerpts above], “Since 1973, the dollar has been unanchored and
has been anything but a stable store of value.” Gold, on the other
hand, serves this role uniquely well because it resists the degrees of
artificial inflation and depreciation commonly afflicting national currencies
driven by naturally self-centric national management.
The central banks of the world, throughout their long history, have more or
less developed the requisite infrastructure and ample experience in the fine
art and science of gold storage and allocation transfer. Therefore, not only
is an alternative to the dollar available for the store of value role, it is
readily available with no significant timeline to accommodate the practice.
To be sure, many central banks have already in place the mark-to-market
accounting structure to accommodate (and benefit from) the significant upward
revaluation of gold reserves as would be expected to occur through the
dollar-to-gold transition.
Various policy signs over the past several years had indeed pointed toward
2010 to be the watershed point in the international monetary transition, but
the depth of the current commercial banking crisis likely argued strongly for
a delay under the thought that calmer waters would facilitate a better
transition. As such, the existing infrastructure and policy is largely in
place at the present time, so a timeline for this store of value transition
can be every bit as short as that for invoicing — essentially, no time
needed for flipping the switch.
But in light of the current crisis and some of the policy efforts underway to
restore calm to the commercial markets, it looks to me that the new timeline
for significant transitions is mid-2013 consistent with the current policy
talks driving the permanent European Stability Mechanism to that timeframe, but
with that said, it could be set into motion at any given moment between now
and then, and between your breakfast one day and breakfast the next. Hence,
it is best that you work to actively establish your desired gold position
without undue delay, and then with peace of mind you can turn your full
attention to the business of living your life as it was meant to be. Spending
significantly further time obsessing over currencies and investments is a
fool’s errand.
R.
The bottom line is that silver could do anything short term. The essence of
the message here is that silver is not gold's trusty sidekick or heir
apparent. The silver price could go up or down, but silver is not part of the
Freegold transition. Only time will prove this one
way or another. In the interim, here's some more music.
Sincerely,
FOFOA
Posted
by FOFOA at 10:59
PM
costata
said...
FOFOA,
Excellent follow up to Focal Point.
"And through this transition gold is going to replace dollar assets
as the monetary reserve asset, and in so doing, will recapitalize the failing
system of today."
I thought this statement was worth repeating. We have a solvency crisis in the
current IMFS. The poster children for this problem are the TBTF banks.
A credit crunch (liquidity crisis) can be solved by providing cash loans or
cash gifts/bailouts. Insolvency can only be addressed by an infusion of
capital or bankruptcy and restructuring.
mortymer
said...
“A common mistake that people make when trying to design
something completely foolproof is to underestimate the ingenuity of complete
fools.” Douglas
Adams
Pete said...
Great couple of articles before the holiday break
FOFOA!
What I find interesting is how much people protest your writing. If they
don't like it, so what?
Well, people are emotionally invested. Not necessarily rationally, and it
shows.
There is a clear difference between what some 'want to happen' and what 'will
happen'.
So far FreeGold is the most comprehensive
explanation I have seen, simply because it addresses the real systemic issues
from almost every angle (although for me there's still that small gap
regarding the 'gold rush').
I hope you can remain confident in the face of some of these speculators,
because the readers who 'get it' really appreciate it.
Happy holidays...
PS @ Costata - thanks for your posts, I find them
to be great reading. Also thanks to the other regulars here who 'get it' -
including you Desperado, more posts pls ;)
ebikeguru said...
"The bottom line is that silver could do anything short term. The
essence of the message here is that silver is not gold's trusty sidekick or
heir apparent. The silver price could go up or down, but silver is not part
of the Freegold transition. Only time will prove
this one way or another. In the interim, here's some more music."
Echoing my thoughts as per my last post. We cannot know what silver will do,
because we are not TPTB of the silver world. That said, I did so well with
the last silver "investment" I did, it would be rude not to chuck
at least some of the profits back at silver strike 35???!!
I think I will mostly be adding some Vrenelis and
English Sovs though after having now slept on the
FOFOA silver piece...
P.S can you limit newbies posts to 40 characters haha!! Dimmed etc really are diluting the FOFOA comments
thread goodness!!
Cheers!!
Fredquimby
haywoodjablowme said...
It's to be expected FOFOA.
Especially when you get a bunch of numb-nuts that recently jumped on the metals
train in the past year or two and don't completely understand or haven't
taken the time to do their due diligence outside of the de-facto hyper /
high-inflation scenario to support their likely speculative position.
In the davincij15 youtube video case, it's one
thing to be an idiot. It's a completely different level of idiocy when you
showcase your idiocy on a global scale such everyone can see it.
It's becoming waaaaay to easy these days to tell
who has actually spent the time to really understand their positions.
Haywood Jablowme @ ZH
DP
said...
Quite a good show. Thanks for putting it on, I've enjoyed the popcorn
:-)
Michael H said...
Here are some speculations regarding silver:
A couple of posts ago there was discussion regarding the question: Why hasn't
freegold happened yet, when A and FOA were
predicting that it was imminent? It boils down to:
1. What has the $ system done to extend its lifetime in the past 10 years?
2. What other events could further extend the $ system lifetime for the next
several years?
FOA wrote that the collapse of the dot-com bubble would lead to
hyperinflation as reduced asset values were papered over. This did not happen
partially because of the inflation of an even larger real-estate bubble to
cover up the losses. Now that the real estate bubble has burst, there are two
options: inflate or die.
Which brings me to silver. What if the next bubble
is in silver?
Here are a few reasons why:
1. Silver is an industrial metal but is not being recycled. New sources of
silver must be made economically feasible so that no interruption occur in
its supply. This situation is reminiscent of the non-middle-eastern oil in
the 70's. The US producers needed a higher oil price to make exploration
viable. Then, when these sources came on-line, the need for an increasing oil
price went away.
2. The goal of a bubble is to siphon off paper wealth into financial assets,
and thus to keep the general price level stable. While high silver prices
will translate into higher silver-using-product prices, food prices (for
example) will not be impacted.
3. A second goal of a bubble is to maintain the illusion of the dollar as a
store of wealth, and to maintain oil-for-dollar convertibility through the
dollar-for-gold link. By diverting precious metals investments into silver,
gold flows can be relatively freed up for oil. The idea would be to play gold
against silver.
In an earlier comment I had speculated that perhaps a paper-gold bubble would
be inflated (requiring one to exchange physical gold for paper gold
certificates to play in the casino). But a gold bubble is just too dangerous
-- juggling live hand grenades -- because the death of the dollar is the end
of the dollar gold market.
So perhaps a silver bubble would serve the dollar's ends.
Amagnon said...
FOFOA;
Your ongoing failure to recognize silver as money is not a local phenomenon -
it is surprisingly widespread.
I am not a silverbug, or a goldbug
for that matter - I am simply an observer.
Your paradigm appears to have impaired your objectivity.
Firstly some context: I can say categorically - I don't believe anything, all
belief is unfounded - because human beings lack the capacity to reliably
divide truth from falsehood.
So, I feel we need turn to empirical evidence, to make inference - once
established by some evidence, we must refine our
theories, always vigilant of internal bias, and ready to toss them away at
any time with no regret.
The case for silver and gold
Historically, where gold circulated as currency, silver also circulated. It
is instructive to note that its value tended towards its relative abundance
with respect to gold.
This infers that silver was historically valued as being EQUAL to gold. So,
silvers monetary characteristics were valued equally with gold, or close
enough to equal as to create no visible discount to its value.
It is further instructive to note the distribution of silver and gold
throughout economies where these metals circulated - and I reference the
repellent phrase, 'poor mans gold'.
Golds scarcity afforded it higher value for a lower
weight - making it superior for any large transaction - therefore it was used
in preference by those conducting large transactions.
So gold is money, but silver is not?
Some feel the need to draw that conclusion, rather than actually examine the
premise.
Silver was circulated where transaction amounts were small - a small silver
coin would purchase food, clothing etc - to conduct such a transaction with
gold would require dust, or clippings from a coin. This poses one of two
problems - first if accurate scales are available this is inconvenient, if
scales are not present then it is inaccurate.
Silver was therefore SUPERIOR to gold for use in small transactions.
I have read through the historical record of Another and so on - and I feel
he is being misrepresented - he had no beef with silver as money.
The very prominent point he was making in regards to gold specifically, was
this; the market is being cornered - and revaluation of paper assets will be
made with respect to gold alone.
In his opinion then, this made a far stronger case for gold.
There is merit in that position - and I would not denounce it.
'Another' was an interesting character - and I certainly enjoyed his
commentary - but he was in my opinion, not possessed of any divine
characteristics that would warrant some religious cult formed in his absence.
His message is important, and the (badly translated) axioms are timeless -
but I think it is far better to consider the future holistically, and with
due consideration of our own, and others capacity for error, and also with
respect for the past.
History tells us a revaluation of assets with respect to gold will cause
silver to tend towards a value dependent on its relative abundance with
respect to gold.
This may be incorrect, but without further contrary data it is a valid
conclusion.
The unknown factor is 'what is the impact of valuation with respect to gold,
where gold is a cornered market'? This may well negatively impact a
revaluation of silver - on the other hand, history tends to infer, silver and
gold are equals.
Sincerely,
FOFOA
FOFOA is A
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