Tuesday, November 20, 2012

Freegold: Gold bubble or new monetary paradigm?

Freegold, not FREE Gold (sorry to disappoint!). Freegold (or Reference Point Gold, RPG) is an environment where Gold is set free from the bounds of a fiat price, where it is used solely as a store of value and reference point for all other currencies. The 'price' of Gold floats freely in all currencies or as defined on Wikipedia:
Freegold derives its name from a monetary environment where gold is set free, and has no function as money. Gold is demonetized, and has one function only: a store of value. The function of legal tender changes only slightly: it is a medium of exchange and unit of account, but stripped of the store of value function. In this environment, currency and freegold will coexist to supplement each other, without interacting with each other.
Posts I've made on this blog tend to revolve around Gold remaining within the confines of the monetary system that it sits in today, that is, Gold will continue to remain priced in US Dollars and cycle in value against other assets resulting in a "bubble" which will pop (assumes that central banks will be able to restore confidence in fiat currencies). However, there is a very real possibility that the monetary and financial system that exists today may be overhauled in the near future given the unsustainable path that central banks are taking.

Greg Canavan of the Daily Reckoning posted a reasonable summary of recent monetary history in 2010:
After WWII the Bretton Woods international monetary system came into being. This was a fixed rate currency regime with the US dollar as the global reserve currency. But to ensure stability and financial discipline, the major currencies were fixed to the US dollar and the US dollar was fixed to gold at the rate of US$35 an ounce.

This is where the Triffin Dilemma kicked in.

The US soon understood that reserve currency status allowed them to run large deficits. The deficits were 'paid' for by issuing US dollars. When the excess US dollars began showing up in global central banks, they began converting their dollars into gold. This lowered the value of the US dollar in relation to gold.

At first the authorities tried to manage the Dilemma. In 1961 they established the 'London Gold Pool' in an attempt to keep the US dollar price of gold to $35 an ounce. This system worked for a while but fell apart by 1968 when France withdrew from the Pool.

The various nations then attempted to preserve the Bretton Woods system by maintaining a two-tiered gold market; one operating at the official US$35 an ounce price while another traded gold at the market price, which was well above $US35. Of course such a policy was completely unsustainable and it too failed.

Bretton Woods was on its last legs. President Nixon ended the system once and for all when in August 1971 he suspended the convertibility of US dollars into gold. From that point on, the US dollar was without an anchor and the global monetary system went from a fixed to floating regime.

What followed was a decade of monetary instability and record high inflation.

Perhaps surprisingly, the US dollar maintained its role as the world's reserve currency throughout the decade. Due to its economic and military might, the reserve currency status of the US dollar actually grew in acceptance throughout the next few decades.

But Triffin's Dilemma never went away. It did remain out of sight though as parties on both sides of the equation enjoyed the mutual benefits of the US dollar's reserve status.

The US benefitted by paying for imports with essentially costless US dollars. In turn, the US' main trading partners enjoyed robust demand for their products, creating employment and income growth.

The huge deficits brought about by excess US consumption produced a massive amount of liquidity throughout the global economy. While Triffin's Dilemma would have predicted a collapse of the dollar because of the glut of dollars in the system, such an outcome didn't eventuate.

This was primarily because the beneficiaries of US consumption didn't want it to end. So they reinvested their excess dollars back into US asset markets, notably US Government debt. Such actions supported the dollar, kept interest rates low, and perpetuated the imbalances.

Some commentators called this apparent happy state of affairs 'Bretton Woods II.' As the saying goes, markets make opinions and this was a flawed opinion born out of an ignorance of what brought the first Bretton Woods system undone.
The article continues (I would recommend reading in it's entirety) and concludes on the following note:
But as we told you last week, the IMF is already holding discussions about making changes to the financial architecture. Very few people understand the magnitude of what is going on, but it hasn't been lost on the gold market.

Gold will be one of the major beneficiaries of change. Back in the 1960s Robert Triffin warned about the dollar glut and the fact that it would bring the Bretton Woods system undone. He was right.

The rising gold price was the first warning sign of the system's weakness. Now, the gold price is again warning of monetary instability. It has been rising along with the US dollar. Gold is again being viewed as a reserve currency.
Where in the past a new or significantly changed monetary system has been considered a wet dream of the tin foil hat brigade, following the global financial crisis and central bank reaction to it, the expectation for such has become almost mainstream (at least in financial circles, prepare for blank looks if you tried to explain any of this to the common man on the street).

There has been a lot of speculation about what the monetary system will look like post Bretton Woods II. A former world bank chief had this to say in 2010:
World Bank chief Robert Zoellick said in an article the Financial Times that leading economies should consider “employing gold as an international reference point of market expectations about inflation, deflation and future currency values.”

Zoellick made the proposal as part of reforms to be considered at this week’s G-20 meeting in Seoul.

“Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today,” said Zoellick.

He said such a reform would reflect economic realities and should be considered as a successor to the existing global currency paradigm known as “Bretton Woods II.”

Bretton Woods II refers to the system which began in 1971, when U.S. President Nixon ended the dollar’s link to gold as established under the Bretton Woods agreement.

Zoellick said a return to some sort of currency link to gold would be “practical and feasible, not radical.”

“This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalization and then an open capital account,” he said. Market Watch
Coming changes to the global monetary system have not gone unnoticed by the world's savviest and richest investors, with Jim Rogers (billionaire) recently making the following comments in a video interview with Lauren Lyster of Capital Account:
(From 7:20) Lauren Lyster: Do you think there would have to be another viable world reserve currency before that happens (for the united states to go bankrupt)?
Jim Rogers: Our bankruptcy may lead to another viable world currency. The problem is there is nothing on the horizon right now. The Euro as it stands now is not properly constructed to serve as a world currency. We don't have an alternative right now, it can't be the Yen, can't be the Renminbi yet. We're in trouble.
Lauren Lyster: So you think potentially the United States could have a huge event in the foreign exchange market or some huge bond market collapse before there is another world currency?
Jim Rogers: Ms Lyster, don't say could... will, let me tell you it's going to happen, whether it's the next recession in 2013/2014 or the one after that, it's finished. Our debt is sky rocketing.

The IMF has proposed the use of Special Drawing Rights (SDR) as an interim solution:
After substantial market depth has been established, which would require very substantial amounts to be issued, and if the perceived safety of other global assets were to decline, Fund-issued SDR securities could be a potential anchor off which to price risk throughout the system (assuming the SDR valuation method ensured the SDR were representative of economic weights in the IMS). In the even longer run, if there were political willingness to do so, these securities could constitute an embryo of global currency. Of course, this longer-term vision is highly hypothetical and support for the nearer term steps need not imply commitment to the longer-term ones. IMF
With a possible longer term plan for a one world currency:
From SDR to bancor. A limitation of the SDR as discussed previously is that it is not a currency. Both the SDR and SDR-denominated instruments need to be converted eventually to a national currency for most payments or interventions in foreign exchange markets, which adds to cumbersome use in transactions. And though an SDR-based system would move away from a dominant national currency, the SDR’s value remains heavily linked to the conditions and performance of the major component countries. A more ambitious reform option would be to build on the previous ideas and develop, over time, a global currency. Called, for example, bancor in honor of Keynes, such a currency could be  used as a medium of exchange—an “outside money” in contrast to the SDR which remains an “inside money”. IMF
The IMF goes onto explain:
Why bancor? A global currency, bancor, issued by a global central bank would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing.
But assuming that these monetary changes (either SDR or global currency) came in during systematic duress there is no guarantee that the market would accept another fiat substitute in place of a real store of value such as Gold.

If BRIC counties have a say in the new monetary system,  there is the strong possibility that any interim (or the final) new monetary system would involve Gold with Russia having voiced support for Gold to be included in basket of currencies/SDR (Reuters):
Russia supports expanding the IMF's Special Drawing Rights (SDR) to include the rouble, the yuan and gold, but sees no chance of the G20 Summit accepting a new reserve currency, a Kremlin aide said on Saturday, agencies reported.

Dvorkovich said he sees no chance of the G20 accepting a new reserve currency next month, but his comments suggest the issue will be in the spotlight at the meeting, where world leaders will discuss ways to combat the global economic crisis.

"We could also think about more effective use of gold and gold and forex reserves in this system," Dvorkovich said, RIA reported. For its part, he added, Russia would support the broad use of the rouble and the yuan as reserve currencies, Itar-Tass reported.
And actions speak louder than words (BullionVault, 2009):
China, the largest producer and private consumer of gold in 2009, has announced that it wants to build up its Gold Bullion reserves. And by how much? Ji Xiaonan, who chairs the supervisory board for the Chinese State Council's biggest state-owned companies, said Monday the country should look to add a massive 10,000 tonnes in the next 10 years.

Is China going crazy after gold? It would seem so if the recent statements coming out Chinese government officials is any indication. In fact, its Bullion reserves began to make big news in April this year when China announced that the country had increased its gold holdings to 1054 tonnes from 454 tonnes in 2003.

Since then, many other fast-rising nations – India, Russia, Brazil, even Sri Lanka – have been making news by announcing that they all want to build more gold reserves.
Another recent discovery (by Warren James at Screwtape Files) has been the lack of (ANY) Chinese refined Gold bars in major Gold ETFs:
The fact remains that (despite looking) we haven't found even one Chinese-Refined LBMA gold bar in a major ETF, which still lends support to the idea that China is holding onto its gold refinery output. This is supportive of Freegold theory, and also any other 'Chinese are keeping their Gold' narrative.To put it in perspective, this is a massive hurdle for anyone who still maintains that gold is just a commodity like the others - China has stuff pouring out of factories like a river including silver bars and other metals, so why should LBMA gold bars appear be absent from the list? (especially since we can safely assume they are being produced).
When the country with the world's second largest economy (by nominal GDP) and highest Gold mining output starts hoarding almost every ounce it can, you'd best pay attention.

Many commentators who think Gold will play a role in the changes ahead suggest a return to a Gold standard in the United States, but a Gold standard (in the traditional sense) wouldn't necessarily be feasible as explained by Victor the Cleaner in this post:
The book Currency Wars by James G. Rickards quickly became a bestseller not only in goldbug circles. One of the main theses presented by Rickards is that the United States ought to return to a Gold Standard.

Have you ever wondered whether this would be possible? The answer is No. But why not? The reason we give might strike you as rather unexpected, but it leads you right into the question of what will be the future international monetary system. The answer is that it is the existence of the Euro that prevents the United States from returning to a gold standard.

The Euro zone is set up in such a way that it values gold at its free market price. Since the Euro zone is a major global trade hub, they are in fact in a strong position to block any attempt by the United States at returning to a gold standard. They can rather force the US to value gold at its free market price, too. Any attempt at linking the US dollar to a fixed weight of gold is futile in the long run because this would eventually lead to an under-valuation of gold in US$ and thereby irreversibly drain gold reserves from the United States. In the present article, we explain these ideas in greater detail.
Probably one of the simplest explanations I've seen for how Freegold would work came from the "Flow of Value" blog by Blondie, but it appears posts have been removed, the explanation is available from a PDF version of some posts:
Freegold is a gold-based currency valuation system where the currency is not tied to fixed amount of gold.
Under a Freegold system gold would value all currencies individually and the exchange value of each currency would still be relative to every other currency.
Eg. Gold gram = Euro 1
Gold gram = Yuan 1.5
Therefore Euro 1 = Yuan 1.5
It's a triangulation. As long as the exchange rate between physical gold and currency is established, the relative value of all else can be objectively ascertained.
If there is too much money printing then the exchange value of one unit of a currency will decrease, and as governments quantitatively tighten the exchange value in gold of a unit of currency will increase.
To put it simply, the rate of exchange between all fiat currencies and physical gold is set free to float. The quantity of debt able to be cleared by a given weight of gold would vary, in accordance with the needs of the market. Gold, in its role as the ultimate extinguisher of debt, would be the clearing mechanism for the marketplace. Sovereign entities (whether individual or state) would have a net outflow of gold when consuming more than they produce, and vice versa. Thus every entity is required, by the free market, to live within their means. When not living within their means, they are forced to live by consuming their savings.
Freegold gives the market a real point of reference, physical gold, from which to assess the relative values of everything else. This is the point of reference originally chosen by the natural evolution of money, over thousands of years. Nobody invented money. It evolved naturally from our desire to exchange goods and services. Evolution! is an excellent description of this process.
In practice, Freegold is a separation of the functions of money. Physical gold resumes its rightful position as the store of wealth par excellence. Fiat paper continues in its role as the medium of exchange par excellence. The numeraire, or unit of account function of money, would be either gold or fiat, depending upon ones time preference.
These diagrams may help clarify:
The first diagram shows the present arrangement. It should be noted that currently the vast majority of entities use fiat currency as a store of value. This is a major reason why this "store of value" is always being "invested", seeking a "return on investment". Because it is not storing value. It needs a ROI to maintain its value (buying power). Fiat is not a good store of wealth.
The second diagram shows what happens when we introduce the context of time, which ultimately creates the resulting situation, illustrated in this third diagram:
The three monetary functions are now each being performed by the best "tool" for the respective "job". Which tool is best for which job is a subjective decision, best left to the sovereign entity (whether individual or state) evaluating their own money. The criteria used in making this subjective assessment may be infinite, but the most important of these is time: how long does one anticipate holding this money? If the answer is short term (ie. "spending money", used for current expenses), then the best form to hold it in is a fiat currency. If the answer is longer term (ie. "savings", a surplus over and above what is required as shorter term "spending money"), then the best form is gold, to protect ones buying power.
A lot of the arguments I have seen presented for Freegold make sense, but whether a practical application of the theory would be viable I don't know for sure. One interesting thing I have noted over the course of the last month as I've read up on the subject is the stubbornness of many Freegold advocates. They are often critical of Silver as an alternative and they raise many good points (such as pointing out central banks are showing the way to the new monetary system via their buying and holding Gold on their balance sheets and not Silver). However, their argument that one should hold only Gold because it is the end game seems to me as foolhardy as the suggestion that one should be all in on Silver because at the current rate we will run out of reserves in X number of years. 

What they don't seem to understand is that what happens between now the the end game could be as important as the endgame itself. Even if we are on the road to Freegold in the not too distant future, there is no reason that a Gold bubble in the conventional sense (of a parabolic rise and crash) couldn't play out before hand. Or there is the possibility that the IMF gets to play out their role with an SDR in the interim with Freegold coming a decade or two down the track.

There seems to be little critical thinking occurring in the most popular discussion spots for Freegold (such as on FOFOA's blog), it's almost like a religion or cult. Those who don't agree with the consensus are often labelled trolls, silverbugs or even gamblers.

I worry that many are sucked into the Freegold concept based on the lottery winning like appeal of a Gold revaluation to the heights expected by some Freegold supporters (below from FOFOA):
It won't take much for this deal to fall apart. And when it does, we'll see the price of gold go up to probably $5,000 an ounce and then all trading will stop. No market will exist for gold at it's true value. For those that have all the gold in their possession are only buying, not selling. Oil will skyrocket too... if it flows west at all. This is coming, and soon. Buy gold. Hold gold. It only has to meet it's true price once in a lifetime and that will be more than worth the wait. I believe this is not a once in a lifetime opportunity right now, but possibly a once in the history of the world opportunity. Silver, platinum, commodities... they may all do well. But nothing will come close to the true value of gold. $50,000 an ounce may even be low.
Major changes to the monetary system have almost always come about at a time of crisis, rather than with the foresight to adequately plan and implement them. Chances are the next time things change it will be swift and while anticipated by many, it could come with little warning.

Although the majority of my precious metals holdings will likely be traded into other assets when reaching ratios which suggest Gold is in an overvalued state (comparative to what we've seen over the past 100 years), there is the chance that the price keeps moving higher and rather than bursting in a bubble it becomes the one exception to the rule, the one asset which truly is heading toward a new paradigm and plateaus at a price that blows even my mind.


That said the shift to Gold as the sole reference point for the monetary system, if it does come, may be tomorrow, 10 years from now or after our lifetimes. I certainly wouldn't be putting all my eggs in that one basket.


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BB.

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60 comments:

  1. Well written again BB. Your last paragraph is the most important.

    I'm hoping it doesn't come for a while for 2 reasons:
    1. The opportunity to buy it at 'discounted' prices.
    2. If the change is needed, western society may be in a bad way and our standard of living and feeling of security will be lower.

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    1. Thanks Dave and agree with both your points. Especially point 2, I find it hard to believe that the central banks would be so quick to give up their control of the monetary system to Gold, so we probably would be in a very bad way before the change was made.

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  2. Great post and I hope you continue visiting FOFOA. However, there is one small thing I think you might be misunderstanding concerning Freegold / Reference Point Gold. Everyone should buy gold only to the level of their understanding and comfort. When a person reaches a certain level of understanding Freegold some say they are at the 'All Inn'. I know it sounds like they have put everything into gold but this is not true. Instead, these people have taken care of their daily lives, perhaps they have spent money on food, clothing, protection for a hyperinflation, perhaps they have enough cars, or boats, or what ever you can imagine one needs to have a happy life. And after everything has been taken care of, and with the intelligence to have accumulated this excess in the first place they have decided that instead of storing their excess value in stocks, or bonds, or treasuries, they choose to SAVE in gold. I don't like using caps but one of the important factors is that patrons of the 'All Inn' are not investing. By definition patrons of the 'All Inn' are done investing and have chosen to SAVE.

    So choosing to SAVE only in gold doesn't sound "foolhardy" at all when Central Banks are SAVING in gold.

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    1. Thanks Indenture and re-reading I have probably been a little harsh on freegolders when I am sure some are not as I've described at all.

      I am sure there are some with balance (live their life and save what they can in Gold) and those without balance (those whose hoarding Gold impedes their regular life).

      Your last point is a reasonable one although most Central Bank holdings make up less than 20% of their foreign reserves, so they "save" in fiat currencies as well:

      http://en.wikipedia.org/wiki/Gold_reserve

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  3. Hello BB. Freegold Observer here..

    Pull up a chart of the price of gold in Indian Rupees.

    http://www.marketoracle.co.uk/images/2010/Mar/gold-28-1.png

    So for a few billion people, gold has already been the one asset which defies the usual bubble trend.

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    1. The very nature of a fiat currency system (ongoing inflation) means that asset prices will tend to rise continuously over time. I don't really see the Indian Gold chart as a single bull market. There are several 5-6 year periods where the nominal price drops or is flat before surpassing the previous peak.

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    2. But do you see any obvious sustained bear markets similar to the USD priced bear market in the 80's ? I don't.

      And rising asset prices continually over time is not true. Im assuming you mean that stock indexes like the DOW have increased over time too. But that is false because it doesn't account for the stocks that leave and enter the index. If you want to compare the DOW to gold since say... 1965 then you would have to take the 30 stocks that comprised the DOW in 1965 and compare the value of that list to the value of gold today.

      That list would include the value of the following companies. Most of which are bankrupt or not even in the index. The same applies to any index in the world.

      -Woolworth
      -Westinghouse Electric
      -US Steel
      - Union Carbide
      -Owens-Illinois Glass
      -Johns-Manville Corporation
      -International Nickel
      -International Harvester
      -General Motors Corporation
      -GE
      -Eastman Kodiak

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    3. M, no there is not a sustained bear market, but I wouldn't expect there to be one given the higher rate of inflation in India. It's to be expected that anything would rise faster in a foreign currency (INR) if that currency is inflating at a higher rate than the currency (USD) that the asset (Gold) is measured in.

      I am not talking about a specific asset class when I say that they should rise continually in price. By the very nature of a fiat monetary system where the amount of currency is continuously increasing we can expect asset prices to always rise. Of course this doesn't always happen due to other influencing factors such as supply/demand, changes to demographics, etc, but consider this isolated example:

      There are 10 ounces of Gold.
      There is $10 worth of US Dollars in circulation.
      Each ounce of Gold can therefor achieve $1 per oz.
      If the US Dollars in circulation increases to $11, then we can expect each ounce to achieve $10.10.

      It doesn't happen this cleanly, but in a monetary system which is continuously inflating we can expect the price of everything to always rise.

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    4. Is there really A higher inflation rate in India ? (An emission more money in India then in the US) Or is there just less willing buyers of their inflation on the world markets and locally (because of gold ;) ? I think the latter. They have rising prices in India but they have less inflation then the US.

      You cant use gold in your example to show that there is continual rising prices of ASSETS in a fiat regime. By using gold, you are supporting my point, not yours.

      And my point is that gold has already withstood the bubble characteristics that befall other asset classes in other countries. And remember, these countries who have been living within their means are the ideal places to sample when envisioning freegold.

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    5. My blog http://freegoldobserver.blogspot.ca/

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  4. BB

    I think you have to think of the price of anything from the basic principles. It is determined at the margin right. We also know that paper gold market is not required, because there is a huge amount of gold in stocks. The perceived shortage is due to the fact that owners do not want to part with their gold. The paper gold reduces the price of gold, and that is the only thing it does. It quenches the demand of gold with paper.

    To think that gold will go up and collapse is to believe that the paper gold market will stay there forever. The paper market will have to go when the Dollar loses its Reserve status. And you definitely know that Dollar losing reserve status is only a matter of time. When the dollar loses, it will cause lots of people to lose lots of money. There will be a scram to get into hard assets. That is the time when people will try to get their gold against the paper, and the paper gold market will crash.

    Once you agree that the paper gold market will crash you can see that the price of gold is way too less. And so the concept of its falling down makes no sense at all.

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    1. I agree that the dollar losing reserve status is a matter of time and agree we are (probably) on the road to having Gold involved in our monetary system again, but as I point out, the timing of this change is disputable.

      We might stumble on from crisis to crisis for another 10 years or longer. There is the potential that Gold forms a bubble within the current monetary system and crashes (e.g. rise to $5k an ounce, then fall to $2k) before the change to freegold or another alternative later on. The timing can't be predicted.

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    2. The real trouble is the physical plane. Have a look at the deficits of the world. At this point almost every country is in deficit. For somebody to have a deficit somebody else must have a surplus. Otherwise everybody is chasing the same things. This will cause inflation in monetary terms.

      We are already getting into a currency war. This will escalate and pretty soon.

      Have a look at what all jugglery the UK is doing to fulfill its budgetary deficit. They are printing money and supplying to the banks without any thing in return. That is normally the penultimate step. As the next step would be to tell the banks to give out loans indiscriminately. That is when you will see their unemployment to drop and then after sometime you have a loss of crisis, ala Weinmar.

      I don't see how UK will last more than 3-4 years. Before getting into HI. An HI in UK will trigger US, as by that time US will also be in supplying banks with funds indiscriminately phase.

      5 years is actually way too long for the crisis. I would think high inflation could hit anytime 2013. And likely Pound will go up in smoke by the end of 2015. Yes putting some time lines to it :-).

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    3. In the middle of the GFC when banks were failing and trillions of USD were being spent on bailouts I thought we couldn't be far from the end of the USD and here we are 4-5 years later with things still ticking along.

      You may be right and things don't last another 3-4 years, but I wouldn't bet the house on it. And even if things come to a head soon there is no guarantee we move straight to freegold, we may see the IMF step in and experiment with SDRs for a period of time.

      All I am pointing out is that there is no certainty on a specific outcome such as freegold.

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    4. At that time it was an internal problem. And was fixed by Fed printing and feeding into the banks. That is not the problem I am pointing to. I am pointing to the problem that China is no longer in surplus. No other country is taking care of the surplus.

      Somebody has to do it no?

      How long can you continue with this problem?

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    5. Well China is no longer adding to their US debt position, but the Fed is buying... how long can that last? No idea.

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  5. Nice post BB. Some posting at FOFOA can be a little brash, hang in there. Skepticism and debate are welcomed. I'm not someone who thinks FreeGold is a certainty. We have some elements of it already, i.e. the ECB's quarterly mark to market of its gold reserves. The other two things that need to happen are a collapse of paper gold and some changes to legal tender laws.

    A collapse of paper gold will happen imo but might not happen for many years. As for legal tender laws ushering in a FreeGold era, I'm not sure how anyone can be certain of such an outcome. Maybe I would give it a 40% chance, not as inevitable as some at FOFOA might see it.

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    1. Thanks for your thoughts A PIIG.

      I find it interesting that both freegolders and the die hard silver bugs think that a paper market collapse is inevitable but in very different scenarios/for different reasons.

      Has there been any discussion on FOFOA about how and why the paper market will collapse in detail (and if so can you point me to where the discussion took place)?

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  6. I'm not very good at referencing particular FOFOA posts, but the reason the paper market will collapse is simple, too many claims on the same gold. The confidence in such a collapse comes from looking at history.

    When currency was convertible to gold, time after time, claims on gold were inflated to the point where confidence in those claims deteriorated ending in a run. In the run large portions of the claims are rendered worthless.

    Today we have the same set up with bullion banking, we just wait for that run that will render a large portion of paper claims worthless.

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  7. FOA:

    Dollar currency and paper Gold? ----- both have been inflated ----- both will fail!---Take a brief moment to look at the dollar as a fiat currency only and forget anything about it's
    past or present connection to gold. Consider the dollar as being backed by the actual goods it's economy (the USA) produces and how that backing is governed by a stable price for those goods.

    In other words let's assume we will allow the USA to print all the currency it wants as long as that amount matches the ability of our economic structure to deliver goods against those dollars.

    Further, let's say the gauge of whether this is working correctly is read in the price of those goods (in dollars) being stable.

    As long as our (USA) society could make goods and deliver then for dollars in a stable price range, it should be fair to say that any and all of us would always own, retain, save and use dollars as a reasonable paper currency. If over any ten or twenty year period, the fiat prices for delivered goods stayed the same, in the minds of everyone (myself included) digital paper dollars would indeed be as good as owning things themselves.

    Do you see the thought thrust of the above? By a wide margin, humans want to equate holding
    dollars as the same as holding goods. Like this fictional account:

    ### I went to a Ford dealer the other day to see about getting a new SUV explorer.
    The dealer I went to had a ten year supply of them on hand (he must have been a big
    dealer - smile) and said they went for $22,000 each. He said that he had so many of
    them that their price would not vary much at all and they could even fall. Further, he
    said that I could take my time,,,,,, no rush,,,, come in any time and he was sure the
    supply would be there. Well,,,,,, I had the $22K in the bank and my old SUV was still
    working fairly well,,,,,,, so I didn't buy. I just went home, safe in the assumption that
    my $22K in the bank was as good as a new Ford SUV. In fact,,,, as the weeks went buy
    I even told my friends I had a "paper SUV" in the bank! All I had to do was "call for
    delivery"! ###

    You see where this is going now, don't you? Over time, America has printed and created various forms of dollars and dollar substitutes while distributing then at home and the world over. The driving force behind this dynamic is in ours and the world's perception that these dollars are paper versions of "real things". This is the bedrock of a fiat currency; that the economic structure of the nation that prints said money can deliver goods against that currency and do it at a stable price.

    Our dollar currency system has drifted far, far away from this expectation. Early on, years ago as we began printing more money than the goods we produced could be delivered (sell) against,
    prices began to rise (price inflation). But we adapted by expecting interest returns on these dollar holdings to make up the price rises. We accepted that if in general, American price inflation was running at say 5% then an 8% return would somewhat cover it. Over time and throughout our up and down price inflation cycles, we progressed further and further into accepting some form of ever increasing extra return on dollar savings as the balancing factor. Today, whether it's the stock
    market, bonds or whatever, dollar holders rely more and more on trading profits and derivatives to cover the added risk.

    ReplyDelete
  8. So what is wrong with this? Well,,,, our private dollar accounts have been covered because their numbers are increasing. At least if you have done your homework and were a good trader! Truly, there are ever increasing dollars in the world and their increase is helping to reassure dollar holders that their money is still equal to "real things". But, in reality it's the ability of the finite US
    system to deliver real goods against these ever increasing paper demands for delivery that is in question.

    Over time, we have come to think of all of our various dollar substitutes as being easily converted into real things by just calling for delivery. In other words, spending them on something.

    Again:

    This "spending" is the process directly before us that will default the dollar through inflation. This is how a contract system, like our dollar currency begins to fail. Everyone, through trading or just plain old interest on CDs has built up an ever larger holding of "paper delivery notices" in the form of dollar credits. Like my example above, these "paper SUVs" have been inflated even as the ability to supply real goods produced in the US, has stayed the same. In fact, "THE PHYSICAL
    GOODS" that must be legally delivered against these "dollar legal tender credits" cannot come
    anywhere close to covering the (fiat) contracts written!

    In the days ahead, we will see it as price inflation as Physical goods cannot be delivered against all the outstanding currency calls in the consumer marketplace. In many cases, it's the holders of these "paper SUV" contracts (what we call dollars) that will see their savings value tumble as the underlying physical goods soars in price.

    So, this is the classical price inflation that results after a long expansion of a fiat currency. From the beginning the currency is seen as a contract for the delivery of goods sometime in the future.

    We save it (fiat) instead of spending it because it's convent and logical. Yet, the more that people, and in general the international marketplace relies on this method of holding their goods the more the officials expand the contracts (fiat currency) as a method of creating fictional wealth. This expanded currency is used to buy services, goods and commodities, even oil! But it's timeline has
    a beginning and an end. Today, we are at the dollar's end!

    More:

    So do we see any comparison to "paper gold" in the above? You bet we do! Like hand in glove
    "gold the money" travels the exact same route "dollars the fiat" does in our modern banking
    system.

    For every person that thinks their "paper dollar" holdings can be spent for goods and receive those goods (call for delivery) at near today's price,,,,,,,,,, there are almost as many "paper gold holders" that think the world system will "deliver gold" in the price and amounts they have contracted for. Folks,,,,,, in today's world that's a lot of gold owners!

    Yet, the holders of "paper gold" will fair little better than the holders of "paper dollars" in the coming super inflation. Both will lag the price rises of physical goods and physical gold as the inability of the finite supply system to deliver comes into play. One will end up in grocery markets trying to spend those paper dollar contracts and beat rising prices, while the other ends up in court, waiting for the delivery of physical gold that simply does not exist.

    ReplyDelete
  9. Sorry about the formatting. I have a pdf of Another and FOA posts full of useful bookmarks and highlighted text, I will try upload it later so others can use it.

    ReplyDelete
  10. "I worry that many are sucked into the Freegold concept based on the lottery winning like appeal of a Gold revaluation to the heights expected by some Freegold supporters"

    I can only speak for myself here. I came across FOFOA's blog about a year and a half a go. Read through it all very quickly, didn't grasp everything that was talked about, and was largely skeptical of claims. At the time I was on board with the hard money guys at mises.org regarding the gold standard, but then I made my way to the USA gold forum and found this discussion about 6 months ago:

    http://www.usagold.com/halldiscussion.html

    It was a level of discussion I had never seen anywhere and it peaked my interest. Since then I have read and re-read through the USAGold archives as well as FOFOA's posts. In those posts are the most plausible explanations I have seen as to why the dollar never hyper-inflated as it left the gold standard, why the dollar was accepted as a reserve currency, why gold went down for so many years, why we will not and should not go back to a gold standard, and why FreeGold might emerge as the dollar dies.

    ReplyDelete
    Replies
    1. Thanks for the links and quotes. That Hall discussion is a long piece. I do intend on reading more of the freegold back story as I find time to do so.

      One thing I see over and over is people saying the paper market collapse because everyone will try and call in their Gold/Silver, but in many instances the holders of paper PMs are not interested in the metal, but simply to make a fiat profit by trading the trend or a technical setup.

      Delete
  11. BB that trading for fiat profit mindset is covered a lot in the old FOA posts. Also not everyone has to demand physical to cause a collapse.

    Just as during the era of the gold standard, if a bank had 10 times the number of claims on gold than physical gold in its vaults, all it took was 10% of the people to run on the bank to render the other claims worthless.

    Likewise in 1971, not every dollar abroad was coming back to the US demanding delivery, but enough to cause them to suspend gold convertibility and end the gold standard.

    ReplyDelete
  12. The very fact they still allow bankers to issue FIAT under freegold makes it sound like a banker shill theory although they deny it. The key to our current crisis is not being unable to save in gold. The key is that our monetary system is controlled by crooks aka bankers and government. If we don't strip that control away from them, and freegold certainly does not, then we don't have a real solution.

    ReplyDelete
    Replies
    1. I agree central bankers/governments would retain control, this probably does someway to supporting the possibility of Freegold happening.

      Are we talking a solution we want or a likely solution...? Because I would like to see control to issue unlimited quantities of money removed from bankers/governments, but I don't think that's a likely outcome.

      Delete
    2. @anon, under Freegold, fiat is still issued - required in fact - but is not relied upon to store value. Having gold as a store of value gives savers the ability to preserve their purchasing power at their discretion and under that scenario, Gold/Market/Choice action then prices currencies directly and keeps the issuers in check but doesn't prevent the system from seizing up due to non-lubrication. But yes, it's not for your benefit - it's so the bastards stay in control (sans collapse). Rgds, Warren

      Delete
    3. Central planners do not want people to get anywhere close to gold so I don't see them going for a gold-based system willingly. The most likely scenario is US$ being gradually shunned during the international trade until a threshold is reached and then a quick US$ crash ensues. USA may very well break up b/c of it. After that a gold standard of some kind will emerge as the only alternative

      Delete
  13. @warren james

    The less people are aware of gold the easier it is for the "bastards" to abuse the FIAT abuse so I don't see how they can deploy a freegold system willingly. As long as they are in charge they will always try to divert people's attention away from gold so that system will evolve into a system very much like what we have today.

    You are right in saying "it's not for your benefit - it's so the bastards stay in control", which puzzles why these FOFOA people cheer for such system. If they are bankers then at least I know where they are coming from but some of them are apparently not.

    ReplyDelete
  14. @anon, agreed. For the record, the central banks must find the discussions amusing - in my view they do not care about fiat or gold since they can print vast amounts of the former and buy vast amounts of the latter). What they DO care about is you working like a serf to support their free & easy lifestyle (i.e. Global productivity) my own (primitive) views on this obscene wealth pump are well described here.

    So, no argument from me - but I will be quick to point out that the Freegold folk are simply observers who have taken the time to articulate what they see ... ascribing any other other motive would just be a lack of study on the topic. For what it's worth, FOFOA's tens of thousands of words also explain why the collapse has already occurred and what you see today is a way of containing the mess (yes, that involves keeping the common folk away from gold), Gold is the super-container which will contain the implosion. I endorse the 'hall of fame' link already mentioned above - if you can digest this text then you will understand that if you don't like the current monetary system then you certainly won't like the next.

    ReplyDelete
  15. @warren

    I have not read FOFOA for a while so I don't know if he has added anything new to the theory. In the past he advocated the freegold as some sort of advanced monetary system that will lead to "meritocracy" (his own words) among other benefits, which I and many others never bought into. Perhaps he has tuned it down a little. Don't know. Your "observer" concept is more to the point since the general public are brain-washed enough that they could accept anything thrown at them.

    ReplyDelete
  16. FreeGold might not be your ideal but it would lead to more of a meritocracy in international trade. No longer would a country be able to run a decades long trade deficit as a result of it having the world reserve currency.

    ReplyDelete
  17. Freegold has been thoroughly debunked at popular gold websites such as TFMetalReport so there's a good balance of opinions on the net.

    Judging the viability of a monetary system is simple. All you need is looking at who is controlling the money supply. If it's producers like what a classical hard money system does then it will be fine. If it's debtors issuing FIAT then it's bound to flop no matter what beautiful promises are tossed out.

    This idea of saving in gold could keep FIAT issuers in check is wishful thinking at best with all due respect. Such mechanism has been there throughout the history of FIAT. People could always throw the paper away for gold / silver should they lose faith in FIAT, and yet did it ever prevent FIAT issuers from abusing it? Never. Zip. Zero. Nil. Not for once in the thousands cases of FIAT in history! Now we are told this time freegold will be different?! Yeeeeeah. Riiiiight...

    If you look at how freegold is advertised you could see it's similar to how a welfare system is sold to the public. For example, it states that it'd just inflate the FIAT just 2% or so and then it'd be fine. That reminds me of how Social Security was introduced with a claim that it'd just tax you a little extra (3%) then it'd be fine. Now we are taxed a lot higher on social security and it's still a budget blackhole. Freegold would fare as poorly should it ever be deployed as it's run by the same crooks that could not manage the welfare system right.

    ReplyDelete
    Replies
    1. Rui, sorry if you noticed your post disappear, the blogger spam filter is not configurable and picky on what it accepts.

      I would be interested in the discussion on TF Metals Report if you know where it occurred or is the conversation taking place across multiple threads/post?

      Freegold would have flaws, but reality is that there's no perfect solution.

      Delete
    2. Baron

      It was unfortunately discussed across multiple posts so it's hard to track now. It didn't start as a topic dedicated to freegold. It's just someone mentioning it and then others pitched in so it's scattered around. We covered the topics such as the need to separate medium of exchange from store of value, debtors and savers, deflation and so on, and pretty much debunked the major claims freegold made on those subjects. If you are interested then try some of the posts I made such as:
      http://www.tfmetalsreport.com/comment/235388#comment-235388
      http://www.tfmetalsreport.com/comment/234706#comment-234706
      http://www.tfmetalsreport.com/comment/234717#comment-234717

      Delete
  18. A couple of comments that were caught in the spam filter have been released (I'm not moderating content). I apologise on behalf of Google for their poor spam control system!

    ReplyDelete
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  40. eToro is the #1 forex broker for newbie and professional traders.

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