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TownCrier (7/10/2000; 14:51:56MT - usagold.com msg#: 33337)
Gold and paper within the ECB reserve model
The passing of the second quarter on June 30 signalled that it was once again time for the European Central Bank to revalue their massive gold reserves, marking them to the new market value per ounce (based, I believe, on the London PM fix of that day) at which value they will be carried on the official books until the next quarter arrives.

The outcome? According to last week's financial statement, with no net changes in quantity of gold held by the Euro System of Central Banks, the total gold assets of the ECB enjoyed a gain in value of 5.511 billion euros, raising the valuation to 121.188 billion euros.

As for their net paper foreign exchange reserves, the same weekly financial statement showed a decline of 500 million euros in value from the previous week.

This is an asset model that can be duplicated with benefit on any scale from national to individual. You can surely see why the official sector of Euroland no longer would derive a benefit from or hold an interest in maintaining the illusion of artificially low gold valuations.

From the standpoint of the U.S. dollar, if you think about it, you will see that the advent of such things as COMEX gold contracts are the psychological equivalent to the tricks banks used in the "old days" to attempt to stave off an imminent bank run whereby they would take cash from the vault and make piles near the tellers to create the false illusion of abundance. Although there is a fine line between illusion and reality (if the illusion works, it defines the "operational/behavioural reality" for yet another day), when the illusion fails, behaviour will quickly adjust to respect the true reality. There is far less gold available than the banking and derivative illusion would have you know.

Woe is he that turns aside from his prudent position in the bank queue because he was comforted at the sight of the cash piles, only to discover hours later that the bank failed (along with his account) when no one else behind him was as easily duped.

Aristotle (07/10/00; 17:56:21MT - usagold.com msg#: 33342)
For those suffering from "FOA or Trail Guide withdrawal," this might help
This was a real treat. I was doing some archive browsing when I came upon this post from one year ago. It is more relevant today than ever, particularly in consideration of the gist of the message in the #33337 TownCrier [Editor note: see above] post on the ECB's reserve model and bank runs. I especially liked the evolutionary aspect FOA draws attention to. I hope the past 12 months of discussion and events helps everyone to gain a firmer grasp on the importance of this post...

FOA (07/31/99; 17:29:43MDT - Msg ID:10016)
various thoughts

What is a "natural market" as opposed to a "manipulated market"? Do people really think that the only true natural markets are where every owner sells everything he can at whatever price current demand will bring? Likewise, every buyer buys all he can use at whatever price current supply will provide? When I read some of the philosophical reasoning presented on the net, I get the distinct feeling that the human factor should not play a part in the marketplace. In other words, anyone that holds off from buying or selling, waiting for a better price, is helping to manipulate the market. Has mankind lost sight of the fact that for a human marketplace to be "natural" it must show the imprint of "ulterior motives" in it's trading price! Yes? No?

Say, I am a big time oil owner and considered not to sell any of it. One day I decided to pump 100 million barrels into a giant tank. I'll just hold it there with the intent of selling it later at what I considered a better price. Am I manipulating this commodity? Or do my actions present the "natural" greed and fear that must be present in a human marketplace? Perhaps, I do not feel that the present world dollar prices of oil, gold, copper, cotton or corn, truly represent the "human use value" this currency reflects. If others think that fiat currencies offer the "natural" values that "supply and demand" create, do I have to sell to escape their damnation of my intent? Is it manipulation because I play all factors into my reasoning? I do consider that, usually these "critical" voices come from "economies" that are already receiving more production value per barrel than the dollar price can reasonably repurchase in real things. It's like the carpenter that is making $.05 per hour on a government job and his manager tries to convince him that is all he is worth. We should not blame the manager for taking advantage of the system? In the same light, nor should we underestimate the ability of Western economist to justify the "supply and demand values" of oil as expresed in dollars. Their readers are coming out ahead, just as long as supply and demand is settled in "their" dollars, that is!

Some even profess that world trade must "play by the rules" and deal in a spirit of honesty . But, what are these rules? And what is honest in our world trading system?

The present world banking operation creates a monetary arena that demands everyone to settle the transfer of all goods and services in a "fiat money" system. One that is clearly "manipulated" to the advantage of each country. The Japanese wrestle the value of the Yen to promote their trade advantage. Every country has it's "behind the scene" method of "interfering" with the way world trade sets the value of it's currency. Do not the actions of these countries truly reflect the needs and wants of their working populous? Even if their motives are, by design, manipulation, they do this with a perception to help their citizens. Even with this view, we see the imprint of "human nature" in world trade, as it's always been.

My point is that "manipulations" are a large part of modern trade valuations. Under a fiat monetary system, it is a "natural" tendency to hold for "your best terms" because the value received in paper currencies is always changing. Just look at 1985, when the G7 plunged the value of the dollar. What was that? Honest "value reduction" in a currency, "new rules to play by" or just a plain old natural response to a modern world?

So why do so many search for and cling to reasons that cannot apply in this current trading market?

A lot of people have been caught holding the wrong "outcome opinion" on this gold dollar thing. Just as in the above analogy, many "Western economist" that analyze the gold market also use a "western dollar perspective" to advise the same conclusion. That being, because we cheated the rest of the world to maintain our lifestyle, we are due for a little inflation and loss of dollar value. So, lets compensate by buying some gold, leveraged gold paper and gold stocks to retain any of our lost wealth.

Well, it just isn't working out that way, is it? You see, that "perspective" is based upon several concepts that we have "evolved" past:

1. "The repeat of the 1970s international currency panic."

That panic never ended and is in evolution into this day! The dollar reserve system has been patched up with debt and more debt over all these years. It was maintained because, prior to the Euro there was no other alternative to go to without shattering the world economy "completely".

2. "A 70s repeat of a rise in gold prices in dollars, at least back to the $400 or $500 range."

That gold bull of the 70s was a controlled burn! Contrary to every thinker, they allowed gold to be sold into the market to take the pressure off the dollar. As the price rocketed, it was easy to see that only a tiny fraction of the dollars held overseas would ever be exchanged into gold at any reasonable price. To fully complete the deal would have seen gold in the many thousands. The rising gold price sealed the fate of the world into using dollars in settlement. In effect they said, raise the prices of oil (and anything else) but you must settle trade in dollars. The USA would then write IOUs to everyone on the planet in order to keep the system going. In effect, to the world, stop buying physical gold, put the dollar on an oil standard, through dollar only settlement and "gold " will be priced to your advantage in a different venue.

Remember, in those days, they did not have a functioning "derivatives" market for gold. The only method of manipulation available was to allow it's price to rise in open auctions, well before any major portion of "foreign" dollars were exchanged. Stopping the auctions put gold back undercover. Falling gold prices kept the dollar on an oil standard until alternatives could be worked out. It "IS" a different game today!

3. "The continuation of a world gold market, expressed and settled only in dollars."

Few people ever factor in what would happen if the London gold market stopped trading gold. It's a "given" among "Western economist" that this is "the way it is" and could never change. If the IMF/Dollar gold market ever failed all gold trading would revert to physical, immediately!

The amount of gold held around the world in paper "derivative" form is enormous. It dwarfs any reasonable estimate I have seen. Every analyst that expresses current supply and demand for gold as under 5,000 tons per year, truly doesn't have a clue. London moves that much "demand" around in a week. Much of it in the modern world form, "derivatives". It is in this massive new market that gold ownership has exploded without spiking the price. On the contrary, this market created the falling dollar price of gold as a function of "maintaining a dollar reserve system".

Without this new form of gold market, a rising physical price would have destroyed the dollar well before the Euro could be established. However, within this paper gold system lies the ultimate self-destruction of the dollar and the destruction of the entire gold industry that relies upon the LBMA for settlement.

If one buys into any dollar based venture today, he is making an assumption that the Central Banks of the world stand ready to maintain this currency as the current world reserve. An assumption, that I believe will cause a major loss of wealth as this plays out. Today, we have "evolved" past the need to keep the dollar "above value" in terms of real things.

Forcing foreign trading partners to take on more dollar debt in an effort to maintain the credibility of past debt is destroying the world economic system. In the past, a US trade deficit provided a home for dollar reserves outside it's local market. Because these "foreign held" dollars were held as backing for other currencies, they expanded the international monetary base during a time of increased world trade. Through out the 80s and 90s, as the American inflation of it's currency threatened several financial blow ups, this system still offered the only logical alternative.

Today, competitive devaluation's of foreign currencies is changing the "old expanding" qualities of the US trade deficit. The same dollars, once sent to buy "overseas", are now contracting the very currency systems they once backed. These economies no longer earn a "return on commerce" large enough to generate enough dollar reserves. Truly, the more Americans buy from their failing trading partners, the more their local currency systems contract. Generating the need for more IMF induced debt. Debt in the form of dollars that flow back into servicing old debt without creating new money. An endless circle that points to the end of using dollars as reserves. Clearly, this new era has sent the IMF / dollar supporters searching for every form of liquidity expansion possible in an effort to buy time.

This is the expected outcome from using a patched up reserve system, built upon an ever higher mountain of debt. The effect creates lower buying costs (price disinflation) in the currency host country (USA) as it destroys foreign financial holdings by building debt into the balance sheets without increasing real assets. The only countries that can escape this fate are ones that can insulate their trading block with a new reserve asset currency (Euro) or have "commodity assets" large enough to back entire currencies (oil).

It is this "deflation" draw down in world trade that will force the removal of the dollar as the settlement currency in international transactions. The modern evolution of events clearly show that no other path can be taken. It is well within the authority of the BIS take this route. It is a reaction that the dollar has brought upon itself from the early 70s decision to drop gold.

The moment that this event transpires, the global deflation of dollar financial holdings will change into the hyperinflation of all local US assets. The exact same fate awaits every country that has tied it's economy and treasury to the dollar. A process completely out of the hands of the Federal Reserve and one that will require "intense foreign exchange controls"!

I suspect that the gold market, itself will signal this event long before it's arrival. All or some major players in the paper gold market will pull away from it's use and create a void on the buy side of the trade. A logical point because the dollar gold contracts could never settle physical gold at the price a "non reserve" dollar would produce. As I said before, this could destroy the current mechanics of the world gold market and could plunge the paper price as the trading market fails. Another gives this good odds, I don't? I think (and have prepared for) a financial event, that triggers the withdrawal of dollar users and forces a physical bidding war beyond the confines of the current gold market. Either way, the dollar price of gold will soon soar as London is removed from the gold window!

In reply to Carl, I also think that gold mine stocks will (in some way) suffer as they are locked by their local governments, into selling gold at (new) controlled prices to honor dollar credits. Also, most all of them will, no doubt (in all the confusion) be trading otc options and futures in current dollars, not to mention their gold loan repayments. I hope you are right in that they are smart enough to wiggle through this.

FOA

[Editor Note: JavaMan has highlighted the following post for bringing forward a broad series of important points discussed between ORO and Aristotle, and we therefore appropriately included it here for convenience.]

Aristotle (7/7/2000; 0:25:29MT - usagold.com msg#: 33240)
My chats with ORO
Having had a lot of dialog with you, ORO, which for the sake of making progress it always made the most sense to dwell on our differences of perception, I thought it would be a good change of pace to emphasize our common ground as taken from your series of posts directed my way beginning Sunday. And while I'm not going to repeat all of the points on which we agree, what I'll do with this post is repeat some of those of particularly worthy points, and throw in an occasional comment of my own to elaborate where it seems fitting to do so. [[My comments will be contained in brackets.]] Everything else from the end of this sentence will be excerpts of ORO's past four posts to me.
-------------------------

ORO: The boom and bust cycles of monetary inflation, at first at the credit level and then at the monetary base level are well known and innate features of debt money. They parallel the gold debt boom and bust cycles that central banks introduced.

Ari: [[Banking at ANY scale introduced this phenomenon, it's just that banking organization, particularly with central banks, increased the observable scale of the boom and bust. But in truth, even without such organization, to an individual with his "savings" on deposit at any one of the individual banks that failed from a bank run, the "small scale bust" of the bankruptcy is profoundly traumatic and ill-tolerated. It's proven impossible to keep legislators from meddling in such affairs to "mend the problem."]]

The indirect gold backing of the dollar that FOA and ANOTHER imply and I think exists, is going to collapse in a deflationary manner in the paper gold market, and in a stagflation/hyperinflationary manner in the dollar that has been hitched to gold in paper form.

[[The various Gold contracts of today are very much like floating versions of the formerly fixed Gold contracts known as Dollars and the other convertible currencies under the old banking Gold Standard which tended to implode nation by nation. The currency/contract failed but the Gold prevailed. As we now have it today, the bullion banking system is organized worldwide, which means the scale of the coming contract failure will be unprecedented. The run on Gold will be global, and glorious--if you already have Gold, that is.]]

The derivatives of gold do not CREATE the current demand for gold but serve to displace it and dilute its value as they are CREATED to fill the demand.

[[You said it, Brother.]]

The funny money systems can survive through periods of 100% annual price inflations - these survival mechanisms are built around indexing to prices [...] The growth of such systems in inflation-prone countries removed the benefit to government and banking of inflating the money supply as people form a habit of carrying nominally-calculated debt and indexed assets. The people competed with government as to how quickly they spend the funds they don't have yet. The people won the race. Sounds wierd, but that has been my personal experience in such periods.

[[That's what I meant by any given system being "workable" after one fashion or another.]]

While wide popular understanding of what is happening in the currency valuation dynamics of nations with a heavy inflationary tendency does improve substantially, it does not mean that alternatives are understood, nor is it understood that the lack of wild devaluation of paper money purchasing power at one point in time serves as a predictor of it happening later.

[[That's why better monetary education is needed--perhaps exactly what the Bundesbank has in mind with the launch of their Gold mark coin program scheduled for next year.]]

The dismissal of gold and free banking as a monetary system is often used as to avoid having to discuss its workings, which are self correcting.

[[As I cautioned earlier, while this system should be self-correcting, history proves that it is impossible to keep the legislators from meddling to cure their constituents' individual pains when exposed to intermittant bank failures. This continues to be the biggest practical obstacle you must overcome in "selling" your program. It's been tried, and it couldn't survive the benevolent/malevolent (your choice) hand of man.]]

Paper debt money is capable of smoothing out ripples inherent in banking, but only at the expense of creating enormous imbalances that later induce collapse.

[[Bingo. We save with Gold today as our refuge against the coming mother of all collapses as alluded to earlier.]]

Savings are not investment. [[More properly]] savings [[are nicely defined as]] a non-entrepreneurial allocation [[or procurement]] of resources

In a paper money system savings can not be had at all, unless done in the form of goods purchased for later consumption and stored within reach.

[[Hopefully more and more people come to see this important point being made here with these several following points. As I also stressed in my July 4th post, paper currency is a fine tool for commerce, but it is absolutely unsuited for use as savings. ORO explains why as follows--]]

Banks, being entrepreneurial, invest the deposits (in gold banking with a central bank) entrepreneurially while diluting [[currency or]] gold values with derivative substitutes. [...] The savings that people hold at banks are not treated [[more clearly, they are not perceived]] by them as investments, but that is what they are. They contain risks of default on top of the risk (rather than calling it risk we should call it certainty) of depreciation of fiduciary media.

[[The following is a good recapitulation of the above points!]]

Bonds and savings are contradictory terms. So are modern "savings accounts." One does not save promises, one saves assets; land, gold, housing, collectibles, equipment. The bulk of bank accounts are viewed by the depositors as savings, while treated by the banks as investments. The main tool of savings in the past, were gold and silver. The displacement of these with paper promises causes dilution during the long periods of monetary expansion.

Investment is not savings. Investment is the putting of resources at risk for the prospect of future reward. By eliminating gold and silver as apparently effective means for savings (by the dillutive effects of paper versions of them), all people are forced [["inspired" or "inclined" is a better term]] to invest by putting their funds in a bank account and having banks invest the funds in a portfolio of loans. Alternatively, savers can put funds in government and other bonds. None of these solutions are true replacements of savings, since all are investments.

[[Too few "Westerners" with a history of relatively stable currency and inflation realize this vital distinction between savings and investment.]]

So far, no monetary system other than straight precious metal accompanied by free banking (or without any banking at all) [["no banking" implies FreeGold]] has ever survived more than 25 years without going through a deflationary or inflationary crisis. The period just before the system crumbles is usually one of high speed prosperity and of high rates of debt accumulation. The fact of apparent prosperity is not an indication of future conditions. Your exasperation, shared by may gold bugs, is to be expected, but is still misplaced.

[[We must have miscommunicated here, ORO. I am not exasperated. Quite the contrary. I understand what's happening, and therefore I'm LOVIN' IT--continuing to acquire physical Gold at these gift prices with all excess funds.]]

The central bank may attempt to slow the rate of damage and extend the "reckoning" to a later date, however, it has not the option of avoiding the damage, nor of preventing the "reckoning" at the end of the process. Failure of debt money systems is structurally assured, what remains uncertain are the timing, the rate of change, and the ultimate degree of damage.

The "near end" in the 70s was not quite as intense a crisis as it had potential to become because of the support granted the dollar on international markets by the central banks of nearly all nations [...] Today, international support on this scale is not available. Like the man at the grocer's who has accumulated too high a credit balance and is asked to pay in cash. "You are my best customer, but you pay off such a small portion of your outstanding bill that keeping your custom is just not enough of a reason to accept your credit. I would do just as well if I closed shop and we were both ruined- because I can't afford you, and you can't afford yourself."

The distortion is maintained through the dollar debt balance of foreign countries and corporations in what can be described as a short squeeze. The EU and Japan suck dollars out of the international markets and into their reserves, and cause the dollar to be bid up in the Newly Industrialized Nations, who now must sell more product and import less in order to service the same debt.

[[And importantly, as ORO said moments ago, "Today, international support on this scale is not available." Therefore, say goodbye to the old life-support system for the internationally strong U.S. Dollar.]]

At this point, without looking at later consequences and without viewing the details of how this is done, I can more than agree with you, Aristotle, we not only have a workable system for ourselves, but perhaps the BEST possible system FOR US ­ if we can make it last.

[[Again, I wonder if we miscommunicated here. My suggestions of debt-based currencies as "workable systems" were made with the euro system uppermost in mind. I will be the first to say that the U.S. Dollar is now past its heydays, and can't be "workably" extended much more without a collapse in value. Buying Gold now will PRESERVE our wealth against these devaluation-related losses. Further, the failure of the dollar will likely be accompanied by the failure of the Gold banking and Gold derivative system. Buying physical Gold now will provide GAINS in wealth when THAT failure occurs. ANOTHER's pitch for FreeGold would help ensure that Gold does not again suffer from any more artificial depressions in value as we now have.]]

The effort to service debt is the sustenance of the purchasing power of a debt currency. While the dollar use within trade is simply as a medium of immediate exchange, this nanosecond of time in which a dollar is used is not where its nature shows. Where it shows is in the time between receipt and use - when it sits in your pocket, or in your account. Devaluation takes time and is thus not reflected in the moment of transaction.

[[That's right. As such, the easiest system for people to cope or "work" with is one in which the month to month losses (as reflected in rising prices) are tame--like two percent per annum as targeted in the euro system. Even there, Gold remains the natural choice for true individual savings.]]

Gold. Get you some. ---Aristotle

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