55,000 dollars

For years, Freegolders have maintained "gold will reach 55,000 dollars in todays dollars".

What has not been said is "gold will reach 55,000 dollars".

Taking the CRB index as a (somewhat imperfect, but sufficient for our purposes here) proxy for the representation of what "todays dollar" is valued at — how much "real stuff" it can buy in the real (non-financial) economy — on any given day in the course of the last three years, the data charts like this:

What's my cost of living today?

i.e.: on this day three years ago, the dollar was valued at 1/330^th or so of a CRB basket. Today we can see that the dollar is valued at 1/280^th or so of a CRB basket.

Taking this view, of the CRB basket being a baseline of "real value" that we can measure things by to get an objective real world valuation of them, we can spin our view of the world upside down and see what the value of "todays dollar" was on each day of the last three years:

What's my dollar worth today?

Many people see the prices of "things" fluctuating in terms of a stable dollar that prices them all. We, however, can choose to see, as here, that after all it is really the value of a dollar that fluctuates — this is merely a matter of ones chosen perspective.

We can also look at the real world value of "todays gold" on each of those days:

What's my gold worth today?

What this shows us is that, yes, gold not only fluctuates in terms of its dollar price, but also in terms of its real world value… its purchasing power in terms of "other stuff" (rather than dollars). But, I hope you will agree with my assessment, the fluctuation is not wild over the years. In fact, if we happen to compare gold's purchasing power today with its purchasing power three years ago… it turns out to be broadly the same. You may at this point decide to go back and review the "What's my dollar worth today?" chart, above. If so, perhaps you were surprised, or maybe not, to realise that it turns out the same is not true for the dollar — its purchasing power today is such that it will buy more than it would three years ago… either in terms of gold or in terms of "stuff". Perhaps this is no surprise though, given, as we just established, gold's purchasing power has been essentially stable over the period… even as the world and his wife has watched the price of gold tumble.

Go dollar! No wonder "nobody wants gold", eh? But, getting back to the point of this post for now, rather than dwell on the fact that there has been deflation, despite all of Ben Bernanke's best efforts at making sure IT doesn't happen here…

What about "gold will reach 55,000 dollars in todays dollars"? Well, I think we can all agree that, according to the publicly available data as charted above, three years ago $1 would have bought roughly the same amount of gold as it would today. And three years ago that same amount of gold would have roughly the same amount of purchasing power in terms of CRB baskets that it would today. If physical gold trading were to break free of derivatives, to go through a reset in its perceived value due to derivatives failing to deliver physical gold to anyone and everyone who demands it, today… to the equivalent purchasing power of "$55,000 just before Christmas in 2011"… the third chart above, plotted on Monday when the closing data was in, may have to look quite a lot more akin to something like… this?

Happy Holidays?
Depends how you're positioned right now.

… The only problem being, the data in this chart is from the market for gold derivatives. The value of which will be going the opposite way. Oops!

Perhaps this helps clarify for some that Freegolders are not trying to put a specific future dollar price on physical gold, but rather attempting to convey the magnitude of the revaluation, in real terms, that gold must go through as it breaks free of derivative trading.

When the predominantly-derivative gold market of today will fail to deliver as promised, who knows? We may indeed be all long dead… or, just perhaps, it may be sooner than that.

Hard Money Socialism

I'm periodically quizzed about 'Hard Money Socialism'.

1) "What is a 'Hard Money Socialist'?"

Someone who wants to save in currency, and to have the real value of those savings protected by society. (Socialising their risk.)

2) "Freegolders advocate saving in gold. Doesn't that make them 'Hard Money Socialists'?"

You are free to save in any way you choose. Freegolders do not believe gold is money. Does this answer your question?


^{We apologise for this interruption to your scheduled viewing.
Normal service will now be resumed.}

The problem is persistent imbalance of trade

Isn't it simple?

There is persistent trade imbalance, by design, today.

If the trade surplus countries choose not to perpetuate this imbalance by merely accumulating ever more credits that they will not redeem for useful goods and services, because after all they are persistently running trade surpluses, then they can choose to instead simply redeem the credits for something useless but real today instead. This act would immediately address the balance of payments issue, directly through the current account. It would also give the trade deficit countries pause for thought, if they have to go back to parting with something real.

So why aren't any of the trade surplus countries doing just this today? That is the real question, and I suspect you would find the answer has little to do with the stock of money.


^{What? Me no more free stuff?
What? Me fewer jobs?}

Melancholia

"Shit!"? Or "get off the pot!"?

The suspense is painful… like being trapped in some kind of interminable Vulcan Death Grip, or something…

• Western paper traders won't bid up the paper (spot unallocated, GLD shares, futures, forwards, options, XAUUSD longs, swaps, leases, whatever) gold $price, while their technical analysis tells them gold's in a bear market and headed for the S bend (or even just circling the bowl).
• Others buy physical, and they much prefer to do that on price weakness… but if the strength seems sustained then they seem to buy a little anyway, perhaps grudgingly, but certainly less so (at least by weight, if not $cost).
• The mines can't feed more physical through the system reserves stream, while the $price is too weak and their costs to bring to market haven't fallen at least as hard.

So we either need to see:

• something to make the paper traders think "gold" has escaped from the bear, so that (a) the Eastern physical buyers drain less weight from the system reserves, and (b) the miners can increase the physical coming through the market (i.e.: to see the quiet run on the fractionally-reserved gold banking system's reserves stopped, even reversed).

or

• the physical system reserves will finally fall below a critical level, and the system will break when the next call comes for allocation or delivery. 

Ultimately, either the price "goes up enough from here" to keep the wheels on the present system, meaning the physical bullion and paper derivative prices of gold continue trading in lock step because the markets perceive them as fungible, or the wheels fall off because the physical reserves, underpinning confidence in the fungibility across all these various products, were stripped out at bargain basement prices by unsophisticated-but-savvy value seekers. Leaving, quite obviously to all, only the prospect of cash settlement for all of these paper derivative products… yes, including fully-paid-up spot unallocated credits in the bullion bankers' books and XAUwhatever longs in the, somewhat huge, forex market.

Will the market then proceed to bid up the price of these paper derivative products, in lock step with the price of physical bullion? Or are they more likely to avoid the foul-smelling paper that they find trying to make its way back through the S bend, while instead embracing the real deal?

<sup>Hey! … Freegold team sucks!!

… yeah, whatever…</sup>

New Gold Dream

Gold is not "financial capital", because it is not money but a tradable asset.

It is also not a "capital good", because it is not significantly part of the means of production.

It is, however, a durable physical wealth asset that can be readily traded for financial capital, which can be used to procure capital goods (or consumption items… or gold!).

If gold were routinely demanded to settle current account imbalances, and was traded free of "fiat gold" (a creditised financial anacronism, left over after the bygone international financial system of yesteryear) and were priced accordingly, this 'Freegold' would significantly reduce the necessity to attract capital account surpluses (for trade deficit countries to go ever-deeper into debt to trade surplus countries).

Balance in global trade would be restored.


^{Happy happy happy!}

Occupy This!

             The revolution begins within, comrade!

Nobody is forced to use Wall Street's (The City's, etc, etc) products and services.

You don't have to keep a fat stack of "cash in the bank", that those evil Banksters can gamble with.

You don't need to put on your credit cards a load of pointless stuff you don't need and can't afford.

Everyone is not required to go to university and amass huge, life-sucking debts in the process.

It is not necessary for you to take on a massive mortgage that you will perhaps never be able to repay.

All of these things are choices we all have to make, as individuals. They are not mandatory checkboxes in the margin of your life story, which some corporate or public [busy] body demands that you must fill in, on pain of death, or imprisonment, or y'know, maybe just a wedgie… a Chinese burn… or a stern and disapproving look?

What is the Occupy movement today really all about? Is it about relieving Joe & Josephine Average of the requirement to make these kind of life choices and deal with the consequences that may ensue?

An example…

Sick of the banks getting bailed out when they make a mistake? Great, me too! So, let's stop the bank bail-outs.

But, wait a minute… how about those bail-ins, with innocent bank depositors like you'n'me losing our money? So unfair! Yes, that kind of thing is much more fun while it's happening to someone else (but especially those evil bankers of course).

Maybe your bank made a mistake with its bets… but that's not your problem — it's theirs! You didn't place any bet on anything, you didn't make any bad choices that went wrong for you. Right? ;-)

^{Be the change you want to see. Throw yourself down the well. Or… just take your head out of your ass.}

OMG teh government is coming to take our money!!

I disagree with those claiming "evil government will take our bank deposits!!".

I think instead there simply isn't enough money in the system to cover the amount of assets (bank liabilities… "deposits") that will at some point get called. The banks will not receive a government bail-out again, but savers (those with deposit balances above the insured limit) getting bailed-in.

That isn't the government doing anything -- it is the government not doing something! IMO ol' Marty (among others) has scrambled his noodle in his bid to blame government for every problem that comes along.

The government will this time simply not be available when the call comes to provide offseting assets (UST bonds) to the Central Bank, in order to enable the creation of that lovely moar money for the banks… so they can turn around and make good on all their promises to "depositors".

This is credibility deflation. Of over-leveraged retail banks. Savers have given the banks too much credit.

It is to say "the link between retail banks and the nation State will be severed". (smile)



^{Bank deposit credit balances are not "money".
This is analogous to "spot gold" credits not being gold.}

No regrets?

^{Time will tell}

T'ai shang hsia

Great rising and falling—       People only know it exists. Next they see and praise. Soon they fear. Finally they despise. Without fundamental trust There is no trust at all. Be careful in valuing words. When the work is done,       Everyone says We just acted naturally.

^{Future. Present. Option. Mandatory. Promise. Broken.}

Why I struggle with Freefiat™

The trouble with any fiat currency system is, by definition, the holders of credits in the system are owed something later by someone — which, unavoidably, implies somewhere in the system a corresponding debt must be owed. If all will primarily hoard currency credits as savings, someone or another must be in an awful lot of debt.


^{Who will owe us?}

It just doesn't really sound much different to today?

magic [maj-ik]

noun

1. the art of producing illusions as entertainment by the use of sleight of hand, deceptive devices, etc.; legerdemain; conjuring: to pull a rabbit out of a hat by magic.
2. the art of producing a desired effect or result through the use of incantation or various other techniques that presumably assure human control of supernatural agencies or the forces of nature. Compare contagious magic, imitative magic, sympathetic magic.
3. the use of this art: Magic, it was believed, could enable the magicians to spend money that someone else also believed they held at the same time.
4. the effects produced: the illusion of great wealth.
5. power or influence exerted through this art: global dictatorship.

^{Deficits don't matter!}

The emancipation of GOLD

In life, all things have an inverse. Good is a derivative of bad; beautiful of ugly; hard of soft; light of dark.

Without the presence of a competing measure, a relative benchmark, it is impossible to properly appreciate anything.

The current quoted gold price is a function of supply and demand in the market for gold-denominated credit. Today you can buy gold-the-reserve-asset-in-strictly-limited-supply, for approximately the same $price demand places on its derivative… infinitely-available gold-denominated-credit from the nice people of the COMEX and LBMA.

The anomaly is a lack of distinction between the asset and its credit derivative - they are treated as equivalents by all but a few market participants. Gold owed is considered equivalent to gold owned.

Debt is the same as equity?

As the underlying asset reserve base is progressively drained from the current pricing system, this perception of equivalency cannot continue indefinitely. At the point of divergence, physical gold will finally be free to find its own distinct equilibrium price in the market… with gold-denominated credit also free to find its own. Beyond this point of divergence, it may become apparent to all that derivatives cannot really perform as hoped. Demand for them may wane. Prices in the two markets may cease to be approximately equivalent.

Physical gold may return to being properly appreciated as the prime wealth reserve asset that it always was. Gold-denominated credit may no longer be worth the paper it's written on.


^{Are you sitting comfortably?}

The future of gold?

Nobody can tell you what gold will be worth; it has no "intrinsic value".

Its value is arbitrary, floating on the whims of collective human emotion.

Nobody can tell you, today, with any degree of certainty, more than... all that glitters is not gold.


^{How's your weathervane?}

I can haz conspiracy?

Trying to control the world?
I see you won't succeed.

T'ien hsia shen ch'i
The world is a spiritual vessel
And cannot be controlled.

Those who control, fail.
Those who grasp, lose.

Some go forth, some are led,
Some weep, some blow flutes,
Some become strong, some superfluous,
Some oppress, some are destroyed.

Therefore the Sage
   Casts off extremes,
   Casts off excess,
   Casts off extravagance.


^{OMG!! The evil, all-powerful elitez, and their liberty-crushing Jackboots!!}

So … don't enable them?
Nobody has to give them what they want.

Just say no to temptation. It's probably not good for you.
Think.

The inevitability of change

With every unit of fiat currency, by its very nature, being an "IOU"… The Rich (at this point, anyone with a positive and non-contracting net worth) holding ever-growing piles, necessitates everyone else to increasingly be in debt to them.

It is inevitable that we must proceed, under the $IMFS paradigm, from "the 50%"… to "the 10%"… to "the 1%"… to "the 0.001%"… to…

It seems to me like "the 99.99%" have already decided it won't get as far as that though?

So if the 1% have a brain — and one would hope they must have, if they were able to take everything from everyone else without them even realising until quite recently… what would it say about the rest of us if even they don't! — they will have already been working on an alternative game we can all start to play together shortly. (Perhaps even for quite a long time? ;) )

Would anything else make sense at this point?

Cyprus Street

^{I know — let's set ourselves up as an offshore banking centre!} Good luck.

What's in your head?

Recognise beauty and ugliness is born.
Recognise good and evil is born.

Is and isn't produce each other.

Hard depends on easy,
Long is tested by short,
High is determined by low,
Sound is harmonised by voice,
After is followed by before.

Therefore the Sage is devoted to non-action,
Moves without teaching,
Creates ten thousand things without instruction,
Lives but does not own,
Acts but does not presume,
Accomplishes without taking credit.

When no credit is taken,
Accomplishment endures.

Ku yu wu ksiang sheng - Lao Tzu

Timeline : Geopolitics in motion

(Click for a larger image)

All this while the accumulated leverage pumped into the "gold" market over the 80s and 90s, in structural support of the dollar until the euro was launched, is still present.

With regard to the price of gold, the Central Banks are not about to just allow the market to collapse the value of their own primary reserve asset. Unlike Western traders, the Central Banks will not be content to buy paper in place of gold. In my opinion.

What real world value will gold ultimately have,
once it is free of this leverage?

1. Nixon shock (Wikipedia)
2. Germans evidence their swap/leasing programs (Bundesbank)
3. The euro was launched on 1 January 1999 (ECB)
4. Washington Agreement on gold (Wikipedia)
5. Gold AM fix prices & CPI-AllUrban courtesy of
   FRED at St Louis Fed

The long and the short of it

(Click for a larger image)

While the world still wants long bonds, it's all good.

Put your money where my mouth is

The one economic zone in the world today where you are still, relatively, safe to hold the currency, is the Eurozone. It presents an oasis of monetary dominance, in an otherwise-endless world of blossoming fiscal dominance.

Politicians will always prioritise short term expediency over the soundness, longer term, of the monetary system.


^{#CurrencyWars? Your cash is expendable.}

Incomplete models produce inaccurate results

Armstrong: Markets decline BECAUSE everyone who has EVER thought about buying has bought. There is no more reservoir of potential buyers to pick up the ball and take to the goal post. Consequently, the market falls because it has lost the momentum to sustain the rally.

With every Central Bank in the world today having a remit for price stability, and with every aspect of the global economy underwritten by the free-flow of cheap and abundant fossil fuel, Martin appears to be overlooking (at the very least) two premises that are apparently not in his model for some reason?

• The reservoir of potential buyers to pick up the ball cannot and will not dry up, if and while there is an environment consisting of (1) a fiat currency system and (2) a Central Bank with an overriding political will to achieve some specific goal (e.g.: act to counteract price inflation or deflation — AKA "price stability"). Strangely enough, given it would appear to be overlooked by just about every analyst, today presents just such an environment. This is not an insignificant detail in modelling the future of finance, IMO. It seems to be accepted wisdom that inflation was never willingly tolerated by any Central Bank and their intolerance was expressed through the market for gold, which then had regressive effect in other markets. Deflation is no less intolerable to a Central Bank today.
• While the world remains thirsty for energy commodities, beyond the capacity to consume of the energy exporting nations, there is still always at least one large potential buyer, luxuriating in the reservoir and ready to pick up the ball any time it gets tossed their way.

There is, however, a qualitative difference among the residents of the reservoir of potential buyers. Many private Western traders are entirely happy to speculate in the gold market using any of the many "derivatives of physical gold" (forward contracts, options, spreadbets, ETFs, silver, miner shares, and other "goldish investments" too numerous to list). Others entities are meanwhile content just to work with the real thing and the real thing only. There may be trouble ahead…

Come in, the water is lovely! Just make sure you have your swim shorts on and firmly tied at the waist — you never know, the tide may go out.


^{Such progress! All financed by mountainous, unpayable debt, now due.
No default possible. No deflation tolerated.}
It's a pickle alright!

Suspense

^{Bonne journée}

Credible Threats

If the cost to government of servicing its debts is lower than the tax income extracted from the private sector, they can deleverage their debts, given sufficient time. (Assuming the government is able to continue issuing the required debt at sufficiently low rates of interest.)

In the days of yore, when there was a gold standard of some sort, this would be a protracted and painful process to pull off successfully. But it was done.

Fortunately, today, the government doesn't have to rely on the free market to supply the necessary credit (as in the good old days). It can issue credit to itself, in effectively unlimited quantities (but in reality limited by the credulity of the market). In so doing, it is able to suppress the interest rate that it must pay (and also receives the interest paid back as income - so the true cost of debt service is effectively 0%), ensuring that it is able to get the credit on economic terms.

The only way the system of today cannot be deleveraged in this way, more rapidly and painlessly than in past examples, is if the free market significantly rejects the governments currency in payment for goods/services, requiring the government to issue ever-larger quantities of debt to itself in order to cover its expenditures on goods/services, outpacing its ability to service the debts from the tax income it can expect to receive from its citizens over the requisite timeframe. The holders of existing debt instruments may also choose to liquidate and flood the market with these assets, outrunning the governments ability and/or willingness to absorb it all - exceeding their ability to contain the interest rate required in the market and thereby blowing their scheme to deleverage out of the water. Oh my!



^{It could never happen here!}

Now and then

Now

... and...

Then

So how do these balance sheets compare, fourteen long years on since the birth of the euro? I thought it may be interesting to compare the numbers - so below is the list of each section of the balance sheets, with an indication of the magnitude of the change across the period. I figured someone might find it interesting, so why not share...

Assets

1. x4.40 - Gold and gold receivables
2. x1.08 - Claims on non-euro area residents denominated in foreign currency
3. x5.94 - Claims on euro area residents denominated in foreign currency
4. x2.50 - Claims on non-euro area residents denominated in euro
5. x7.37 - Lending to financial sector counterparties of euro area (5 "then", 5+6 "now")
6. x27.87 - Securities of euro area residents denominated in euro
7. x0.50 - General government debt denominated in euro
8. x3.47 - Other assets

Liabilities

1. x2.62 - Banknotes in circulation
2. x8.51 - Liabilities to euro area financial counterparties denominated in euro
3. x∞ - Debt certificates issued ("now" €0)
4. x5.05 - Liabilities to other euro area residents denominated in euro
5. x16.04 - Liabilities to non-euro area residents denominated in euro
6. x4.65 - Liabilities to euro area residents denominated in foreign currency
7. x1.66 - Liabilities to non-euro area residents denominated in foreign currency
8. x9.53 - Counterpart of special drawing rights allocated by the IMF
9. x3.72 - Other liabilities
10. x6.83 - Revaluation accounts (unrealised MTM asset gains/losses)
11. x1.62 - Capital and reserves

Of note

• The balance sheet bottom line now is x4.27 what it was back then.
• Gold and gold receivables formed 15% of the balance sheet total both then and now.
• The leverage of total assets against gold and gold receivables, "then" was x6.88, "now" is x6.68.
• Between the revaluation accounts plus capital and reserves, the total equity in the Eurosystem balance sheet is now €492,988,000,000 or so. So I figure they could handle quite a lot of stress before they would have to worry about becoming insolvent.

Meanwhile the Fed's balance sheet is currently leveraged x55 or so (but if they brought the Treasury's gold fully onto the balance sheet at floating market valuation, MTM like the ECB does, they would find themselves with a very similar leverage ratio). It could be time to reconsider the way the Fed's accounting is done?

Tell me what this says to you?

All charts courtesy of FED FRED - click to get a larger view...

1984-> 3-month Tbill yield

1984-> Monetary Base

1984-> MZM velocity

1984-> US GDP

^{I love you Fred!}

The price of real value

^{(Click image for a larger view)}
Shown above is a chart demonstrating a fairly tight correlation between the US$ price of Brent crude oil and gold, over the last three years.

Crude oil is the major input to all economic activity today — powering equipment for the production of foodstuffs; anything manufactured with machinery and/or containing plastics; anything transported long distance from where it is produced to market; any activity where the staff producing it have to travel to get to their place of work; etc. Nothing is more significant to the cost-base of everything traded in the world today. Of all the benchmark markets for the trade of crude oil, Brent crude is the most representative of real world trading, hence I have used this rather than $WTI for the chart.

If there were a tight correlation between Brent crude and the US$ (i.e.: there was price stability in US$ terms) then the line on the chart would be broadly horizontal. But what we can see is, clearly, that the prices of both Brent crude oil and gold, in US$ terms, are generally rising and doing so at a fairly similar rate. Or to look at that another way, that the value of US$ is steadily falling against both of these benchmarks of real world trading. We could also have tried charting the Brent crude price in another currency of your choice, but the picture would have been pretty much the same — because all currencies today are traded against each other and move broadly, like a herd, in the same direction: down.

To further illustrate this point, below is another chart, this time showing the ratio of GOLD:BRENT, which as we can see (taking into account the small range of values on the Y-axis) is broadly stable. The blue line is a 200 day exponential moving average of the ratio, which we can clearly see is meandering around the 15 level, marked by the red horizontal line.

(Click image for a larger view)

To summarise what the chart is saying: over time one troy ounce of gold is traded at the same value as approximately fifteen barrels of crude oil.

Real world trade is taking place denominated by broadly stable exchanges of goods in terms of real world value, rather than in stable US$ pricing. This is how trade has really taken place for millennia.

People mainly save in currency today, thinking they are preserving their purchasing power for the future. But the purchasing power of currency is, demonstrably, anything but preserved over significant periods of time. If you have savings to preserve the purchasing power of over long periods, rather than current balances that you are setting aside in readiness to make payment on your short term commitments ... please consider storing those savings in something other than currency. Spend the cash on a real world asset of enduring value, then forget about it until such time as you may need to convert it back into cash in the future. This is how to preserve the value of your savings for the long term, in real terms.

^{You may have fewer choices later.}

You would prefer a longer term perspective? Sure - who wouldn't! ;-)

• Wikipedia: Crude oil prices since 1861
  ^{(Note: log scale.)}
• MacroTrends: Gold to Oil ratio historical chart
  ^{(Note: volatile during wars and since 1971.)}

Monetary Base and $PoG

^{(Click for a larger image)}
Operation Twist didn't expand the monetary base — unlike TARP, QE1, QE2, QE3 and QE4. Without base expansion, we see deflation.

• ^{http://www.bullionvault.com/gold-price-chart.do}
• ^{http://research.stlouisfed.org/fred2/graph/?id=AMBNS}
• ^{http://en.wikipedia.org/wiki/History_of_Federal_Open_Market_Committee_actions}

On ZH-scare "Buba gold repatriation to break CB paper gold system".

When I read the ZH article, it suggests to me that:

1) gold is being repatriated from France because Germany (being in the same currency union with France) will not need to pledge any gold held in custody at the BdF for foreign currency - it can get all the euros it will ever need at home or from the ECB.

2) No mention appears to be made of repatriating from London - so one assumes what is with them, around 13% of their total holdings, will remain in custody with the BoE, at least as long as Britain remains outside the Eurozone.

3) The article seems to make it clear that not ALL of the gold held in custody with the Fed will be repatriated. This suggests to me that they are happy with trusting the Fed as their custodian, but they do not feel it will be necessary to have so much available to pledge for USD liquidity in the future.

I think it is just a reassessment of what is likely to be useful to them in the future, then deciding if you don't need it to be in custody with someone else then why not just take delivery and remove all doubt anyone might occasionally express.


^{But perpetuating conspiracies is so much more of a crowd-pleaser.}

2013 - Happy New Year?

^{Bring it on}