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The intention of The
Golden Chalkboard is to feature a focused selection of data
or rare commentary that I think will be useful to enhance your
insights into the gold market and the monetary system.
These are a few posts from
my friend 'miner49er'. Wanting to give them my fullest attention
through highlights and notes, I've saved them here so that I,
or anyone else, might better consider them and rejoin the discussion.
But before you might turn away with the hasty assessment that
the material provided here is too lengthy for your time or attention,
I would nearly hazard to make an iron-clad (gold-clad(?)) guarantee
that it WILL prove to be worth your while.
No matter what your level of financial proficiency might currently be, rookie or pro, if you read to the end you WILL come away from this page with a much better understanding of the workings of the world in such a way that will likely lead to improvements in your life's interactions. Not lightly do I say this. --Randy
miner49er (03/05/02; 22:31:56MT - usagold.com msg#: 71156)
Thoughts on Money
http://www.federalreserve.gov/boarddocs/speeches/2001/200111302/
....The defining characteristic
of an exchange medium is its liquidity.
Certainly the defining characteristic of money also is its liquidity.
(If you can't spend it, it ain't money.) The two other chief properties
of money are those providing a working unit of account, and a
store of value. Yet these, so far as money is concerned, are inconsequential
unless the medium to which they attach is sufficiently liquid;
i.e., readily exchangeable across time and space.
Some say money makes the world go round. Actually in this respect,
commerce
makes the world go round. Money just greases the axis on which
it turns.
Something that mediates (facilitates, improves the efficiency
of) a transaction, must necessarily provide an acceptable, reliable,
and useful means to make account of the proceedings. It must also
be capable of storing, or suspending, the value of the items being
exchanged for the duration of the exchange -- as this provides
predictability and stability. If an entity can satisfy these requirements,
it then has the fundamental qualities to mediate exchange within
its universe. Does this make it a medium of exchange? No, not
at all. Not until the entity gains broad enough acceptance, and
use, among the participants in this realm, can it be thought of
as such.
The term "medium of exchange" is born of our traditional
schooling and concepts of money. Here the medium itself serves
both as that which intermediates (facilitates, improves the efficiency
of) a transaction, as well as being the focus and the stuff of
the exchange (dollars, beads, gold coins, etc.).
In times past it was essential to link the medium directly to
the exchange -- as electronic settlement conducted in a networked
world did not exist. The very properties that made the transaction
efficient were necessarily inherent in the medium. Parties accepting
the medium in exchange for some good or service would either recognize
the authorizing stamp on a piece of metal or paper as enforcing
its role as tender, or accept the medium's intrinsic commodity
value, thus recognizing subsequent acceptability (liquidity) when
they should turn around and exchange it themselves.
They had to ensure the stability
of these exchanges across
time and space since time
and space were often very long and very far apart. Since the value
of the medium was intrinsic or enforceably tokenized, the natural evolution
would be to think of these media
as not only something that held value throughout the life and
scope of their commercial use, but as something that could be kept enduringly as part of one's overall net worth.
The medium became not simply a "store of value" to stabilize
current commercial transactions, but a "store of wealth"
that was expected to hold its value indefinitely.
Today we live in a world of instantaneous settlement. We also access and process
untold amounts of information just as quickly. This allows commercial
opportunities to be identified, and business options exercised
with super-human reasoning and decision-making skills. Endless
possibilities are opened up to find and work "a good deal."
The margins may be small, but "sure," and incomprehensible
volumes of assets and liabilities can move around the world with
the click of a mouse. This vast and ever-increasing financial
and economic activity requires a transactable medium that not
only can handle the tasks, but even drive the evolution of its own usage
requirements as well. I
speak of more than just derived and leveraged finance. Conventional
business, on a global scale, requires unprecedented versatility
as well. Even as our stick-figure barter of loaves and fishes
demands a tool that smooths out the process, so the movement of
super-volumes of cargo across the globe, over and over and over
again, also requires something to go between buyers and sellers
that is up to the task.
We see the word vehicle used increasingly in the stead of exchange
medium. Why is this? In the rarefied world of nuance, ideas germinate
in mental petri dishes. Gametes of thought combine and begin a
zygotic progression of conceptual cell-division. What is planted
at the outset determines the course of development. So the fineness
of degree differentiating these two terms is not the accidental
result of the "twinkle in their father's eye," but a
deliberate usage to define the framework of the discussion going
forward.
In Mr. Greenspan's speech discussing the makings of international
currencies, he states, "there are efficiency gains to channeling
international transactions through a single currency, passing
demands and supplies for other currencies through trades involving
a so-called vehicle." The concept he is advancing is that
of the international currency finding value in its use as a vehicle
for exchange. The inefficiencies to the buyer of either maintaining
large stores of inventory in a grab bag of different currencies
in order to speed up exchanges, or uneconomically procuring the
necessary instruments on the spot, with its subsequent delays,
and unpredictability, are mitigated by using a globally recognized,
deep and liquid unit in place of the local currency to settle
the trade. This is also acceptable to the seller, as he is able
to easily re-exchange the vehicle units into his local currency,
or invest the vehicle units themselves, depending on his business
model.
The buyer converts to the international currency, not because of its lasting
wealth value, but because
of its usefulness in performing his transaction. The
super-liquid markets should no doubt be able to absorb his currency
conversion. Likewise the seller accepts the international currency,
not because it is so valuable as a wealth-store, but rather because
of its usefulness in pricing his goods in terms the markets understand
and work with.
What has happened here? The exchange of some good for some secondary
currency has taken place. An international currency, acting as
a vehicle, facilitated this potentially illiquid transaction by
transforming the objects of exchange into units of recognized,
accepted account.
The hallmark characteristic of a vehicle is that it carries things
from one place to another. That which has been carried from a
to b has been transferred. Transferring x from a to b in return
for y being transferred from b to a is an exchange. The vehicle
functions as a medium in this transaction, while not itself actually
being exchanged. A vehicle more appropriately therefore could
be called a "medium FOR exchange" as contrasted with
the term "medium OF exchange."
[Technically it is more accurate to note that the vehicle is involved
in exchange, but is not the focus of the transfer, but simply
the means by which the transfer is made possible. The concept
is still meaningful as presented however.]
The parties to this transaction really don't care what the medium
is, so long as it does the job. Whatever does the job most expeditiously will
end up being preferred for use.
That which involves the least hands-on involvement, or active
thought on the part of the exchangers will be chosen ("one-click"
buying) because it introduces the least friction and encumbrance,
which translates into additional costs -- tangible and intangible.
The purpose of this outline is to give a very simplified view
of the vehicle concept, not to imply that these types of structures are
necessarily simple in practice,
or always so one-dimensional. But as a conceptual zygote, the
notion of making a distinction between "medium of" and
"medium for" exchange is essential. The subtle shift
from linking lasting value directly to the medium, in the stead
of allowing it to find its value through its functionality is
what this exercise is about. Another excerpt from Mr. Greenspan's
speech:
"Because the
attractiveness of any vehicle currency grows as its liquidity
increases, an international currency has a tendency to become
a natural monopoly.
"If the underlying demand for one of two competing vehicle
currencies falters for a reason not clearly perceived to be transitory,
and its bid-ask spreads, accordingly, increase relative to its
competition, demand
will shift to that competitor.
But that shift, in turn, will widen
the bid-ask spread of the faltering competitor still more, inducing a further shift
of transactions to the alternative currency. This process ends
with the demise of the weaker currency as a competing vehicle
and the stronger of
the two becoming the sole surviving vehicle."
In the eyes of U.S. strategists,
the dollar maintains distinct advantages as a superior instrument
in which to conduct business in the 21st century economy. Looming
catastrophes in Japan, derivatives markets, and elsewhere certainly
give cause for serious re-examination of the structural aspects
of the U.S. currency, and its financial system, though. Undoubtedly
not a few good minds are steeped in this, and very much up to
speed. The complexity of the entire affair is beyond any one person's
comprehension. As such, I will not venture there. Nonetheless,
however, the big-picture appears to be evolving as mentioned above.
From this standpoint we may be able to discern a divergence between the
evolution of the U.S. dollar and the euro. Among other things, the euro seems to be establishing
a tie to freely-priced physical gold as is witnessed by their
regular marking of their gold stores to the current market price.
In doing this the euro seems to be seeking a more traditional
model for the currency. ECB thinking appears inclined to allowing
the currency to function somewhat enduringly as a store of wealth,
and not simply contemporaneously for its transactional use value.
[Randy's
note to Miner49er:
my good friend, I wonder if a reassessment of your take on the
meaning of these mark-to-market operations might be helpful. I
think you'll come to share my personal conclusion that, moreso
by this than through any other aspect -- through this ECB demonstration
of climbing rather than fixed gold prices -- it is indeed good
evidence that the currency is being progressively marketed to
its citizens as a pricing vehicle first and foremost. A modern
vehicle for modern man. Only in some distant future might it be
inclined to function interchangably as a traditional store of
wealth, and only then as the prices in the mark-to-market operations
become flat over time. My quick thought, only, for what it's worth.
But then again, credit goes to you as you did say 'somewhat',
and continued with the following...]
This by no means infers that the bank is taking on the liability
of convertibility. Of course not. Allowing their gold reserves
to rise or fall in value according to the market price does affect
however the basic principals of reserve banking.
Leaving aside all the esoteric issues about loaned gold, who has
what, who owes who, and so on, let's just look at what a significant
price rise would do to the banking dynamics involved. Should gold
rise from say $300 to $3000 an ounce, the ECB in marking reserves
accordingly has just expanded its lending capacity 10x without
mortgaging a single euro to future productivity. ECB member banks
are quickly found with the luxury of keeping conservative reserve
levels, writing down bad dollar debts owed them, and comfortably
paying down dollar debts owed, while most importantly having plenty
left to lend into a euro-zone economic expansion.
Should the U.S. maintain its current mark of something like $45,
[$42.22
per ounce] it must then
keep finding justification for further dollar expansion. As we
can see from the creative and albeit quite ingenious tactics employed
over the past few years, they are hard-pressed.
Can the U.S. also decide to change its policy and let its reserves
be valued at market prices? It will probably have to figure out
some way to do this in reality, in order to settle outstanding
obligations. But leaving this aside, the effects of such an action
would be quite different in the dollar world. Mountains of existing
debt, contracts and allerlei derivatives are structured on the current paradigm. This paradigm is based on a premise
that the U.S. maintain a perception that the dollar is "as
good as gold." This is the vestige of a centuries old fixed-gold policy in
economic thought. To suddenly
switch gears and revalue the asset to market prices, however,
would have volcanic repercussions. Even incremental price adjustments
would send tsunamic shockwaves throughout the financial markets.
Yet doing nothing in the face of an unprecedented gold-price increase
would make out the U.S. as not knowing what to do, with the likely
reaction: loss of confidence, and capital flight.
In some respects this seems to be the inevitable outcome of fiat
money. And no, I don't mean the paper-your-wall-with-it kind.
To mandate a ratio between gold and silver, as was done for centuries,
by sovereign decree; or to establish a fixed amount of gold or
silver to be the value of a currency unit, again by the declaration
of the governing authority, is this not the perfect definition
of "fiat money?" And so the U.S. dollar, via the current contract
markets, is in the last stages of a near thousand year evolution
of this concept. It is not
lost on them that they are at the end of an era. That is why they
are seeking to create a new thing. They have to.
So U.S. strategy must remain, in the meantime, that which permits
no significant rise in the gold price at any cost. There is a
resolution to be had here, though. They are not simply hoping
against hope until we all die, and those not yet born take up
the mantle. Looking back at what Mr. Greenspan was quoted as saying
above, the intimation is that if the U.S. can still capitalize
on its core competencies -- its well-developed acceptability for
its hyper-efficient transactional usage -- it could damage the
euro, which has still yet to attain this level of utility.
With that underway, the euro would begin to falter, and "...if
the underlying demand for one of two competing vehicle currencies
falters for a reason not clearly perceived to be transitory ...
demand will shift to [the] competitor [which widens] the bid-ask
spread of the faltering competitor still more, inducing a further
shift of transactions to the alternative currency. This process
ends with the demise of the weaker currency as a competing vehicle
and the stronger of the two becoming the sole surviving vehicle."
Couldn't have said it better myself.
So here you have miner's view of the gameplan, as seen from the
back row...
Good night all...
miner49er
miner49er (03/06/02; 08:41:45MT - usagold.com msg#: 71171)
...
Two speculations circulate
about the euro / dollar affair, and the strategies involved. One
is that the euro faction is playing a wait-it-out strategy against
the dollar, letting the dollar fall from its own mis-steps. The
other is that this whole struggle is really as important as we
make it out to be.
If there is any validity to these two notions, then perhaps the
U.S. might find it in its interests to stir the pot. (As I don't
know the numbers regarding steel imports, this may not be of any
use if they are fairly small.) Steel tariffs, while certainly
having value politically, also serve to put pressure on European
exports. This is just one more body blow to the euro-zone economies.
The ECB has tried to maintain a detachment from the political
day-to-day affairs in these economies. As long as the pain-threshold
is not breached, the ECB can conduct this sort of policy without
much hassle. If the U.S. successfully squeezes euro-zone steel
exports, it means just that much more pain in euroland. The political
pressure for the ECB to do something, like lower rates again,
would be turned up a couple notches. The ECB does not wish to
succumb to this pressure, but will find it increasingly difficult
if euro-zone economies suffer too much.
In my last post I emhpasize what others have pointed out, that
the euro currency animal seeks to be a different thing altogether
from its dollar counterpart. Part of the dollar strategy is to
undermine this effort, and cause the euro to react in such a way
that it begins to behave like the dollar. If they can achieve
that, the dollar stands a good chance of winning. The euro is not designed
to act like the dollar.
Decades of planning have ensured this. If it changes course, it
will venture into terrain for which it is not suited. It would
be like using an Airbus to give guided tours of the Grand Canyon.
Being a airplane, you could probably get the job done, but gosh,
it was never designed to do that!
...
miner
miner49er (03/06/02; 10:35:02MT - usagold.com msg#: 71179)
Trapper @ 71173
Hey Trapper, your comments are interesting. (Is the euro a new
pea added to an old shell game, or just a new shell?)
I hope I am not giving the impression that the euro,
or any unbacked instrument is something worth keeping as one's
permanent wealth store. It need not go beyond mention that keeping
the fruit of one's sweat and blood in the form of someone else's
promises, and capacity to perform, is risky business.
What seems to be at stake here
is a dollar, extended about as far as it can go, trying to attract
further use (expansion) by capitalizing on its functional value.
Namely that it is usable as a reliable, deep and liquid, globally
recognized and accepted medium for commercial and financial exchange.
The euro on the other hand, is trying to differentiate itself
from the dollar. It too needs to become this, but is deploying
a different strategy. To go head to head with the dollar is useless,
as it would have to undertake all the structural dynamics of the
dollar, to do and behave as the dollar does. If this were the case, why use the euro
when the dollar works fine?
The euro has come into being to address what became the fatal
pitfalls of the dollar's policy in the past decades. This is not
to say it will be ideal, or successful in the long term either.
What I wish to portray is the inescapable fact that we live in
a world of unbacked currency, and that this is not going to change.
Therefore, what are the advantages and drawbacks of the instruments we have to choose from?
Where you refer to me supposing
the ECB is using gold in a float, I presume you mean my correlation
between its market-marking operations and its lendable reserves?
If so, what this is all about, is a realization on the part of
the euro planners that gold has for decades been undervalued by
decreed suppression of its price. They know it can only go up, and substantially. It is not their
intent, neither is it necessary to make it convertible in the
former sense. If you want gold however, you can go get it in the market at market prices, as much as you want
and can afford. Fair enough, why should the banks socialize its distribution
by managing its price?
So the ECB has a bunch of gold, say 10% of reserves. If a 1000%
increase in the POG eventuates, then lendable reserves increase
proportionately and gold-backed reserves are now 100% of current
total reserves.
Remember, these are not convertible reserves
in the sense we traditionally think of
vis-a-vis the old dollar paradigm. In that environment, policies
that cause pressure on the currency / POG parity result in a drain
of the bank's gold reserves -- where the POG is fixed. If the
POG is allowed to float (and we infer this in the euro as they
DO mark their reserves to market quarterly), then the reserves
will function like any other bank reserves, bought and sold, lent
and repaid as banking needs dictate. There is no particular need
to have to have convertibility via the bank's bullion window,
as institutions can buy it on the spot in the market at the same
price, and as you can get it down the street at your local gold
and silver dealer also for about the same (although I do suggest
you use Centennial...).
The end result is again, lendable reserves increase substantially.
And the anticipated offshoot to this is quality and affordable
funding made available for the euro-zone economies.
The next question is what is to prevent paper gold from again proliferating, and de facto setting the gold price
like it does today. The simple answer is that euro-zone policy
will not permit the kind of paper activity we see today. They
will simply regulate it within their realm. Outside the realm
the belief is that the horrendous discrediting of paper instruments
in this arena believed forthcoming, will taint any efforts to
rebuild Babel any time soon. (There is much more to be said here,
and it is available in the FOA / Another archives. They handle
these issues quite thoroughly. I could not even begin to cover
it all here, and am running long enough as it is...)
True, if gold declines in value, reserves shrink, and deflationary
pressures set in, but this is not anticipated They have no fear
of a significant or sustained retracement of the POG once it gets
going.
In the same way that the dollar has worked very hard at capping
the POG for the very purpose of allowing it to remain a viable
debt instrument, so the
euro will work very hard at allowing gold to continually find
its market value, as its
very design causes it to benefit precisely as a debt instrument in a rising
POG environment.
The euro in this case, for its life-cycle, will remain "trustable"
currency -- but that precludes the understanding of the purpose
of currency -- to facilitate commercial and financial exchange
-- not to be a permanent holding of your wealth. That is what gold is
so well suited for!
And contrary to natural inclinations, which we all have from our
training in the tradition of money = wealth, the "weakness"
of the euro is in the fact that there is not huge debt associated
with it. As
long as the debt is sound, the more the merrier. This is what banking is all about: lending. Viable economic endeavors funded by
bank loans, and other credit extensions are how the world conducts
business. The euro is doing everything it can to get more euro
debt on the market. This
generates the very use value that gives it credibility as a deep
and liquid exchange medium.
The bottom line is store
your hard-earned savings in gold.
Use your investable funds, prudently -- understanding that they
are not your savings. They are risk capital. Since investments
are going to be denominated in some currency, take careful stock
of the makeup of the currency in which your investment is named.
I hope this helped clarify my comments for you...
Rgds,
miner49er
miner49er (03/21/02; 06:14:21MT - usagold.com msg#: 71878)
Monetary Socialism...
"Socialism is that policy or theory which aims at securing
by the action of the central democratic authority a better distribution,
and in due subordination thereunto a better production, of wealth
than now prevails." 1911 Encyclopedia Britannica
When I first heard FOA use the term "hard-money socialist,"
I thought he was trying to accentuate a point by being provocative.
Not that the point lacked validity, but rather that I only perceived
the link vaguely. The more I began to look at things, the more
I began seeing that there
is a very general theme of socialism underpinning the monetary
philosophy of many who would never see themselves as socialist.
Let's start at the beginning by searching for the Grail. Let's
try to define "money." In an effort to find a good definition,
instead of asking the obvious question, "What is money?"
it may be better to ask, "Why is money?" And in order
to break this into simpler pieces still, I want to refrain from
the usual first premise of money being the "therefore clause"
that addresses the stick-figure barter dilemma of loaves for fishes.
I want to also preface this discussion by noting that I have been
heavily influenced here by FOA's discussion of the "money
concept." (I don't say this to artificially lend authority
to my position, only that where there are obvious similarities
to FOA's thinking, I want to give credit where it is most deservedly
due.)
Before we can address the problem of how to facilitate the exchange
of loaves for fishes, we first need a way to price fish, period.
To jump right to the final step of exchanging loaves for fish,
does the disservice of implying that money, or the concept of
money, initially comes into play at the time of the exchange,
whereas the exchange is the culmination of several initial steps.
Each individual has unique ways, conscious and unconscious, of
sizing things up and assigning value to them. These undefined
value appraisals first need to have the framework of a uniform
standard by which different goods may be compared. This framework
must also be capable of translating these unique and illiquid
personal assessments into some commonly held notion of worth.
When economic participants think in terms of the same unit of
measure, and at any point in time, on average, hold something
of the same concept of value as calibrated by these units, then
these participants are speaking in similar terms. This being the
case, they can now come to terms in their commercial dealings.
They are now speaking the same language. In this sense, money is the language
of value.
Money is a vehicle that facilitates my ability to price something
relative to something else. Money transfers my individual, un-definable
value concepts into common, definable value terms. When appraising
something, those terms, which I naturally gravitate towards, are
money to me. In the realm where these terms are the vernacular,
they find expression in the coin or note of the realm, which is
current. In other words, the currency communicates these commonly
held value terms, thereby facilitating commercial transactions.
Since my earliest days I have been trained in making my value
associations in terms that my society and culture made familiar
and natural to me. And since the means I used to transact my dealings
were likewise identified in these same money-concept terms, it
becomes perfectly understandable why I confuse the currency instrument
with the concept it represents. Currency and money are two different
things altogether. Yet, because the currency is denominated in terms of
the money-value concept, we end up using both terms (money or
currency) interchangeably.
When I stated the other day, "if you can't spend it, it ain't
money," I myself was confusing the two terms. If we substitute
"currency" for "money" in this phrase, it
renders somewhat of a tautology. "If you can't spend it,
it ain't currency." Or, more precisely, "if you can't spend it, it ain't
current." This is sort
of like saying, "if it ain't white, it ain't white,"
demonstrating the point by a nonsensical redundancy.
I may well use the currency of another realm with considerable
fluency, but if I am still prone to doing mental
tricks like: round it off, drop the zero and take two-thirds,
to get the money-concept equivalent in which I most comfortably
do my value appraisals, then that currency does not represent money to
me. It is not defined in terms I recognize
as money. It really is a foreign currency. From this it is clear
to see that it really is important for the euro issuers that the
currency is now in the hands of the mainstream. With use,
they will stop mentally converting their purchases into marks,
francs, lira, punts, and what not... In time, the euro will be the money
language of the people...
So in this way, we are looking at money as an intangible. It is represented
for use by means of some token that is current. The token has become currency either by decree
(tender laws), or by acceptance for its intrinsic worth (commodity
currency). In either instance, we must now address the issue of
value. I will refer to this as "value suspension," instead
of "value storage," because the concept of a value store
forces the idea of intrinsic worth upon the currency unit, where we've not yet established
whether this need be. The currency unit as defined thus far has
only one purpose: to be the tangible means of expressing the intangible
money concept.
In order to take this out of the impractical realm of philosophic
musing, and make it work, the currency has to represent something
of worth in order for someone to exchange his produce for it.
If all the currency did were represent the common language of
value expression, then the seller would be giving up his hard-come-by
tangible produce for what amounts to monetary applause. Yet, to say it needs to be a store of value
presumes too much. A store of value means the currency unit itself
has intrinsic worth (or is guaranteed to redeem something that
does) commensurate with its nominal tag. We have come by this
terminology because of our heritage
of using commodity currency (or more accurately, because notes
are also issued against it, commodity-backed currency), where
a unit of the currency is established by fixing it to some amount
of a physical commodity. This is one way to approach the issue,
but it does not point us to the primitive basis for why there
is an issue at all.
What the seller wants is assurance that the mental money-value
he assigns to the currency, that he accepts for his produce, will hold a predictable
amount of this value while he anticipates keeping it as currency -- and not spending it for something
tangible. In a variation, the lender wants to know the currency
unit he lends will be paid back not just nominally, but at parity
to its perceived money-value at the time it was lent (or at some
predictable fraction thereof, where he could make up the loss
by adjusting the interest rate charged).
Hence it is inaccurate to say these un-backed currency units we
use today store value, even should their purchasing power
remain constant. Suspending value is more appropriate in
that it simply suggests that, when re-deployed in some transaction
down the road, the currency will be usable for this forecast value.
It does not imply the unit actually holds value in itself. This confusion has led
to a pervasive cultural mindset
that insists on keeping its net worth in ledger entries denoting
a snapshot of monetary value, which they just assume will somehow
be retained -- somehow. Only a commodity-backed currency
even has the potential to actually store value, insofar
as convertibility to the commodity is guaranteed. However, it
too is compromised
as soon as paper instruments are created against it, and it continues to promise convertibility
at the same fixed price.
In the same way that our environment conditions us to confuse
the money value-defining concept with the currency used to express
it, so also our legacy of commodity-backed currency conditions
us to confuse the currency instrument with the real wealth denominated
by it. The purpose
of the currency is most basically to facilitate financial / commercial
activity (which in part
does require value stabilization, or suspension). But we have
come to both think of it, and use it unthinkingly, as an instrument
that stores value enduringly -- something that is not just part
of a financial / commercial intermediation, but a final rest-stop
of lasting wealth altogether.
This legacy has also framed the terms of how we view unbacked
currencies. (By unbacked, I mean not backed with a tangible real-wealth
asset.) A gold-backed dollar gave way to an unbacked-dollar. Yet,
this dollar continued to play the role of a commodity-backed currency,
in that it acted like it could store wealth indefinitely. Instead
of backing its value at a fixed ratio to gold, it promoted itself
as capable of retaining its worth by virtue of the bonded debt
the issuer held. This debt, U.S. Treasury bonds, purports to redeem
itself in currency units that should have essentially the same
actual purchasing power as the money-concept notions of value
they were issued in -- even 30 years hence. That's a pretty tall
order to fill. And in looking at the incomprehensible amounts
of this debt outstanding, what we have, in essence, is a U.S.
citizenry that has permitted itself to be indentured to permanent
service, for a debt it can never wholly extricate itself from,
not in real terms anyway.
Without rehashing the story again, the executive summary has it
that one of the main purposes for the contract gold markets was
to provide something of insurance to dollar debt holders. That
should the U.S. not be able to make sufficiently good in real
terms, contract holders had a way to make claim to gold (a real-wealth
asset), just in case -- and outside the official system.
A sign of trouble would be a sustained increase in the price of
gold in terms of the currency. Therefore, a stable gold price
could be taken to indicate that it was okay to keep on lending
in and investing with the currency. A stable gold price would
be a signal to the markets saying, "look, even though we
don't promise convertibility with our currency anymore, it's ok,
the currency is healthy, as you can see for yourself, because
its price in gold is not deteriorating in the free market..."
It is fairly obvious in hindsight that this "free" market
in gold, via contracts, provided a venue to develop mechanisms
to manage the price to get it and keep it in a range, as this
would provide the illusion that all was well with the dollar's
soul. Practically, this became therefore an extension of the fixed
system -- the chief purpose being to demonstrate stability in
the currency. It seems that we are at another transition point in this phase
of the progressive default on the gold standard (actual and de facto) through the last century:
first to the citizens who presumably "own" the gold...,
next to the foreign creditors who believed they dealt in a fully
convertible currency instrument..., and soon all long contract
holders, when dollar-denominated paper claims for gold also get
defaulted on.
The day you peg the currency to a commodity and promise full convertibility
at the pegged price, is the day you begin that commodity's slow
march to inconvertibility.
The purpose of the currency is to communicate the value notions
of its users through some common measure. All the man in the street
cares about, is whether he can buy stuff with it. He has seldom
if ever given a thought where or how his "money" came
about, and given no reason to conclude otherwise, he assumes its
stability. Basically so long as it buys roughly what he expects
it to, whensoever he expects it to, he is satisfied to hold onto
it until he needs it. It is convenient to do this.
When the mindset of society begins to have lasting doubts that
it won't fetch what it used to, and it appears there is no way
to get enough risk-free return to assuage these fears, then they
will begin unloading it for real stuff
-- from deodorant to double-eagles.
Understanding this, it seems a reasonable policy step to say,
"well let's just guarantee the price of something everybody
agrees is worth something, so that if they know they can always
redeem it for such, they will have confidence that the currency
is good."
Ok, fine... so at what price are you going to guarantee it? The
decision cannot help but be arbitrary. Even if attempted in good faith, using
a battery of hard analysis, it still attempts to centrally dictate something, under the presumption that the central
authority can make a better decision than the people themselves.
The result of this decision is believed to provide a better distribution,
and production of wealth, than under the prevailing system. This
by definition is socialism.
And what are the consequences of this action? Let's assume the
government made a pretty good guess at the pegged ratio. What
did they actually do? By picking the right sales price for the
commodity, they have shown they had their finger on the pulse
of society's consensus value notions for the commodity on that day. On that day all is, on average, well.
By pegging the currency, they have also pegged the people's mental
money-value concepts, as the currency's role is to express these.
The problem with pegging the value concepts is that concepts change
as perceptions change. And perceptions change all the time. Disequilibrium
is introduced immediately. It may be very minor, but it is a fact.
As time goes on, the value concepts are bound to change with greater
and greater variance. Systemic shocks can cause great change in
value perceptions, very quickly. And it should be noted that these
changes do
not at all have to ever return to the arbitrarily imposed starting
point again, ever...
More than likely, disequilibrium becomes endemic.
Were there never shocks to the system, the course of human development
still disturbs the system with a perpetual accretion of disequilibria.
In spite of war, famine, pestilence, and tragedy untold, history
is one long
progression of increased human productivity and material wealth.
For the peg to remain valid, the amount of the fixed commodity
available in the financial system would have to keep pace with
the overall real increase in production. Else, the necessary increase
in currency supply, putting pressure on the decreed exchange price,
would have to be tempered.
Lenders could choose to keep more gold in reserve, decreasing
lendable funds, thus increasing the bid for those scarcer funds,
or they could raise the rate charged for using those funds outright.
Unless they believed they were directly in harm's way, they would
likely do neither. If the economy is in real expansion mode, lenders
are not going to spoil the party just because they want to maintain
the integrity of the gold exchange rate.
All experience demonstrates they will lend leagues and furlongs
beyond the point of recklessness, and then some. That simple unavoidable
aspect of human behavior alone should be enough to give pause
before considering whether a fixed gold standard is the way to
go.
Notwithstanding all this, the simple tension between legitimate
funding being available at economic terms, and the constraints
of an out-of-sync exchange price, would seem to stultify enterprise
rather than facilitate it. Doesn't that seem to contradict the
purpose of a currency in the first place, to facilitate exchange?
In order to maintain this real expansion without prematurely adjusting
rates or reserves, the growth would have to be sustained by an
equal introduction of new gold supply to the financial sector
in order to keep the ratio realistic in a purely mathematical
sense. This is always unworkable because the mathematics are built
on data that are incomplete, inaccurate, lagging, and politicized.
So let's assume there is perfect and instant knowledge of the
economic data, and we can quickly and correctly adjust the amount
of gold available in the financial sector to properly maintain
the established ratio. This still misses the point altogether.
It attempts to keep the value fixed on something, whose very purpose
demands its ability to vary. Currency is simply the current, commonly held translation
of society's value perceptions at large. Perceptions will change, and society's value
appraisals with them. Pegging
the currency's value to the commodity does not allow the individuals
who make up society the freedom to adjust their mental pricing
of the commodity. The peg,
that started out with good intentions perhaps, has become a tyranny;
a decree imposed by fiat upon those who must operate under it;
a perpetually false statement of worth.
One for All and All for One...
Much more can be said to further elaborate (or belabor?) the distinction
between the money paradigm of money as
real-wealth store, and money as a value concept that allows us
to price
and trade in true real-wealth
stores.
At the risk of wearying the reader any further, let me conclude
here. Alan Greenspan, in a speech given to the National Summit
on Retirement Savings on February 28th (http://www.federalreserve.gov/boarddocs/speeches/2002/20020228/default.htm),
provides telling information regarding the emphasis of U.S. Government
/ Federal Reserve policy. This is not surprising. It is just one
further manifestation of the political / monetary hybrid we have
engineered by ages of imbalances introduced through keeping gold
prices fixed (one way or the other).
After introducing a litany of considerations individuals must
consider when addressing their personal retirement plans, he lays
this foundation:
"Though from the point of view of an individual household,
saving reflects financial claims adequate to meet future needs,
the focus
for the economy as a whole, of necessity, must be on producing
the real resources needed to redeem the financial assets."
This groundwork calls our attention to an individual's awareness
of how his savings are deployed.
This is the conclusion we are supposed to reach: Since their deployment
affects how the economy, in which they retire, will be able to
redeem their savings satisfactorily with real things down the
road, the individual should also harbor these considerations when
initially deploying the capital. Sort of a financial "Buy
America" slogan.
He goes on to say: "The role of finance is to channel saving
into investment of the physical capital assets that assist in
the production of the gross domestic product, which, in turn,
serves both retirees and active workers. Clearly, an efficient
system of finance can more effectively deploy a given stock of
capital and thus maximize its contribution to supporting the population."
Wow... are you catching the subtle emphasis here on the population
at large vs. the individual? This is what's being said: Speaking of an individual's
retirement plans; the individual needs to be more cognizant of
how his investment affects society's future production. This is
to provide a better environment for his society to provide goods
and services to him individually in the future; and not just him,
but the population generally...
I thought the financiers (and the financial system by extension)
existed to profit from the investor, as the investor pays them
to help get the best return from the investor's funds. The whole
speech is worthy of commentary, but this point is illustrative
of the political path that we have chosen and upon which we elect
to (must) remain. Revisiting the headline definition of socialism
above and comparing it with Mr. Greenspan's quote, is this not
effectively what Mr. Greenspan is intimating?
"Socialism is that policy or theory which aims at securing
by the action of the central democratic authority a better distribution,
and in due subordination thereunto a better production, of wealth
than now prevails."
"[A]n efficient system of finance can more effectively deploy
a given stock of capital and thus maximize its contribution to
supporting the population."
Thank you for reading,
miner49er
miner49er (03/25/02; 21:31:03MT - usagold.com msg#: 72137)
Cavan Man and Mr. Gresham
- response to enquiries...
Sirs Cavan Man and Gresham...
Good evening gentlemen, good to see the forum in such lively exchange...
I'll try to address the questions you both had. If I fail to cover
them adequately, and you feel it worth the effort, I'll try my
best to clarify or elaborate. I am quite tired right now, so I
hope I've not inadvertantly erred from exhaustion... Anyway, here
goes:
First, Cavan Man, re: the "debate." I want to state
I'm not trying to pit one against the other. I insist on the prudence
as Mike conveyed in his #72062 post, and the understanding of
the different purposes of each instrument type. I added this repost
to help illustrate the plausibility of a scenario that could precipitate
an effective shift of the geo-political dynamics from one buttock
to the other. In such a dynamic, mine holders are instantly hosed, as
the sudden real-asset significance of gold is at once reawakened
in the minds of governing officials.
This would have calls for all kinds of intervention: trading holidays,
rapacious
taxation, control of the
mines, regulation
of production, etc.
In the midst of such, anyone who is lop-sided in paper, is now
scrambling. Even if one is deft enough to bail basically intact,
the proposition that many claim to have as part-two of their grand
plan -- i.e., buying physical with the proceeds -- is greatly
frustrated, as the leverage is largely gone. Moreso, the prospect
of even finding physical is much harder during the transition. That's in the best case. If things played out
something like the repost posits, all the leverage would be gone,
and no physical would be found during this time, period.
Is this situation that Another / Allen discuss what will happen?
Who knows... I sure don't. But the point of the exercise is to demonstrate the
plausibility of the hand
these key players are holding.
The need for cheap oil (i.e., something like today's prices),
and the scarcity of gold, gets balled together in the premise,
that those who would be here demanding a lot of gold, also have
the means, and the will to actually pay for it. They also have
the power to withhold something the world needs, if the world
decides to default on, or defraud them.
Why have we not witnessed the transition yet? Consider for a few
minutes the gravity of playing this card. Then consider it some
more. To engage this strategem
will alter the geo-political landscape entirely, and for good.
Playing this card does not guarantee victory and well-being to
the holder. The risk of ensuing chaos, and the subsequent economic/military
reprisals would be real and present, and very severe. You better
have all your ducks (allies) in a row.
Another states:
"Conversely, why would they then make the "proposal"?
Because either they have enough gold to buy the world at the new
price, there is a crisis in which they feel it is to their advantage
to do this ( such as a US$ crisis ) or they might have a geopolitical
rational."
With this understanding it can be inferred that they (ME oil)
have not made the "proposal" yet, because they have
not seen it yet (with all things considered), to be prudent.
In later postings, the issue of the euro is brought into focus.
At this time (March 1998), these postings provided little revelation
of how the euro would play into things. Subsequently, FOA indicates
that the gold-for-oil ideas, the notion of a world oil currency,
that characterize the early Another writings (1997-98), are modified,
as the euro comes more prominently on the public stage.
The reason the U.S. dollar is threatened and not benefited by
a thorough revaluation of gold (not the $350-$600 stuff, but the
multiple thousands kind -- as the 1 oz / 1000 bbl hypothesis demonstrates),
is a story with many beginnings. The primary thread that conducts
the whole thing however, (in my opinion), is the issue around
stabilizing the dollar by perpetually fostering the illusion of
stability vis-a-vis the gold price. The U.S. made policy decisions years
ago that promoted the parity concept.
They have everything built upon this foundation. Everything. They
have been carrying the fiction of gold at $45.00 on the books
for nearly 30 years. They have, de facto, indicated to the world
that the dollar is stable in terms of gold by building upon the
highly controlled market price which gold "sells" for
on the contract
markets. It is now too late
for them to change course.
Let's say such a revaluation takes place. What does the U.S. do?
Leave gold on the books at $45, denying the market price? Instantly
the dollar would lose all credibility. Not just for its over-printing,
but even its decision makers would be discredited as ostriches
with head buried.
Revalue along with the market? They would experience even worse
unpleasantries. Political anarchy, and revolution would be on
the horizons as everyone realizes that all their holdings: 401k
plans, savings accounts, debt holdings (even the "riskless"
U.S. T type), equities, would all vaporize. And no carrot of recovery-just-around-the-corner
will be able to keep them hoping. The U.S. Government, and all
its mouthpieces (CNBC, WSJ, etc.), would all have the masses with
pikes and staves storming the bar with litigation. And then marshal
rule to put out the fire. What hell...
As in all things, the workout will be as "gradual" as
possible (and conducted under the comatose narcotic stupor of
the spin doctors and other public relations medicine men). The
rise in
gold would be held to be a phenomenon, and an anomaly -- economically unjustified, contrary
to economists and expert opinion from all quarters... Clearly
an act of inimical aggression... even an act of terrorism... All
the while, behind the scenes, debts and scores will be settled
at a much higher gold price, and U.S. gold will at this point
leave our shores, for good.
Most importantly, it cannot ever appear the U.S. was aware of
this. They will play the victim to curry all the national support
they can muster. It will be deemed in the national interest to
do so. The
contract markets will default anyway.
Then the U.S. will be able to revalue its on-book holdings. But
to revalue with the spot market price, in such a hypothetical
situation as the Another / Allen post describes, would make the
U.S. out to be complicit, and hence the cause of the default in
paper.
Mr. Gresham --
In my view as to "why it would happen" at all, I want
us to go back to the context of this post in time. Another is
discussing here the likelihood (and need) for a world oil currency.
There has been a long on-going discussion (as I'm sure you are
familiar with) of oil being sold cheaply in paper currencies,
with the addition of gold in the background. [Randy adds: clever financial engineering through
such derivative avenues as commodity swaps could facilitate such
a thing very smoothly, without making obvious pricing waves on
the publically visible market. (This is what is alluded to with
layman's terms in the Hall
of Fame's
first post by Aristotle.) The only hitch in this scheme is that
as a very sizable account of gold would accrue to the clever oil
barrons, the worry running through their minds would always be
"Will this "paper" account of our gold be honored
with real metal at such a time as we might choose to demand delivery
of what should now be ours to claim?" The worry stems from
history and bullion banking being what it is, you know... (more
on this "woryy" in the next paragraph)] Is this in fact true? I have no way
of knowing. Nonetheless, the case as delivered in these lengthy
writings over several years leaves me convinced of it.
Three things to consider up front: 1) the ME oil producers do
actually value gold enough to demand it partially in exchange
for oil. 2) Flip it around. They want gold so much, they are willing
to pay substantially more oil to obtain it. 3) Only oil has the
capacity to command gold out of the vaults. (Such a demand also
has the capacity to bring missiles out of the silos as well. Hence
part of what they have to consider in making a prudent use of
this trump card...) [Randy's note: with point #3 here, my friend miner49er
touches precisely on the key point that I raised above.]
So in order to design something broad and deep enough to work,
a proper ratio needs to be settled upon for the exchange. If oil
is $30/bbl, and gold $300/oz., how much gold would have to be
included in an exchange, where the currency price for oil remains
basically the same? If we start even at 1gr. / 1 bbl, we would
be looking at numbers of roughly $9+ for the gram + approx. $20
for the barrel. But at 30+ million bbls/day, we would be paying
1,000,000 oz / day, or over 30 tons. Too high a price.
How about 1/1000th oz. / 1 bbl? Currency price of oil is now approx.
$30; and physical metal settles at around 30,000 ozs. / day; or
approx. 330+ tons / yr. (Real quick and dirty math). Arguably
deep enough. So now we have a hypothetical realistic working ratio.
The world can indeed comfortably pay physical gold for oil at
these prices (1000 bbls / oz), and still have plenty of gold to
do it for the duration of oil's life expectancy from this part
of the world (say, max 20+ years). Would it ever go this far?
I doubt it. But Saud realizes this is their day in the sun, and
it's setting quickly. In order to make hay, they will need to
act before their depleting asset is gone, or the world really
does come up with a substitute at an economic price to at least
alleviate the need for ME oil significantly.
So, with the ratio in place, why the bid? You suggest it to be
unproductive to seize the markets, whether they do it directly
by going into the markets, or indirectly by the "proposal,"
and letting others do it. Let's look at it differently. The desire
here was not to seize the markets and shut down world commerce.
That is why a plausible discount to gold has to be arrived at.
Gold would flow at the ratio described, but only (ONLY) physical
gold. And this is so because only (ONLY) oil could be taken seriously
enough to both A) pay for it, and B) have means to pay that gold-holders
would accept.
All this takes place at the rarefied elevations of CBs and officialdom.
The effect on the ground is intended to be minimal (currency prices
stay about the same), and the politics would have been that the
lifestyle we had developed around the current paradigm was worth
maintaining, even at the expense of our gold. Political fallout
is a very strong motivator.
So, ME oil producers have at their disposal an ace to play at
their discretion. They can play it one time, and one time only.
It MUST be used prudently, as there is no guarantee of winning,
just because the card is played. When they play this card, it
will be a time when they feel it necessary to show some of oil
and gold's muscle by tearing off their dollar suit, and flexing.
Another indicates that (as of March 1998), "The massive increase
in the "reserve currency" price of gold would, no doubt
be ushered into the USA house of congress as a godsend answer to Americas debt
problems. With the "full
production" of oil, now viewed as a sure thing, The world
may well see the USA send the military into the Middle East just
to ensure that this "deal" is not disturbed."
For reasons mentioned above regarding the chaos that would be
brought on by the inflationary vaporization of the assets of practically
the entire population, baker to banker, the sudden revaluation
would not be publicly welcomed in Congress. This perhaps was not
understood back in 98. Also, the euro considerations as described
by FOA in later writings render this application "back-burnered"
pending further developments... Hence, I think that such a revaluation
of gold is indeed entirely possible, plausible, and conceivable.
But from what quarter, and out of what blue... I haven't a clue.
And while the possibility exists that a U.S. military presence
in the Peninsula to "ensure that this 'deal' is not disturbed"
exists, I think the U.S. is more threatened right now because
of the euro axis in its ascendancy. The situation Another speaks
into, involves a U.S. dollar still functioning as THE reserve
currency. With the prospect of oil finding gold's currency value
in euros, the U.S. may become desperate and irrational. Let us
hope for sober minds on all sides...
Full circle -- this repost was really meant to simply illustrate
that when considering mining stocks, be aware of the very real
possibility of a sudden, overwhelming change, so as not to be
caught with pants at ankle height. So I hope I've adequately addressed
your questions. I apologize if I have failed this and wasted your
time reading this response.
All the best,
miner49er
miner49er (5/3/02; 06:51:56MT - usagold.com msg#: 74821)
Trade Settlement in Malaysia
- Old Wine in New Wineskins...?
http://www.nst.com.my/z//Current_News/BT/Wednesday/Business/20020327025311
(Note - I put this together actually back on March 31st, but frankly
forgot about it... So I've dusted it off a bit, and decided to
throw it out now, for any who care to read it. ALSO -- the link
is no longer valid, unless you can search their archives, but
you can find a number of snips from these articles back around
this time on the forum archives, if anyone finds the need.)
The other day there was some discussion regarding Malaysia's plans
to institute a gold payment mechanism to manage settlement in
its international trade. The discussion arose out of an interview
with Prime Minister Dr. Mahathir Mohamad of Malaysia as reported
by several news organizations.
I admire Dr. Mahathir, as he demonstrates again his willingness
to adhere to convictions and principle, even in the face of enormous
pressure from the Beast. Although castigated in 1997 for his stance
restricting speculative currency movements, his country withstood
much of the ravages of the tsunamic lava flows of "hot money"
that laid waste the financial landscape of his neighbors.
Looking over the information provided in news accounts of this
interview, I saw some things that raised a few questions, though.
Dr. Mahathir envisions the use of the Islamic gold dinar to be
the means of account settlement in trade between countries. He
highlights the general plan of how the gold exchanges would take
place. Using a two country example to simplify the illustration,
the trade balances of each country are calculated using their
respective local currencies, and are then priced in gold, which
is employed as payment. It is also used as the medium to conduct
these exchanges. In order to reduce the physical movement of gold,
these balances wash each other out, so only the amounts in surplus
or deficit are exchanged. (Essentially, convert and net...) To
further eliminate unnecessary movement, credits or debits can
be applied to these imbalances. The assumption here that Dr. Mahathir
makes is that the price of gold is reasonably stable. â¤Its
value [gold] may appreciate or depreciate according to the world⤙s
demand and the demand in a given country. But the fluctuation
would be minimal,� he said.
Malaysia seems to want to restore gold to its historic prominence,
but risks conducting affairs according to the old ways of doing
business. They evidently do not wish to fix the price of gold,
yet pursuing this course of action, it seems, will make this nearly
unavoidable. I would like to analyze this situation in terms of
the discussion of money for which we began laying a groundwork
the other day [#71878].
A quick review...
Money is defined as that means, which takes an individual's inarticulate, and unquantifiable appraisals of things, and translates them into commonly understood terms, so that the individual and others inside this universe of commerce can fluently dialogue about their prices [ed. note: and through these prices, hence, come to understand their relative worth among dissimilar things].
The currency of the realm is any mechanism that satisfactorily expresses, and transmits, these monetary evaluations.
Its primary purpose is to facilitate commercial/financial exchange.
Chief properties of the currency
must be 1) its ability to dynamically adjust to changes in society's
appraisals of these things; and 2) its ability to predictably
suspend the considered value held by the parties of any given
exchange for the duration of the transaction.
In the past, this was attempted by pegging the currency to a fixed
gold ratio (or some derivative of this function). The emerging
paradigm seems to want to let currencies discover their value
through a truly free exchange ratio to any and all commodities,
paramount of which is gold. As we discussed previously, our legacy of commodity-backed
currency causes us to confuse the currency instrument with the
real wealth denominated by it.
This is why we can lend something that has no intrinsic worth,
or anything backing it that does, claim it to have stable value,
and do it with a straight face. Effectively, our "money"
today is nothing more than an irredeemable, you-must-use-it credit
claim. And callable, too.
First gold, then gold certificates, gold notes, then contracts
for gold not yet born. Then default. We have spiralled so long
and far down this vicious vortex, that the intolerable systemic
default of the current quasi-gold standard is imminent. Not only
will the powers that exist by virtue of this precarious structure
fight to the death to keep it intact, the more astute among them
also recognize the serious threats to U.S. national security (and
by extension, global stability) from the instability such a collapse
would incite -- especially in this day.
Therefore, the show must go on.
This is the inevitable, inescapable result of a system that pegs its currency to a commodity in order to give it worth. The intent may originally be to enhance its currency property of temporarily sustaining value for its immediate transactional use. This quickly gives way, however, to the impression of lasting value being stored in the currency, which then causes it to be perceived as a real asset in the minds of lenders and borrowers alike. This is what ultimately breaks the system.
Currency is not meant to be
construed as a long term value store. To the degree that it does
or should have non-monetary worth, is only to the extent that
this property is necessary to make commercial transactions easier
for that particular economy. It should contribute to the medium's
ability to adequately convey the monetary appraisals held by its
users. Otherwise these monetary appraisals end up becoming distorted,
and inflexible, as those forces take over, whose interest it is
to control the medium's monetary use, by manipulating its non-monetary
value. Once currency is wrested from its natural role of expressing
fluid monetary processes, and becomes bound in contracts of fixed
convertibility, it no longer serves to represent dynamic value
concepts, but fixed and arbitrary value illusions instead.
Thus gold in the Malaysia plan (if it works as described in these
[very] summary accounts) is set up for a fall. I want to point
out that their plan may actually work differently, but owing to
the likelihood that the editors undoubtedly perceive things through
traditional understanding, they may well have reported the whole
affair with the wrong slant. That said, we'll approach our analysis
with what we're given.
In the first place, it fails its exchange facilitator role right
out of the gate, with concerns about gold's physical movement.
The purpose of these account credits and debits, according to
the article, is to further diminish the costly transportation
of gold. It is obviously inefficient if one designs a process
in which gold is to be a vehicle for account settlement, and then
has measures put in place before the fact to accommodate transactional
obstacles brought about by inherent attributes of the medium.
Additionally, in mandating settlement in gold, we instantly introduce
the prospect of default. By permitting credits or debits to be
applied against balances ("...the surplus or deficit can
be credited or debited against future imports and exports."),
it seems we only perpetuate the present dilemma. If the trading
partner is gold-poor, then deficits on the part of this country
must be met with a
gold debt, whose
purpose is not for some administrative benefit of efficiency,
but genuinely a need for more time to make good. If the gold price
fluctuates significantly, and moreover obtains a new, higher plateau,
this only exacerbates the situation of the gold debtor. Simply,
an agreement that mandates payment with physical delivery fosters
an environment of defaults and non-performance, and invites efforts
to keep the price down.
Other considerations... Say I run a deficit to you one month,
and you agree to let me make up the balance later -- ostensibly
for the above-mentioned administrative purposes of reducing gold
movement. I compensate you for the delay either with interest
payable, or a fee. I do indeed, currently have the gold, but find
our negotiated settlement to be more cost effective than the costs
of moving the metal itself. Now if the gold price remains stable,
or moves in a creditor-friendly direction, then it won't be long
before you prefer to just hold onto this paper, as it is effectively
stronger than gold, so long as confidence in its convertibility
is maintained.
It won't be long before this
"good as gold" paper is traded, speculated upon, hedged,
lent against and lent itself. Then in order to help our speculations,
or rescue our over-extensions of credit, assistance will be provided
to make sure the gold price doesn't "get out of hand,"
and we will all agree that it is better for us to manage the indiscriminate
volatility of the markets, so as to promote overall stability.
Thus we are back once again to fixing (or "managing")
the gold price.
Let's look at this yet another way. It appears that transactions
will take place in the local currency, and be priced to gold at
some point after they are recorded. So now the whole gamut of
tricks will be employed to ensure the best exchange rate, from
the simple attempts to "time" the transaction's entry
to the books, to the panoply of hedging practices currently employed
in today's environment. This is so because the transactions are
not settled with actual delivery at the time they occur, hence
creating all the opportunities to abuse the float that exist today.
Since the goal here is to secure the best price, the pressure
will continually and always be to depress gold relative to the
local currencies.
FOA maintains that the way the Euro courts will avoid these problems
is by not enforcing contracted terms that require physical gold
delivery. Cash settlement will be the typical workout. In response
to the conclusion that this would simply cause contract dealings
to take place outside the Euro court jurisdiction, he contends
that there will not be any substantial, organized markets in which
to do this after the current dollar market cracks up. You could
make whatever deals you wanted, but you would not find anyone
willing or able to enforce gold delivery, if one party decided
to back out. With no one able to bind your counterparty to delivery,
you would find it hard to even organize a market to deal in gold
paper, as there would be no incentive. The effect of all this,
according to FOA, is to drive gold dealing mostly into the physical spot
markets. Gold in this environment
becomes something that cannot be inflated through credit use (with
its subsequent debasement, and defaults). [FOA #78, 6/19/01]
A note that is issued by an entity that owns substantial real-wealth
assets free and clear, is genuinely productive, and keeps its
debt within check relative to its assets and income, is likely
to be used, holding its worth not on the basis of contracted convertibility
to the issuer's assets, but simply on the basis of who the issuer
is... on his authority... in his good name. This concept is not
new and has existed forever. What is different is to contemplate
this in the realm of an international currency. FOA discusses
this point in addressing some of the very fundamental concepts
behind the design of the euro:
"Not long after the US defaulted on it's gold loans,,,, dollars
held as gold certificates,,,,,, major thinkers began the long
process of forming another world currency. One that would not
maintain the fiction of a gold standard with the somewhat fixed
gold prices inherent in such a system."
"[ ... ] After operating on a fiat system for 20+ years people
are starting to realize that the only thing that backs a currency
is the real
productive efforts of their people.
Yes, over time we always borrow more than our productive efforts
can pay back and proceed to crash the money system. But what else
is new? (smile)
"We call this a money's "timeline" [ ... ] "
"It seems people saw something else that would make the Euro
unique. Paid up assets also stand behind circulating money. Indeed,
if someone ow[n]s a $100,000 dollar piece of land , has a good
producing job and borrowed $50,000 against his land,,,,,, the
world is likely to circulate that debt note as a fiat land backed
currency. But, if his gold (the land) is worth $1 million in a
free physical market,,, AND RISES FURTHER IF CURRENCY SUPPLY OUTPACES
REAL PRODUCTION,,,,,,, and his other debts are relatively low
,,,,,, the same note would circulate just as effectively if the
$50,000 was borrowed against his name alone." [FOA #7, 2/26/00]
A currency
[Ed Note: read monetary/banking
system]
designed to work in an environment
where gold is exchanged free of the impediments of paper manipulations,
is likely to be used by those who want physical gold -- as it
is not threatened
by gold. This is diametrically in opposition
to the current reserve currency paradigm. They would seek to use this new currency as
the medium with which to conduct their business. It's simply easier
(and less costly...).
If an oil producer wants to take partial payment in gold, even
a miniscule portion, he simply cannot get it in markets that trade
at today's prices. His bona-fide, serious, and completely backed
demand, introduced directly to this system would kill it because
there simply is not ever going to be enough actual gold to meet
this demand at current price levels. But if we should let the
price rise to obtain its market level, the system would fight
this with maniacal desperation, as the entire system relies upon
gold at the present artificially low prices. Every kind of pressure,
intimidation, compromise and creative forward financing would
be deployed, all in an effort to thwart delivery (or at least
postpone it into the sweet bye-and-bye). Just do anything to prevent
exchange at the offered price...
But isn't the currency supposed to facilitate exchange? It seems
if I try to use THIS currency to get the job done, it will prove
woefully inadequate for the task. This currency does not freely
express the value estimates of buyers and sellers in its markets,
so necessary to facilitate transactions. Rather it handicaps and
sabotages the effort instead. The policies of its issuers by design
do not allow the instrument to perform its job correctly. So,
if a new currency ascends from the horizon, whose design is to
make the process a lot less painful...
Will the euro be ideal? No, it will have its own pressures that
cause its own imbalances, and subsequent destruction. It will
have its own timeline... birth, youthful beauty, age and treachery,
and ultimately death... But the point is not to create the perfect
system, which in an imperfect world is impossible. It is just
to identify reality (political, technological, predominant world-views,
etc.), and put something together that most successfully accommodates
the dynamics at work in that season. That said, it seems a currency
modeled like the euro would better serve the demands of modern
international trade settlement. The application of gold is best left as something
physically acquired with the surpluses in an open (and free) marketplace.
The Malaysian concept (at least as far as we've been introduced
to it) is not unlike putting old wine into new wineskins. They
correctly wish to allow the free pricing of gold, they also seem
to want to elevate gold to its traditional status as "the"
premier wealth holding [new skins]. They err, however, in trying
to use gold as a currency [old wine]. They confuse the concepts of money,
currency, and wealth. They
mistakenly wish to make gold function with the dynamic properties
of currency, while still attempting to establish in it the longer
term, fixed value attributes, required for something you issue
paper against. In this day that role is inefficient and inappropriate,
as it leaves gold subject to endless manipulation because of these
dual conflicting roles.
I know that if you put new wine in old wineskins, the skins burst
from the action of fresh fermentation. I don't exactly know what
the outcome is of putting old wine in new wineskins, except that
it doesn't make sense. (I suppose all you would get is leathery
tasting vinegar.) Albeit the interview snippets give only a very
removed glimpse into what the Malaysian plan contains. Nonetheless
it seems there is a lot of room to "work" the system.
However, I'm certain they have thought this through much further
than I could even fathom, and have the bases covered. With that,
may it be then, that Dr. Mahathir's Malaysia prospers, and their
trade surpluses avoid the entanglements of the paper-plying middlemen,
and are instead deployed in prudent investment, and in the outright
acquisition of this grand metal of the kings...
miner
miner49er (4/8/02; 06:57:34MT - usagold.com msg#: 72955)
timbervision @ 72940
Greetings, Sir timbervision -
Let me to reiterate another concept forwarded by Another, FOA,
and echoed here by others. Buy gold as your understanding allows.
In other words, don't be moved by fear or greed. Typically people
never feel they've accumulated enough. They are always afraid
the train is leaving the station, and they're not ready to go
yet. Or, let's face it, we don't like to admit it publicly, but
we all have done the math ("hmmm... let's see $300 oz -->
$30,000... wow...! Say, what about $50,000???).
If fear or greed drive an individual, it is to these that the
individual has become enslaved. Better to be enslaved by your
own rational understanding, rather than emotion. Your understanding
can always be improved. Emotion can be just as intense for the
fool, as well as the sage, and is thus a poor guide for decision
making.
The purpose of owning gold, is not an end in itself. Remember,
it is a
STORE of wealth. It represents
the savings of the excess earned from your own productive efforts.
Ultimately, you or your descendants will spend it. Hopefully,
prudently. In spending it, it is hoped that what they get in return
fairly represents the toil and sweat you expended today to obtain
it. By saving gold you attempt to store this potential wealth
as best as possible in something that gives you maximum freedom
from the whims of our "controllers," and likewise best
represents the future value of these productive efforts engaged
today, anywhere, and at anytime.
What is unique about today, is what FOA calls a "political
gift" for those who have eyes to see it. Gold, for all the
reasons this forum discusses, is artificially way, way under its
true price, if it were let free from the leash of official systemic
management. This gives the added punch of an extremely rare prospect of a most significant
investment return as an added bonus.
This is something you or I will never see again in our lifetime.
Wealth represents "well-being." If you did sell your
house, and use the proceeds to buy gold, how will you sleep at
night..., now? Suppose gold languishes another year, two years...,
five years? Are you so convinced of the dynamics surrounding this
issue, that you won't waiver, and get afraid, and end up selling
at a loss, and swearing to never own gold again? Or will you live
as best as we mere mortals can, living as much as possible in
peace and quiet, while steadily accumulating a tried and true
wealth store for your future, as well as those who come after
you? And acquiring it without the frenzy of "what if..."
that impels so many, that makes you no better off than the speculators
who are always on the edge, always monitoring the price of everything
they've gambled on...
Better to just acquire gold steadily, as you have the means, and
do it as your understanding of these issues gives you freedom
and peace to do so.
cheers,
miner
miner49er (4/9/02; 08:02:21MT - usagold.com msg#: 73007)
Cavan Man @ 72976 - Paper
Gold
Dear Sir CM... I had to weigh in on this topic after reading your
post. You stated: "So, if you are a large paper gold holder/player
and your paper gold is in your portfoilio to hedge against a variety
of risk; and, further; if you see that in light of various and
sundry current events which would normally support a significantly
higher gold price, even a modest + 10% or so; do you exercise
good judgment and prudence and sell those same paper instruments
because they are not delivering what you paid for? Is this how
the bifurcation of the market might unfold?"
What you say has validity for certain players, but it calls to
my attention what is a significant mis-perception of the contract
gold markets, and why so many find their action bewildering. Sir
timbervision used the term counter-intuitive, when describing
this type of activity, where the metal goes up, but associated
paper instruments go down. I think it's not so much that their
behavior is counter-intuitive, as it is this mis-apprehension
of the nature of these markets in respect to this. Once gaining
the additional perspective, it should be perfectly understandable,
the plausibility of this seemingly contrary action. Indeed, it
should now appear to be..., intuitive...
Not out of the Woods, yet...
Permit me to indulge a discussion of Bretton Woods as a back drop.
In Bretton Woods, a system was set up in which the U.S. promised
to retain a fixed convertibility to gold, while other signatories
would fix their exchange rate to the U.S. dollar. This created
an odd relationship, where the U.S. theoretically would have its
monetary policy checked by the other Bretton Woods signatories.
The U.S., using a mix of gold and their own debt as reserves,
would expand or contract according to a determined gold reserve
ratio. When they expanded, the additional currency would find
its way overseas by virtue of a trade deficit. If the central
banks perceived the dollar expansion excessive, or became pressured
by the inflation the U.S. was exporting, they could purchase U.S.
gold from the Treasury with these excess dollars. This lowered
the U.S. gold reserves, and put pressure on the reserve ratio
that the U.S. targeted. In response, theoretically, the U.S. would
slow down on the expansion until an appropriate reserve ratio
was again met.
Likewise, were the U.S. to contract too severely, thereby reducing
currency supply, this would manifest itself overseas in deflationary
pressure. In response, the foreign banks could sell gold back
to the Treasury for dollars. This would pressure the U.S. to reverse
course, as they were now holding excessive gold relative to their
targeted ratio. Once again expanding, this would relieve the deflationary
pressure in the foreign countries by re-introducing more dollars
to their reserve systems.
In both cases, the gold operations were performed to pressure
U.S. monetary policy, in whose hands (by the design of Bretton
Woods) was their monetary fate.
What was discovered, of course, was that if one is big and powerful
enough, and also retains control of the very asset being used
as a counterweight to their policies, this entity can and will
eventually do what they jolly-well please. And so it was in the
U.S., in the 60s. Considering Viet Nam, Johnson's "Great
Society" initiatives, and importantly, the dramatic increase
in real economic growth during that phase, tremendous upward pressure
was exerted upon the gold ratio. And the U.S. expanded its currency
with an attitude...
A basket of currencies, or a handbasket to...?
Ultimately in 1971, the U.S. defaulted on its obligations under
Bretton Woods, and broke the fixed convertibility gold link to
the dollar. So what have we gained by this rehash? What I want
to bring to the forefront is the nature of the monetary operations
involved. Typically, we have been given the impression that the
gold draw down that began escalating in the late 60s was solely
motivated by fears that the U.S. dollar was going to hell-in-a-handbasket.
And the banks were furiously acquiring as much gold as possible,
so as not to be left holding the basket... While on one level,
this certainly has merit, I think we should look at this a bit
differently.
Part of the foreign bank action was simply responding, with monetary
operations, a la the designs of Bretton Woods. Dollar expansion,
resulting in trade deficits (surpluses in the opposite countries),
resulted in currency expansion in these countries from the excess
reserves. These countries in large part were simply reacting in
the prescribed fashion, seeking gold purchases to alter the U.S.
reserve ratio, and thus pressure the U.S. to slow down expansion
(subsequently alleviating the inflationary pressure in their own
countries).
Understanding this, and making a distinction here between a motivation
of action within scripted protocol, and a frantic, desperation
drawdown is important as we progress in this discussion to the
current environment. While there was undeniably worrisome expansion
of U.S. debt during this era to pay for Johnson's social programs,
and the war in Viet Nam, there was equally as substantial a period
of real economic growth. This was catalyzed in large part by new
technologies, and the new usages they found for oil. As FOA points
out, the U.S. was able to derive exponential productivity gains
from a barrel of oil with these new technologies, and was expanding
debt currently on the basis of projecting this extensive new real-growth
potential far into the future.
This did not escape the attention of the foreign central banks,
who in light of this awareness, were most likely not so much afraid
of a U.S. dollar/economy collapse, as they were the unknowns of
a gold de-linkage, and what that augured. FOA posits that Nixon's
default wasn't to stop gold hemorrhaging, but to force price inflation.
Under Bretton Woods, the foreign banks were trying to contain
their inflation by the established process of purchasing gold
to alter U.S. reserves. Nixon, and the U.S., on the other hand,
wanted some price inflation -- particularly in oil. This would
encourage domestic producers to bring reserves online that were
uneconomic, when competing with cheaper Mid-East oil at current
prices. The bet on the part of the U.S., was that they could sustain
the price inflation, and hence contain it from becoming monstrous,
because of the buffer they anticipated in the real-growth potential
of oil with its new technology uses.
In summary, the gold operations of this period were not the impulsive
or reactive behavior of a bunch of idiots, but more a combination
of carrying out designed prescriptions within a well articulated
framework, and the strategic exploitation of the system for larger
geo-political purposes. With this perspective, let's look at where
we are now...
Seeing the forest for the trees...
It is important to make clear that gold has always, does currently,
and always will have economic uses within our financial/monetary
systems. Gold's purpose is not to be squirreled away in a vault,
never to see the light of day again. Gold is an asset. Assets,
to be useful as assets, are to be allowed deployment under appropriate
conditions. If conditions for some group warrant nothing more
than acquisition and holding, so be it... If, as under Bretton
Woods, the U.S. would buy and sell gold at the demand of foreign
banks in some coordinated scheme to manage reserves, so be it.
If the banks exchanged it with oil producers on the side for cheap
oil, so be it. If the U.S. did away with much of its holdings
in order to gain some strategic objective, or to even buy time
in a crisis, so be it. The purpose here is not to give commentary
on the rectitude of this or that action, but to point out that
gold is used. It is used to achieve bigger objectives. (And sometimes,
these objectives may be the procurement of...more gold...)
Why do contract markets exist in the first place? They exist to
provide buyers and sellers a place to contract, in various ways,
the future purchase or sale of some thing, for whatever reasons.
Chiefly, they help participants smooth out rough spots, mitigate
uncertainties, or stabilize cash flows -- they are a medium for
the exchange of risk, for the principal purpose of promoting stability
and predictability to participants. Speculators are ancillary
to the process.
Typically, a large, sophisticated institution participates in
the gold markets for the reasons of portfolio balance, hedging,
or "insurance." They do not, participate in this context,
for investment or speculation. These markets are an evolution
of the foregoing Bretton Woods arrangement. Where official gold
is no longer "ballast" to stabilize the currency, these
markets in an evolved way, exist mainly to accomplish the same
purpose. These large, institutionalized participants are in need
of some means to keep the currency, in which they have instrumented
their substantial affairs, at some predictable value.
The main reason behind the U.S. allowing those under their jurisdiction
to again privately hold gold bullion, was as a necessary pre-requisite
for U.S. based corporations, institutions, et al., to undertake
the task of gold management on their own. Those participants,
whose business strategies demanded outright acquisition, would
come to realize that the marketplace differed decidedly from the
Treasury's bullion window, as any display of large, outright demand,
would gun the price, causing unwanted volatility. In order to
take some of the pressure off physical demand, an outlet was necessary
for those who's purpose in acquiring gold, was simply for the
effects of gold. These entities did not need to, and typically
did not want to possess it outright, other than for its current
stabilizing properties. If the stability could be provided without
holding the metal, but just a derivative of the metal (deriving
the desired properties and packaging them in some instrument),
then more gold would be freed up for those who really demanded
it. (Like oil producers, if we follow Another/FOA's reasoning.)
One might view this as a means to obtain/retain the "value
suspension" attributes of the currency, that we discussed
a while back.
For this purpose, contract markets are ideally suited. Hence,
a dichotomy of interpretations now exist for gold. It is at once
a reserve asset of the monetary system (although technically no
longer a monetary asset). It is simultaneously, a commodity, for
the purposes of its exchange in the futures markets. This is by
design, and this design was to generate stability in the financial
arena.
If I have to do business in a world, where all currencies' values
are dependent on the policy and performance of the U.S. dollar,
and all I want to do is protect myself against problems arising
from the currency, or its supporting economy, then the functioning
dynamics of a contract market may suit me just fine. I view my
contract expenditures as a cost of doing business -- something
like insurance premiums, if you will. Contract expirations with
no pay off, are not met with groans, but relief. Just as when
I insure my property, I don't relish the occasion of an "insurable
event," so I can say I got my money's worth, so here too,
I would as soon that things remain likewise stable. I only want
to have some insurance, just in case. In the same vein, as I insure
my property against fire and flood, I also don't expect the policy
to be of much use in the event of a nuclear war. It's not the
purpose of the policy, and if I want coverage against more severe
cataclysms, I expect to pay more for the service. Perhaps much
more.
Each entity participating has different reasons for participating.
They too, have different levels of "coverage" that they
desire to obtain. In life insurance, some may insure their lives
at $250,000, and determine this to be adequate in light of their
anticipated needs, and a cost/benefit analysis to premiums paid.
At the other end of the spectrum, a successful CEO of a large
corporation may be insured in the tens of millions, the company
considering the substantially greater cost worth the expense.
In each of these cases, though, the preferred outcome is to not
ever need to exercise the policy. If, however, the CEO is replaced
by another, there is now no longer a need to keep insuring the
former CEO's life, insofar as the business is concerned. The impact
of his living or dying has become irrelevant to the business.
A river runs through it...
In FOA's introductory post, he uses an illustration of a river's
flow to portray the political flows of time and history as characterized
by our perspective. Up close, the haphazard movement of the water
can lead one to make all sorts of improper conclusions, based
entirely on an incomplete point of view. From far above, the direction
is clear. Despite all obstacles and impediments, the course of
the river is endlessly, unstoppably toward the sea. It is this
observation, FOA tells us, that reflects the inspiration behind
the design of a new monetary system for this age. Instead of fighting
the natural flow of mankind, as the restrictions of a fixed gold
standard do, why not rather design a system, that does not inefficiently
spend such effort and resources going against the course of human
nature? Further, the pent up force from centuries of fixing the
gold price, have yet to be realized. They will one day be released
with incomprehensible fury. Why not have a system in place that
rides the wave to one's advantage, instead of one that insists
on further damming the flow?
It is in this analogy, that a host of other issues can be addressed.
Were not the foreign central banks furious over the 71 default,
and wanted to make sure they got a fair portion of U.S. gold for
all the dollars they held? Partly, yes, but this is to look at
one arbitrary portion of the haphazard swirls, eddies and other
disturbances found, when getting too close a view. What is important
regarding this perspective, is that this activity is energized
by, and carried upon, the bigger, overall flow of world affairs,
and not the other way around. Similarly we can look at the issue
of a "cabal" suppressing the gold price. What we should
look at, at least for the purposes of this discussion, is not
whether or not one exists, but why one can exist in this framework
so successfully. It is not enough to merely say one exists and
operates solely at the behest of governmental discretion, as such
a dynamic would not of itself be able to control all the world's
gold movements. It would be necessary for such an effort to find
success, that it leverage the power of the natural coursing of
this river, to obtain its ends. And in the case of the "cabal,"
it is instructive to note in what context they find it expedient
to work. If their purpose is to suppress the price of gold, why
not use a market environment that is conducive to, and in large
part exists, to advance a stable price environment, hence the
modern contract markets. This is obviously why they did not choose
to implement some strategy in the spot markets. Why swim upstream?
The advent of the euro brings with it an alternative to the dollar.
Importantly, it is an alternative to the dollar concept. Each
day, more entities, who participate in the current gold markets
in order to provide dollar "insurance," hedging and
portfolio balance, will find they can achieve the same business
objectives, more efficiently (i.e., at less cost) with the euro.
They should be able to do this, by system facilitated, outright
gold ownership, within a currency structure that is designed to
work best (find stability) in a freely priced gold setting. All
this without the inefficiencies introduced by the current markets:
counterparty risk, political surprises, and the hideous complexity
of the derivatives game -- all in an effort to foster an illusion
of gold price (and by extension currency) stability, which is
the requirement of the current paradigm.
Down and down she goes..., where she stops, nobody knows...
As this transition occurs, participants begin refinancing their
business operations in euros as their international currency of
choice. What this means, is that each day fewer and fewer participants
are found in the dollar gold markets. They no longer need to insure
against loss of life and accident for the former CEO. Hence, fewer
long contracts ("policies") are purchased with every
passing day. What's more, these former participants will also
sell their unneeded existing contracts, further exerting downward
pressure on the price. The only people buying them will be the
long speculators, who still foresee price action in these markets
as one day discovering the real price of gold. Instead, they will
likely be met with wave after wave of institutional longs, leaving
the arena. On top of this, the emerging divergence between the
paper price, and the spot price will, by this type of action,
be further exacerbated. Those who were insuring against "fire
and flood," (gold at maybe $400, or $600), will now see imminent
catastrophe on the horizon, and realize that their "insurance
policies" are not going to be of any use, when this storm
hits. The policies they purchased were not designed to cover this
class of event. The long spec views this action, and interprets
an imminent short squeeze, with the long awaited price discovery
that saves his bets, while the institutional players are getting
the heck out of Dodge -- and taking all their market volume with
them...
On top of this, you will likely see one last assault by the shorts,
who now smell blood. Following in the wake of these exiting institutional
longs, they will make one final, lunging thrust into the heart.
And who will stop them?
All the while the price of the physical metal begins a long and
sustained bull run, and those who bet on this with paper leverage
are the ones left holding the aforementioned handbasket...
Hopefully, if anyone has stayed with me, you can see this now
from a different perspective. What I've tried to contribute, in
addition to what Another/FOA have laid out all along, is an emphasis
on the simple business aspects that drives market behavior. The
financial considerations of gold, for these large institutional
participants, are very technical and sterile -- devoid of the
tensions of speculative interest. This is what the contract markets
are suited for, and designed for. Speculators delve into them
to find some angle to work, and work it for a killing, and while
playing an important part in the mix, are again, ancillary to
their essential functions. This is true of gold or gasoline, palladium
or pork-bellies. These markets exist most happily when there is
nothing more going on than yawning, hum-drum, monotonous stability,
and the implicit lack of price movement that this brings with
it.
Best to all ,
miner
miner49er (04/09/02; 20:37:41MT - usagold.com msg#: 73051)
Cavan Man @ 73032 - Paper
Gold...
Greetings, again, Sir CM - First, I apologize if I left the impression
that I was using you as a "straight man." The last thing
I would want to do is ricochet off someone's post...
Second, I hope the post was not too confusing. I wrote it very,
VERY late last night, partly while I was on the phone handling
some other crisis (tempest-in-teapot stuff, really...). After
having read it just now, it could certainly use a little rework,
but c'est la vie...
Mainly what I wanted to address was the issue of "large paper
gold holder/player[s]," and risk management, and the conclusion
that many would decide they perhaps were not getting what they
wanted insofar as hedging risk was concerned, and leave the markets
for, presumably, a better risk-management tool. And that the condition
that indicates this, is the evidence of a languishing POG. At
least, this is how I understood your post.
I chose this point to illustrate what I feel is the reason so
many observers have a hard time understanding why the price languishes,
more importantly, why it will likely never reflect the true price
of the physical metal... Even when the very conditions they know
should cause a price rise are looming large over yon' horizon...
The point is fundamentally, that these big players don't necessarily
care one way or the other about whether there is a gain, or not,
and whether they exercise their contracts, or cash them out, at
a regular loss (cost of insurance, if you will). It is as if they
are holding "insurance policies" for a certain level
and type of coverage, which over the past quarter century, has
been satisfactory, given the operative paradigm. They have not
insured in this system for the eventuation of 1000% POG increases,
or rollercoaster volatility. And, by and large, through happenstance,
market force, government intervention - overt and covert, dollar
performance has delivered, and these markets have, indeed, been
adequate.
Smart money recognizes the storm on the horizon, and realizes
that the herculean potential contained in the storm clouds will
deliver damage that these contracts ("policies") do
not insure against. Thus, they are not selling out because they
have thus far failed to perform. They know they cannot perform
in the future, as they are the wrong instruments to hold altogether
for the coming events. Add to this the consideration, that not
only are they "underinsured," they are insuring something
that will no longer need to be insured. Like the former CEO, why
continue to waste premiums on him? Insure the new guy, instead...
If moving to an entirely different currency for the denomination
of your affairs, use the tools that work best for that currency.
Dollar gold contracts will have no place in hedging/balancing
a portfolio of euro instruments...
Thus the great "bifurcation" you speak of (btw, nice
word...) takes place because of the obsolescence of the previous
market paradigm, and the awareness of its insufficiency for tomorrow's
world. Lack of price movement, until now has been Ok, as indeed,
for whatever reasons, the instrument hedged against has not needed
it. You are rightly perceiving the moment, I believe, as these
players are NOW looking ahead. At this moment, so far, the gold
substitute markets have outperformed the instrument they are hedging
against. They have done quite well against the dollar this past
year. At this rate, you would think they would stay with it.
But this is where the crux of the issue lies. These guys are now
perceiving the storm against which they are not protected, and
are exiting this arena. Without an apprehension of this concept,
people are prone to think that it's simply the lack of upward
price movement that is causing the exodus, which they perceive
more as capitulation, rather than smart people heading for the
hills... Thus many are saying to themselves, "I know better,
the shorts, the cabal, the Fed, BuBa, whoever, can't hold this
together forever, one day the squeeze will come..."
In this they are right, these guys can't hold it all together
forever. They won't have to, though, if this forecast is at all
correct. And there are likely to be painful squeezes, but they
won't be the end game, and it won't bring financial wholeness
and satisfaction to those leveraging for that end. These markets
will likely not melt up into oblivion, but down instead.
This is partly how the shorts will hope to get out of this. As
physical buying accelerates, the conventional logic has it that
people will leverage these increases with futures and options.
Actually, the bulk of the volume in the contract arena, are these
institutional risk-managers, who are only concerned with the contracts'
ability to keep parity with gold, and have interest only in taking
any gains in cash, which is what they do their business in...
They don't care about physical, that's why THESE guys play THESE
bets. For them, paper is a more efficient medium to work with.
Preferrable to dealing with physical storage, transport, and insurance
concerns, etc. As long as cash price performance keeps some predictable,
and stable relationship with the metal itself, they... are...
happy... They exit when they no longer believe their contracts
will provide this stability. Their sell out will decimate the
paper price, because they foresee the discrediting of their "insurance"
policies, altogether. The shorts will not only be relieved at
this, but if they perceive the price on its way to single-digits,
they'll chase it all the way down... and then rub it in the ground
at the end...
Sure, some people will get hosed, they always do, and some spiking
and squeezing will take place, and some people and houses could
be ruined or badly damaged, but the overall thrust is likely to
be as stated.
Yes, dear Knight, we probably do travel the same trail, but I
am wont to go exploring, and sometimes get myself into trouble...
but we both help each other stay on the path less traveled by,
as it does certainly make all the difference...
cheers,
miner
p.s. I am also quite aware that the insurance analogy is imperfect,
and that these contracts are not technically to be construed as
insurance, but that's another story...
miner49er (4/10/02; 07:36:13MT - usagold.com msg#: 73076)
timbervision @ 73057
- Paper Gold, etc...
Hi, timbervision - just quickly, as I gotta run...
a) Your Q: "Does he mean "you paid for" them to
go up in a leveraged way with a rising price of gold?"
The issue is again, and most, most importantly, why do the institutional
risk-managers participate in these markets to begin with?
They engage a different thought process from the speculator. The
spec is trying to find a way to leverage the existing system in
his favor by getting out in front of what he perceives to be the
system's weaknesses. Thus, he would be the one prone to say, "Look
at all the reasons gold SHOULD be increasing, but it's barely
up 10%, I can't park my money here forever, I'm outta here!"
He would, by getting out, be saying in effect that the angle he
thought he could work, was unworkable. Or that his timing was
so far off, it doesn't meet his objectives to just sit and wait.
This is not what the risk-manager is saying. He is managing risk.
Risk of what? Here, the dollar, or some instrument that relies
on the dollar. If the dollar performs with stability and predictability,
he is happy. His hedge in paper gold is only there to mitigate,
and help smooth out RELATIVELY minor bumps and glitches. He might,
say, import some raw material for his business. If the dollar
devalues a bit and his costs are up 5%, he wants to be able to
offset that with a cash gain in some instrument that provides
nothing more than ballast for his operation. If paper contracts
provide him cash gains to offset accordingly, his objective is
reached. He again is happy.
If statistics were reliable, and honest, an inflation indexed
government note would work. But they are not, and indexed notes
are suckers bets. So he goes for the gold, and because in a world
where the cash price in dollars is, by design, kept relatively
stable in terms of the metal, these guys go for the cash contracts
-- for the cash benefits. This ties over into another question
you had:
b) "And are you, in your second post, saying the same thing
when you say 'these guys are now perceiving the storm against
which they are not protected, and are exiting the arena.'?"
Since "these guys," the risk-managers, are not thinking
along the lines of the speculator above, they are not getting
out because of the system's failure to have produced sufficient
price action -- so far. In terms of their business, the system
has, is, and still is providing sufficient price action, but just
barely now... And it is the forecast, that it may not do its job
much longer, that is causing the slow, snowballing exodus of the
large commercial player. He, again, is not saying, "My gosh,
look at the aggregates, the current acct. deficit, the Mid East,
oil, etc., gold should be skyrocketing! This is ridiculous! ..Ciao!"
That is more the mindset of the spec. The risk manager, on the
other hand has been happy with the market's performance, as it
has successfully managed his risk, by providing the little bits
of "hedge" when needed. Yet, for the most part it has
not been needed, since the insured instrument -- the dollar --
has performed as desired. Only NOW is he starting to notice, that
the dollar, in WHATEVER business aspect he is concerned with,
is devaluing, and that his hedging instruments (paper gold), are
beginning to NOT keep pace, and that conditions are that the market
is slipping, and his instruments may NOT be credible much longer.
So, what does the crusty old commercial institutional manager
do...? Wait for a spike, and sell into it like there's no tomorrow...
Consider this also. I'm speaking here mostly of long contract
holders whose business requirements need to protect against a
weakening dollar... Hence they go long to make up in a higher
gold price. What of the evisceration in U.S. manufacturing, who's
real-live, warm-blooded people, who run these businesses, must
also live with the devastation they experience from a STRONG dollar...?
This is surely some of the force behind the short gold...? These
guys, recognizing a trend to a weaker gold price, most likely
hedge the other way around. Much more risky, but maybe it is as
FOA says here, "So how will these big derivative players
make out on their paper gold loans and paper gold shorts? I think
they will make a fortune because they understood Another better
than the Western Gold bugs could!"
c) Lastly - mining shares...
Yes, mathematically the leverage does decrease proportionately
as POG increases. Say a mine brings to market at 270, and gold
is 280. Gold at 294 is a 5% rise, but the miner sees a 140% increase
per oz. Gold goes now another 5% to 308.70. The mine now sees
only a 61.25% gain relative to the POG increase, ceteris paribus,
of course... The big issue here is this little Latin stuff which
we like to use to make us look smart... "The rest being equal..."
Hmmm...
If POG increases, then prices are also increasing, and thus wages,
oil, and every other cost... The mine is not likely to keep costs
at 270 for long in this scenario. This makes some difference,
but is not that terribly important while gold is still at these
levels -- and the dollar is still at its levels. The price of
gold presumably should beat the price increases. A significant
increase in gold portends more ominous conditions however, and
those conditions are the transition out of the dollar to the euro.
The very hyperinflation that mine speculators want to leverage
-- as they see this manifesting in the POG -- will come about
because of the transition to the euro. This hyperinflation WILL
be felt overwhelmingly in dollar costs, that WILL make a big impact
on the mines' profits.
It seems odd to want to speculate on the impending discrediting
of the dollar, by buying investments and bets denominated in the
very instrument one believes will be discredited...
This compounded with all the other pain and woe: nationalizing,
rapacious taxation, regulation, plus takeovers by hungry hedgers...,
and you have a very risky sandbox in which to now play with your
hard earned, and scarce capital... so in my opinion...
...So much for just quickly... Hope this makes things clearer
to you,
miner
miner49er (05/30/02; 09:56:43MT - usagold.com msg#: 77006)
Providing a perspective
on gold through analogies
In a somewhat similar way to the association of a booster rocket,
and its final payload, so is this current environment. For a season
the booster and the payload both track the same trajectory, and
move in tandem, the payload being driven by the booster. There
comes a time, however, when the booster is no longer needed (it
is also spent), and suddenly the payload, without a hitch, breaks
away from the booster, and continues on its course. The booster
equally suddenly becomes lifeless, and falls gracelessly to Earth.
Indeed, it could not continue. It was designed to do what it did,
and if it were to remain, would only destabilize the payload,
bringing both to ruin. It was not designed for this leg of the
mission.
While the analogy is clearly not perfect, it can be used as a
launching point (awful, awful pun...) to illustrate what many
here have discussed over the years. The present contract-based
environment will not be able to contain a price of gold that begins
to fulfill the mission of expressing the true market valuation
of the physical metal, itself. It is really better viewed perhaps,
that the payload portion is instead pulling the booster, and the
booster is somehow retrofiring for all its worth to keep from
going any further at all. It is hard to know all the complex physics
that come into play which address the velocity, changes in atmospheric
pressure, how the construction stands up to the heat, vibrations
and other stress, or how much fuel it has left. As such, the casual
(and even decently informed) observer can only guess at what point
the two will separate. Certainly some on the ground insist there
will be no separation, others anticipate such a break, and each
hazard their own opinion of the day and the hour.
Each of us will lie in the bed we have made. It has never been
my contention to foster an "us vs. them" atmosphere
regarding paper gold vs. physical gold ownership. Such a temper
on the forum leads only to fruitless salvos being lobbed back
and forth. The fruit in this discussion is born when each opinion
is presented with the deferential humility that goes with the
one thing each one of us is all too painfully aware of: none of
us knows everything. (And I certainly wag the left tail of this
bell curve myself.) Nonetheless, I try to always present here
that which has become clear and convincing to me, and with a sober
demeanor; for I never know what a day will bring forth.
That said, I will voice again my caution about the future of the
paper-based environment. When it ultimately reaches critical mass,