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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,â¤? 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, it will just suddenly break. Those who are carefully (and knowledgeably) observing may have some lead-time, as there may be a little warning. However, let me switch analogies for a moment.

When I was driving an old junker, sometimes I would know that it needed work of some sort, maybe the fuel pump was going, or the clutch, or whatever. At first I would be very conscious of any little strange noises, or sensations in the way the car was handling, and so forth. After driving it awhile, I would tire of this constant vigilance, as other things would distract me, and after all the car was going along fine. Maybe my worries were blown all out of proportion. After all the pump was only replaced recently, and I just had it in for a full checkup -- the mechanic pronouncing a clean bill of health...

And so I became less cautious about how far I drove it from the house, or how fast I would take it on the highway, or how much stress I might put on the system accelerating from a full stop, etc. Sure enough, I have had to have my car towed a couple times in my life.

Most of us have no inside knowledge of what's taking place geopolitically, or in the financial arena. We hear of wars and rumors of wars. We know a little bit about how derivatives work, and have some sense that they can really blow up. We know (like Maybury's CHAOSstan) that many parts of the world are woefully unstable and given to unpredictable volatility (yet we own many shares that have significant, if not total, exposure in these places -- places where many of us don't even know who runs the country, or how it's run...). Yet we insist we are investing. (Now if you do perform due diligence, you know who you are. I am not really addressing you folks, although, for the macro reasons concerning this market environment, I still humbly offer my cautions.) For the rest, it is important to be honest with ourselves, and realize that this is not investing. This is not even speculation. This is a high-risk gamble. Moreover, how much do you know about the due-diligence efforts of the broker/promoter who sold you these things?

This contract market environment exists for 3 main sub-purposes, which all ball up into one overriding, unequivocal manifestation. They are used for the traditional commodity purpose of supply/cash flow hedging. They are used by the commercial players in their suite of risk mitigation processes. And they are (ab)used by certain political and financial forces, each for their own designs.

This has been covered on countless occasions here. The bottom line to all of this is that each faction desires the price of gold to be stable or declining. Speculators fulfill their role in the grand scheme by betting on anomalies, and aberrations upon which they believe they can capitalize. Some specs maintain realistic horizons, and do (and have) made out on the occasional trend changes that go with the ebb and flow of any market. Others (IMHO) mistakenly hold that this contract-based market is THE single means the world will ever have of gold price discovery.

If this is true, then it must be able to satisfy reasonably most claimants for delivery. But it won't. It simply cannot sustain the prices now being commanded by snowballing volume in the physical markets. And when it breaks, it is not going to send its price to the moon and bring satisfaction to the long participants -- those in it for the gold or the cash payout. It is going to hurtle gracelessly to the ground, while the payload of actual physical gold will continue on unabated.

The true commodity players will leave because there will be no physical for those who want delivery. There will be no need for cash flow hedging by true sellers, because they will sell directly into the spot market at much higher prices, that won't ever return to previous levels anyway. The risk management types will be gone because the presumed stability upon which they hedged will be gone, the markets lastingly discredited as a means to price discovery. And the political purposes will have ended or evolved. Some aims achieved, others failed.

You own unhedged mines? Predatory takeovers by hungry hedgers will keep you up at night.

A rising POG, but no increase in miner wages = strikes and labor unrest.

Good property in Argentina? Government confiscation to claim it as a "state asset" to sell for dollars to bail starving debtors. (Perhaps not only starving for dollars.)

You own only US mines? If a dollar crisis comes (which is in large part why people are buying these mines -- to offset potential dollar problems by leveraging to a POG increase), the grand profitability of the mines will be tempting prey to rapacious taxation. And... even though some don't think the mines might be "nationalized" here (because of the foregoing, i.e., it is more profitable to just tax them), consider that immense quantities of gold may well have been promised to a number of players who have the ability to enforce delivery (oil, Europe, China(?), e.g.). 1933 style confiscation will not bring in enough, and is too cumbersome to enact. It is much easier to demonize gold (like oil in the 70s), and go after them... even if this doesn't mean the typical, clumsy 20th century style nationalizations that were common among socialist/communist states. It may not be labeled as such, but the practical considerations will be directed output to pre-selected channels at prices that will at that time be far below market (and the mines will still get taxed...).

Euro Breakout and a Rising POG in the Currency War...

As long as gold was on a chain around the original market-marking price of the euro reserves, the euro could be kept down. As long as the dollar price of gold was kept down, a rising euro would devalue their POG reserves and hurt their balance sheet. Consequently, a weak euro kept the dollar strong, and assured of its continued role of world reserve currency. So POG-on-a-leash = Euro-on-a-leash. This link refers to a speech by Alan Greenspan from last November. I quote an excerpt here:

"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."

This was the hope and dream of the dollar faction. As long as they could keep gold down, they could keep the euro down (since the ECB could not afford any contraction of their balance sheet). They would then wait it out, advertising the dollar's superiority in facilitating global settlement (i.e., EZ munny), and still maintaining the benefits of price stability, until Europe ultimately blinked...

The dollar would sacrifice its manufacturing sector, as the euro would battle high oil prices and other imports (in strong dollars) and the political pressure it brought in their sagging economies. (Also, steel tariffs on our part were just an indiscreet effort to further damage Europe by off-setting the one benefit of a cheaper euro: competitive advantage in export pricing.) The major participants whose interests aligned with the ECB could not just go into the market and bring relief by bidding gold, as their buy signals would cause a rupture in the market(s) as the dollar infrastructure would quake as money went to gold in torrents -- not necessarily benefiting the euro in this kind of move. It appears they had to just let fundamentals take their course, as the buying pressure had to come from beneath. And it would. And it is.

This type of pressure is slower and more manageable, and more easily apprehended (and thus assimilated) by people. But once in motion, cannot be reversed. The pressure valve can still be regulated for a while, and it will be upon the dollar faction to perform this. Once physical buying pressure overcomes the ability of paper interests to manage the price of gold down, there is no longer any need to keep the euro down (those ECB balance sheet concerns...). As long as the POG appreciates more rapidly than the euro (and it will for sure), the balance sheet is enhanced.

A strengthening euro increases euro confidence as it decreases the cost of dollar-priced oil (and other imports) and thereafter encourages euro priced oil, which benefits euro zone economies, which encourages euro investment, which means more euro debt, which increases liquidity, and stresses the international currency status of the dollar. This causes further dollar devaluation, which pressures dollar-priced gold up, which encourages more global physical off take which further pressures POG up generally, which damages any currency that is structured to compete with the POG, and benefits those that are designed to go with a rising POG.

This finds public acceptance on an increasing scale, as more general-public participation in physical gold ownership (clearly being encouraged by every corner of the planet -- except dollar-aligned areas) causes those with euro holdings to indirectly benefit by its appreciation along with gold. The converse anticipation of dollar export pricing advantage due to its new weakness is more than offset by now-realized big increases in dollar costs as dollars are dumped mercilessly. So the shin bone's connected to the knee bone, and suddenly Mr. Greenspan's statement is realized in the euro.

This is not meant as an advertisement for the euro, but instead attempts to illuminate the critical role this currency plays in the ultimate unshackling of gold from the constraints of a world currency system built around a relatively fixed gold price. And this is the planned outcome... Throw into this the prospects of the ever-feared "exogenous event," and the hair-trigger possibility of a sudden paper market reversal is compounded. Wars and other catastrophes always loom. And a derivatives crackup is always possible. And it most likely would not occur in a JPM/Chase or some other visible entity. They will be taken care of. And it would not occur most likely around some convenient time frame, like contract expiration, since it would probably involve some unknown parties (remember LTCM was once an obscurity), in some one-of-a-kind exotic that will trigger the grand chain reaction. No one without intimate knowledge of the specific problems will ever, ever see it coming...

So, all of this is not meant to be confrontational to paper investors. NOT AT ALL, believe me. I have no interest in seeing you fail. I hope you all make all you can make, and most of all have happy lives. I do (very thankfully). I also realize that some of you trade for a living, and need to engage paper to generate your cash flow. Understood. My aim is to maintain a detached analytical perspective, and hope that comes across here (although, I'm probably a bit more passionate here than usual). Physical gold ownership does not carry with it any guarantees either. But it has all the positive properties so thoroughly expounded here, and is still the premier wealth asset, and store of value.

A bird in hand is worth two in street name...

miner


miner49er (02/16/02; 18:49:51MT - usagold.com msg#: 70211)
Financial Arbitrage Socialism ­ the next New Deal
In a speech to the Euro 50 Group Roundtable on November 30 (http://www.federalreserve.gov/boarddocs/speeches/2001/200111302/), Fed Chairman, Alan Greenspan, discussed the Euro as an international currency. One of the requirements that an international currency must have is efficient utility as a vehicle in cross-border transactions. In this, a combination of robust payment and communications systems, depth and liquidity, make the complexities, volume and frequency of the immense international money flows of global commerce possible.

In considering the usefulness of a currency through both time and space, this would be considered as "through space."

Yet, what is the most important attribute of a currency that makes it attractive as an international settlement currency? "First and foremost," according to Mr. Greenspan, "an international currency must be perceived as sound. To be acceptable, market participants must be willing to hold it as a store of value."

This would be considered as "through time."

There is an awful lot in this speech that makes interesting commentary regarding the fierce and quiet struggle between the U.S. dollar and the euro for premier status in this role, but I want to focus elsewhere today. It should come as no great revelation that in order for a currency to function satisfactorily it should be able to maintain a predictable value in terms of goods and services throughout the timeframe considered by the participants in the transaction. Lent currency, when paid back in depreciated units, makes the creditor whole nominally, but his real return suffers. Likewise, appreciating units are harder for the debtor to come by, and so the lender risks non-performance and default. Predictability, hence stability, allows both borrower and lender some room for confidence in forecasting, and helps ensure follow-through at par.

Herein lies the heart of the above-mentioned struggle, and the great contrast between these two fiat currencies: each claims its worthiness as a store of value; yet each has very different reasons for alleging that claim.

The dollar, once defined in terms of gold and silver, has seen several critical leap-points in its evolution. First a break from silver, then its gold-backing replaced domestically, then devaluation of the dollar in terms of gold, and finally default on its gold-backing internationally. Untethered, it began a campaign to demonstrate its undervaluation in terms of the potential capacity of the U.S. economy to produce. This process was aided by a combination of cheap oil, and technology only then beginning to uncover and develop the possibilities of petroleum by-products.

Mr. McGuire: I just want to say one word to you... just one word.
Benjamin Braddock: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin Braddock: Yes, sir I am.
Mr. McGuire: "Plastics." (from, of course, The Graduate - 1967)

Several variations on this productivity theme have been performed since, with choruses of the hedonic multiplier ushering out the end of the century. Overlapping this denouement was another phenomenon that gave further life to the dollar -- the stupendous increase in the purchase of financial arbitrage products. This wave, ascending in phase with the unprecedented increase in credit financing, found its footing in a different kind of use for the dollar. The nature of these instruments, being very short term, lessens the importance of the currency vehicle as a store of value. Rather its liquidity, and the ability to transact enormous amounts of the currency instantaneously, permit the razor-thin spreads traded to be profitable, and allows participants to capitalize on the fleeting, almost imperceptible mis-pricings they arbitrage. The colossal volume of these instruments has influenced greatly the economic engine for nearly a decade now. But, alas, this too is coming to an end.

The steadfast repudiation of gold as an instrument of globally recognized wealth by the U.S. dollar faction has come to the point of self-destruction. If one denies the law of gravity, and steps out of an airplane, there is a period in which there is no penalty suffered for breaking this inalterable law. Certainly these few moments are quite thrilling. Reckoning will arrive however. Even should there be a rescue, it must come by some force that is itself not breaching the law, but advantageously utilizing it unto deliverance.

The euro on the other hand, takes a decidedly different tack. While giving assent to the necessity of improving economic productivity and employment within its currency bloc, it is determined not to allow itself to become bogged down in this political quagmire. The ECB has one chartered objective in maintaining the integrity of its currency -- inflation targeting. As a backing it has quietly, yet forcefully, used its gold reserves to advantage by marking them regularly to the market price of gold. Thus a rising gold price is a boon to their asset mix (in contrast to the U.S., which maintains its reserves at an outrageously undervalued constant). As for the "sale" of gold by the member banks -- I am not an insider, but I am also not naive -- these guys assuredly still have most of their gold. The owners of these banks are not 30-year-old kids. They are old money. Old money knows the value of gold. They play hardball. And they are not stupid.

The euro, in its marketing efforts, downplays the economies that use it, and advertises its emphasis on the integrity of the store through convertibility to the entire commodity panoply (gold included) in the free market. (In other words, don't look at what others might foolishly do with a good tool - instead this is what the euro can do for you.) The concept of non-interference actually enhances the ability of potential euro buyers to forecast their businesses. A currency that either fixes or manages its exchange rate to any particular commodity or other currency always stands to blow-up unexpectedly. So its players are buying a period of very determined stability, but always at the risk of a cataclysmic failure of the system. A currency that can be freely exchanged in a free market for any commodity or currency offloads the risk to the buyers of the instruments. But it allows the risks to be managed by traditional forecasting methods -- not burdened with the surreal illogic of politicization.

So we have a black-and-white, day-and-night contrast between these two competing units. The dollar has committed itself to its ability to hold its own without a use for gold, and with it the implication that it can ever pull out of its hat something that will give it use as a value store. The euro, structured to emphasize gold, stands poised to benefit from a revaluation in its price. And by avoiding political entanglements, gains flexibility to manage the currency more soundly.

A new breed of rabbit... (designer-cloned especially for hat-pulling...)

In another speech by the Fed Chairman (thx Randy), this one before the Greenlining Institute on January 10th (http://www.federalreserve.gov/boarddocs/speeches/2002/20020110/default.htm), there is a noteworthy discussion on the need to emphasize "savings." Considering the target audience, attention is given primarily to economic development and methods to get the financially "underserved" portion of the population, plugged in.

Amid the discussion is mention of a concept called "individual development accounts." These are basically tax-favored savings instruments for those who qualify, with matching-fund sweeteners, for the purpose of "saving" for things that improve a community's development: home-buying, business-starting, and education, for example.

What we have here is "targeted savings." Not a new idea by any stretch, but perhaps there is some new twist to extrapolate. Let's build on this a bit. First let's put the notion of savings into proper perspective. Savings as discussed here, is not savings. It is a loan to the bank. It is an investment (and investments are not savings, they are risk-taking ventures). You elect to become creditor. In return you expect them to yield back to you a portion of the profits they plan to make with the money you lent them -- and enough to make it worth your while to forego alternate marginal opportunity. You may have used your "savings" to loan to them, but it is a loan nonetheless. Deposit is a terribly misleading term.

Second, this concept, as mentioned, is really no different than other incentive-providing instruments. The premium you pay for the additional benefits (tax favored treatment, matching funds, etc.) are that you have time and usage constraints. Upon maturity of the obligations, you must still obtain goods and services -- even the targeted ones -- at current prices. Your bet is that the marginal benefits of preparing for these expenses, via these vehicles, will be greater in relation to alternative possibilities. Your risk is that the vehicle you are using -- a dollar denominated instrument -- will hold its value according to the prediction you have made in tying up your funds in this instrument at the expected rate of return.

In the case of the U.S. dollar, the onus for sustaining this value is a function of the sweat and grunts of yourself and your fellow taxpayers. (But I'm already dancin' as fast as I can...! Work smarter, not harder! Just hold hands and buy an SUV -- the gas guzzlin' kind have a greater effect on the hedonic multiplier...). You get the picture.

If I'm reading between the lines correctly, I perceive the U.S. Central Bank is quite well aware that they have wrung all the blood and plasma out of this stone, and are beginning a shift to a "new alchemy." (Not the old bricks-and-mortar alchemy, stupid... this is a new-alchemy...)

Traditionally, we have tried to instill the currency unit itself with value by way of commodities, or people's productivity, or even hyper-efficient transaction utility (the use value required by big money arbitrageurs, et al.). We then hope that the currency unit can hold its value by these mechanisms in terms of future procurement of goods and services.

What if we could promise the goods or services, deliverable in the future, at today's prices, instead of guaranteeing the accounting instrument? There are a couple of ways to look at this. The first is more conventional, sort of like a forward contract / lay-away hybrid. The second is more intriguing. First, let's examine the more conventional mechanism.

If we take the forward concept away from the framework of corn and pork-bellies, and the lay-away concept away from Walmart and Target, and apply the thinking to the purchase of old-age care, medical expenses, college tuition, and the like, we do have a new variation on a theme. Indeed, the accounting instrument will assume, of its own, stability vis-à-vis the things it is contracted to buy. (Ah, the wonders of fiat...)

Let's look at an example. A contract to purchase a year of tuition in 2020 at MyState University begins with a standard loan account. I lock in my 2020 tuition at 2002 prices, say $15,000. Between now and 2020, I make payments on a scheduled basis, and in 2020 I use the balance accumulated in this account to purchase my tuition. Several characteristics should be observed.

I will not receive interest on this account, as the obligation is not "savings" as such, but pre-payment installments for an actual good or service purchased today, with delivery deferred to the future. Money paid into this account is not mine. I am not able to borrow against it, or withdraw it. What I own is a contract. The contract is negotiable, and transferable. I can sell it on the open market.

While there are others also interested in 2020 enrollment at MyState U., the contract on its own is generally illiquid. To protect both parties from undue risk, funds and trusts would emerge to buy these contracts and transform them into marketable securities. (No doubt AAA and high yielding, too...) Immediately you incur all the dynamics of the current environment, with all its temporary advantages, and reliance on an asset structure built upon promises. Once balled up, these new instruments would function much like a financial currency in the contract marketplace, and among arbitrageurs. And as currency is want to do, its notional backing would face constant debasement. Practically speaking, the quality of the tuition eventually received would not be what we expected.

Why would people enter into such arrangements? Because, unhappily, people are possessed of the good and bad quality of child-like trust in their governing institutions. They want to believe the best. In the face of everything beginning to crumble around them, they would be ready to receive this financial lifeline, as a means of procuring anticipated future needs at current prices. They have been effectively discouraged from saving gold. They sense a need to hoard in the face of escalating prices, so why not provide them something to hoard, that is still yet defined in terms of a financial asset? Governments would buy the idea as it serves to remove much of the financial burden from a whole host of social programs. Yet it does so without causing the bureaucracy to relinquish their coveted control of these same programs. Financing companies would welcome the idea, as it would provide both a new game to play, and a fresh fix of funds to play with.

The concept provides a notable shift form the traditional tax-and-redistribute socialism of the 20th century, and launches us into a brave new high-tech world of pay-to-play socialism. A socialism for the new millennium. As in all socialism, the end product is still less than what the recipient hoped to get at the outset, but in this permutation, it is oh so much more efficient! We have now taken the next step forward from Doug Noland's "Financial Arbitrage Capitalism." We have moved on to "Financial Arbitrage Socialism."

S. Patrick: You who are bent, and bald, and blind,
With a heavy heart and a wandering mind,
Have known three centuries, poets sing,
Of dalliance with a demon thing.

[...]

Niamh: Then go through the lands in the saddle and see what the mortals do,
And softly come to your Niamh over the tops of the tide;
But weep for your Niamh, O Oisin, weep; for if only your shoe
Brush lightly as haymouse earth's pebbles, you will come no more to my side.

[...]

Oisin: The rest you have heard of, O croziered man; how, when divided the girth,
I fell on the path, and the horse went away like a summer fly;
And my years three hundred fell on me, and I rose, and walked on the earth,
A creeping old man, full of sleep, with the spittle on his beard never dry.

From "The Wanderings of Oisin," W.B. Yeats

I mentioned there was another less conventional way to approach the financing of this concept. Let's look at it now. In the contract concept just mentioned, the contract still ultimately depends upon the fate of its denominating instrument (the dollar). The funds used to purchase the contract disappear immediately into the world of whithersoever-they-will, no longer coupled to the future deliverable. In contrast, this second approach attempts to maintain this coupling. In doing so, the possibility exists to create a new "special-purpose" currency vehicle altogether. Instead of the buyer effectively buying forward a future deliverable, he instead sets up an account somewhat similar to an IRA conceptually. The goal is again targeted savings. Only this time the deposited funds belong to the depositor, and remain associated to the deliverable.

Why targeted savings? Two reasons. First, this helps ensure these funds stay under the control of the financing institutions -- as they remain financial assets, and do not find their way into real goods and services purchased currently. This would cause the fated exposure of the tenuousness of the financial assets relative to escalating consumer prices. Second, (really the same thing, just another way of expressing it) it transfers the feared unknowns of where these currency units may ultimately alight as value stores in the public's mind (commodity and goods hoarding), and polarizes them to a defined future deliverable (which is still presently negotiated as a financial asset).

The nature of the deliverables must be such that they can readily be redefined. They must also be in high and inelastic demand. Services such as health care, old-age care, and education suit these purposes quite well.

In this method, since the originating funds still belong to the depositor, these funds effectively become part of the financial institutions reserves. Since these funds are earmarked for the purchase of an appreciating asset, at a fixed price, they acquire extra value, and can be lent at a premium. Such accounts can also find liquidity by being rolled up together with similar instruments, and diced-and-spliced according to the wants of the marketplace. The service ultimately provided, as in the method above, will be inferior to what the buyer hoped for, but he will most likely receive it nominally anyway.

What is different here is that the funds involved take on a life of their own so long as they are traveling in this new savings vehicle. As long as the funds are tied to an inelastic and high demand future deliverable, they, like Oisin above, in a land of eternal youth, retain their youthful vigor.

Do we not now have a new "virtual asset" backed currency that can travel side-by-side with our other fiat currencies, including the old and mortal dollar? Could this new currency not be used as tender in our daily transactions (bread, butter, and beer), and thus add new life to the entire U.S. dollar regime? By providing a confidence of a value store to a daily use currency issued by the U.S. dollar faction, is not the incentive to move to gold taken away yet again from domestic participants? And, hopefully, could this not entice global speculators to stay for one more drink and one more dance, too?

As far as complicating restrictions on the premature withdrawal or termination of these accounts, perhaps no more would be required than that they would be nominally exchanged for old-fashioned mortal dollars. And like the tragic Oisin, once so much as haymouse brushing earth's pebbles, these special-vehicle dollars, suspended in youth, would return to their proper age and strength, to purchase whatever they may command in that day.

Will people actually go for this? For all the reasons listed earlier, yes of course. Will they accept an inferior future product - the inevitable outcome of such schemes? They already do with traditional socialism - for which they still clamor - even with its track record of inefficiency. Would people not be likely to accept a more efficient, cost-effective way to get the same thing? Especially, if they feel they have more "control" of the outcome... They "save" today in tax-deferred retirement accounts for all its worth because they believe unquestioningly in the integrity of the unit that accounts their "savings." Even as they watch their so-called savings evaporate before their eyes. Very few have any knowledge at all about what they are doing. Why would I expect people to behave any differently here? Cynical perhaps, but pragmatic...

So, welcome to the "New Alchemy." But if you have a choice, I suggest you reject alchemy altogether and just buy gold -- the real thing -- while it's still selling at give-away prices.

A few thoughts... maybe interesting, maybe way off base... but thoughts nonetheless...

Good weekend all,
miner

miner49er (03/07/02; 06:56:56MT - usagold.com msg#: 71226)
Trapper @ 71210
Good morning Trapper -

Regarding my "faith" in Europeans not to engage in paper gold. This was the same thing ORO would address. How do you keep people from playing these kinds of markets, when they are so profitable? In reality, I wonder how this will actually play out, myself. What I suggest, is that the euro folks will make the effort to regulate these markets in their favor, even as the dollar folks currently do the present markets. Areas outside of their jurisdiction will eventually find ways to do whatever they want, I imagine, but the expectation is that this will take some time after the anticipated decimation of the dollar-based contract market environment currently holding sway. In this "time" a lot of things can happen, and who can prognosticate? Probably, we will tend in the future to a single world currency as this will both facilitate global commerce, as well as hinder financial activity that behaves contrary to the policies of the currency issuers.

So as long as the euro works best in an environment of rising gold prices, regulations will foster this outcome. Even within the system, people will find ways to circumvent the regulators. So the regulators will keep regulating, and the circumventers keep circumventing, in the grand old cat and mouse game called "beat the system." Just like today.

Outside of their realm, maybe they just apply enough "influence" to the jurisdictions harboring the offending markets, that their own regulators make these markets a little less profitable? This influence does not just have to be about precious metals. Pressure can be brought to bear with just about anything, and in return for just about anything. Sound the trumpet about "human rights abuses" in mineral rich ABCLand, until you've exacted favorable trade concessions from them in return for putting the horn away. Just like today.

If the euro is at this time the chief reserve currency, euro-zone regulators will count on this to leverage their will. If oil is still what we use to light up the world, and it flows from euro-friendly countries, they can also provide assistance to encourage others to abide euro-zone regulations, where they are in oil's interests as well. Just like today.

This is nothing new. This is what all ruling factions do while they have the scepter. The U.S. has used the IMF to promote its own interests across the planet for decades. I have no reason to believe that this will not be the same with Euroland as well. They will have their own IMFs to influence policy across the world. They will make recommendations to various nations on how best to develop their economies, structure their governments, etc., and provide rewards (e-z loans, grants, military aid) for compliance, or punishments (sanctions, divestiture, military action) for those who don't go along. Just like today.

This is one of the main reasons it is the coveted jewel to be the issuer of the world reserve currency. It allows you to impose your will. That is why I don't think it's really so much a matter of "faith", that I conceive the plausibility of Euroland's controlling the operation of contract precious metals markets in the future, if they are at cross-purposes -- just as they should be able to influence, control, or manage other externals to their realm. Not forever, but for its season. It is just part of the human condition as shown all through history.

I also don't wish to make out that everyone is sinister. On an individual basis, people do things consciously and unconsciously that promote the things they believe in, and ultimately this finds itself in things that benefit them. When a collection of individuals acting for a common purpose (a government for instance), move together, the behavior is magnified out of human proportion, and can appear monstrous. Hence the perpetual metaphors of states and nations as "beast," "leviathan," and so forth.

There are certainly evil people, and evil ruling forces. There are also good people with beneficent designs. I personally make no judgement on any individual in either the U.S., or in Euroland as far as their intent. Only God can do that. What I wish to observe is the collective manifestation of the synthesis of all these participants: good, bad, and opportunistically ambivalent on the world stage. And the analysis suggests that there really isn't anything new under the sun...

Thx for reading good Sir,
miner

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