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Page III Index
ORO (7/19/2000) On Savings and Profits
auspec (09/04/2000) Gold Economics in Abbreviated Format
SteveH (10/15/2000) On the Who, Why, and When of the Gold Market and Expected Price Reset
Sierra Madre (10/31/2000) On Floating Currencies, Gold, and Reserves
ORO (11/10/2000) On the Electoral College and the Republic
Holtzman (01/04/2001) On Eternity
Mr Gresham (1/6/2001) Alan Greenspan and Payments System: Squeeze is On
ORO (01/13/2001) Thoughts on Black Market Gold
ORO (01/30/2001) Triffin's Dilemma
02:48:29MT - usagold.com msg#: 33624)
Aristotle - comments, installment 5 -- and for HBM
Note: Re Aristotle (07/10/00; 17:56:21MT - usagold.com msg#: 33342) -- FOA withdrawal
FOA did indeed put it together in a wonderful summary at the time. More concise and sharp than anything I ever read on the topic of international monetary economics and politics. [Editor Note: Click here to read that referenced commentary.]
Aristotle (07/01/00; 19:28:55MT - usagold.com
Aristotle (6/15/2000; 19:09:20MT - usagold.com msg#: 32406)
Hill Billy Mitchell (6/15/2000; 15:47:40MT - usagold.com msg#: 32398)
The central role of gold in the financial markets is not unalloyed. To give myself as an example, I put nearly as much, and on occasion more, into antique etched crystal, artworks, and turn of the century antique furniture than I do into gold and silver, as a percentage of income. The point of the matter is the joy of ownership of items directly useful that are both beautiful and of some rarity. These items also have a much more liquid market today than they had in the past due to the rise of the internet. Prices are much more predictable, and antique retailer's margins are now squeezed and come more from appreciation of inventory (price inflation) than from the margin between buy and sell prices.
The store of value function of the rare item is kin to that of gold, but less effective because of the limited liquidity and the differences between items. Gold is highly liquid and much more mobile. It is not subject to destruction, and is spendable internationally at uniform prices.
In the taking of income "off the table" into true savings, the funds put into the rarities and gold (and other PMs) are not at risk. They are not in fiduciary obligations subject to default, and they are not in a running business that is likely subject to swings in the market and political climate for the whole of its value. The rarities have intrinsic value that is far less susceptible to changes that have potential to make a running business worthless, to cause default on fiduciary media (turning them worthless), or to changes that cause currency collapses that destroy the purchasing power of non-defaulted fiduciary media and equity in surviving businesses. The value of a debt security and a bank account are subject to the vagaries of default and currency inflation. The value of equities is only that of the future income they can produce; the income potential may evaporate due to competitive products produced at lower cost, regulatory interference, etc..
Financial and business assets have a potential value of 0. The rarities are unlikely to face such demise, and their potential value on the downside is much more than 0.
There is now the question of physical savings vs. investment. So long as investments give their holders the impression of allowing them to obtain the items of savings in the future, the straightforward investors are likely to maintain their current low conversion rate from investment to physical savings. The temptation to continue with a recent peak performer is great, even when the fundamentals have been depleted as drivers for the future value of the investment. The straightforward investor is a momentum investor, he can be described by the investment decision equation:
Income rate + capital appreciation rate => Market interest
R(t) + [P(t) / P(t-1) -1] => Im
So long as the
relationship holds, he is inclined to keeping his positions.
The momentum investor is backward looking.
The momentum investor is also delaying movement into physical savings so long as the prices of physical savings vehicles (PS) answer to the relationship:
PS(t) / PS(t-1) - 1 <= Im
For the sophisticated investor, the speculation of continued momentum is questionable, and is investigated at length. According to the sophisticate's view, he will hedge against momentum performers and diversify away from them.
The "old money" politically savvy, economically aware, and connected "players" are those who move towards the physical savings vehicles at a steady rate. Their family financial history stands as an education that indoctrinates them with the realities of economics as revealed by this history. They take a longer view of capital and see savings as separate from investment. They save over periods of decades rather than years, and take funds "off the table" on a continuing basis as they understand the dangers of political - economic situations as they build. What understanding that is missing is provided by hired intelligence that they pay for very well (some of the payment is for the purpose of preventing these advisors from revealing their views in public).
To these people, monetary volumes are seen as sources of potential competition to their own physical savings plan, and they do their best to both prevent competitors from access to these items and to prevent their knowledge of them. Often they will use all their influence to squeeze the savings vehicles out of reluctant private, public, and corporate hands. The declining gold reserves of bullion banks have moved into these hands. They are in positions that allow them to push governments to use their power to sway markets in their favor. As Another said; the price is low because someone very important is buying.
This latter class of investor will accumulate in secret, and will be unlikely to reveal their view of markets even to political leaders in their employ, nor to otherwise trusted business and personal confederates. They do not view capital in monetary terms, and refrain from calculating returns in these units. They view true accumulation of productive capital in its own terms, just as they view savings in terms of gold and rarities. The accumulation of productive capital is viewed as a net addition to the sum of competitive and profitable operations in their control (not necessarily under their direct ownership). These are the people that will take true business profits off the table and save them in physical form.
The nominal return on their investments is not a first concern, but the accumulation of actual capital. Often, they will lend to a "bad risk" in order to obtain the security put up for the loan. These are the owners of loans to miners when resource prices are low and the miner seems destined for bankruptcy, and Moody's or SP put up a warning on their debt. The loan is not intended to float the business, but to secure the transfer of ownership to the creditor without a competitive bidding process that would reveal the player's opinion of the business' value.
The capital return on capital is not revealed in nominal profit margins and not benchmarked to nominal interest rates. It is seen in mining, for example, in the accumulation of mine reserves and capital equipment. It is revealed in accumulation of square footage of high value real estate, maquiladora plants in Mexico, and chunks of Daewoo. The preferred method of acquisition is purchase during distressed sale when the market price of the business acquired is very low, or when it is possible to avoid the open market altogether.
The repossessed business, if it were the one that over invested in up to date new capacity would not necessarily be profitable at first, but the ability to wait out the competition that is at a disadvantage because it is still servicing debt, while the repossessed bankrupt can reorganize and produce without being hampered by the capital debt load weighing on competitors, will eventually win it market share and profit margins.
When considered in this way, the routine capital return on capital is on the order of 1.5%-3% in mature businesses, as the capital is consumed by use and needs to be updated to remain competitive in either product quality or cost. The bulk of capital expenditure fills maintenance and updating needs, not the need for new capacity. The capital return on capital is often higher for new industries. However, during an investment boom, capital is often consumed as new generations of products and services that involved a smaller initial investment drive out prior competitors who had invested heavily in earlier generation technology that has become worthless when the new technology came online.
Microsoft is the greatest example of this trend, as the markets continuously inject capital into Microsoft through the buying of ESOP share distributions by its employees. The R & D efforts of Microsoft are greater than its revenue, and have been so for years. The markets absorb this excess cost through the purchase of the stock granted to employees instead of salaries, and used by the corporation in its acquisitions instead of cash. The reality of Microsoft's monopoly is that it costs more to maintain than the market is worth. It is only the belief of the momentum investors in the value of Microsoft's monopoly that makes it possible for Microsoft to operate. This belief of investors is supported by the accounting standards that hide the cost of ESOPs that move the expense of R & D from Microsoft's books to the new investors in its stock. While investors are unwilling to foot costs for warehouse and inventory building by Amazon.com (the bulk of its investment) because it appears on its accounts and makes their earnings disappear, they are happy to do so for companies who's main expense is in R & D labor; particularly genomic and software companies. The main reason for this situation is the inability of the investor to understand the product, identify its market, or estimate the value of having the advantage of first to market, nor the barriers to entry for competitors.
Back to the issue of net profit in "real" terms.
In FOA's version of the "Western Investor", the equation describing the momentum investor is applicable. There is an expectation that plenty will be available for the future and one need only wait and invest in one of the momentum financial vehicles and then reap the rewards and convert them into savings. Thus 4-5% of capital gains are spent rather converted to savings. Many recognize the problem of currency inflation, but do not understand that the process that brings substantial price rises/currency depreciation occurs AFTER the excess currency is produced. The understanding that the new currency adding fuel to inflationary fires is actually being produced by central banks because of deflationary pressures that threaten systemic collapse due to default of banking is beyond most "Western" investor's comprehension.
The ingrained thought is that the "too much money" that is "chasing too few goods" is concurrently being produced. That has never been the case. Only 1/4 to 1/2 of new currency is "chasing goods" the rest chases other paper, settles in debt mutual funds and bank CDs etc.. In these financial forms, debt money accumulates and collects interest and/or capital appreciation.
Just as holders of junk internet stocks were holding them and chasing others despite clear evidence that market valuations were not only unrelated to potential earnings, but that some stocks were trading at multiples of the expected size of the market being sought by the company. Within a few weeks, the internet currency depreciated by 30-40% for the BEST companies. The lesser corporations are now providing their investors with nearly a complete loss of investment. The same structure is built into the debt currency and the financial vehicles that substitute for it. The senseless expectation of further capital appreciation based on the previous experience is identical to the expectation of currency and substitute holders having similar purchasing power to that at the time of earning the funds, if a sufficiently high interest rate is obtained. Since interest rate levels reflect that same expectation, it is only AFTER a breakout of "price inflation" that interest rates reflect the PAST currency inflation.
The suddenness of the currency depreciation catches the unaware by surprise. The spirit of it as a substitute for a bank panic is lost on the "Western" or momentum investor. The fact of currency inflation being a default by banking, government or a country's society as a whole is not in this investor's frame of reference.
The more careful investor I termed "sophisticated" still refrains from exercising his full judgment in diversifying into real assets because of the army of "experts" (a.k.a. financial sales reps) saying that what the investor needs to hedge against currency depreciation is "leverage" to the price of gold or to the one or many commodities who's prices threaten his purchasing power. The fact of these instruments being identical in their nature as fiduciary media to currency and its substitutes is lost on this investor. That they can only be free from default if infinite amounts of currency are potentially made available by the central bank is also disregarded here.
Now comes the point of the "old money" and "smart" saver that take resources out of investments and put them in physical savings over decades. Being free from the illusions of extrapolation from the immediate past, and having an understanding of the nature of currency depreciation as an outright default of a fiduciary media, these investors buy gold. They do not wait for market signals and the like. They make their move constantly. Some may use influence and judgment to secure credible gold obligations from gold mines to substitute for immediate delivery for the purpose of allowing lower long term gold prices. Each of these "giants" is capable of moving the markets if he were to attempt a shorter term strategy of "market timing" of his accumulation. He, and others like him, will do their best to HIDE the purchases - quite unlike the momentum investor who is happy to "pump" his current holding (even if he has no intention of actually "dumping").
This is the "player" that is accumulating his 1-3% of capital every year in actual gold, in land, in the extremely rare art and well crafted antiques. This is the core of participants in international trade, and the core of capital ownership that seeks an actual return of physical assets from their business. These are the individuals and families that do trade and business on a grand scale. The public corporations in which many retain stakes are only part of the picture. The bulk of their holdings are private and do not go public unless the markets are willing to provide substantially more than they think the company is "worth". UPS was private until just recently, as was Goldman Sachs. The owners are cashing out.
Remember that net individual sales/purchases of stock outside of mutual funds show a sell rate of $587 billion annually. If you add to the $166 billion of individual's funds flowing into mutual funds about 1/2 or 2/3 that amount that go into particular stocks, then you have a group selling at a rate of some $700 billion per year. Large companies buying back their own stock provided $150+ billion, M & A provided somewhat less in cash, mutual funds and individual purchases come to $250 billion, and the balance is coming from abroad at $188 billion with the pension funds netting near 0 or selling, for a total of $700 billion.
A recent Business Week survey of the top corporations across the globe revealed that the average dividend yield around the globe is 1.5%-2%, the effective rate which cover Japanese bank costs in lending short term and the best Japanese government bond yield. The core driver of the global equity bubble is the attempt by Japan to keep its banking system afloat while keeping the Yen currency viable. They exported the monetary base inflation that was created to address the need to reflate the banks through carry trades and by inducing foreign direct investment of the trade surplus generated by their corporations. Though the 0 rate policy is a response to internal problems in Japan, it has played a major role in maintaining the value of the dollar. This was the case till their trade surplus, which provided non-Japanese dollar holders with something to buy with dollars outside the US, became too small to cover the US trade deficitís doubling and now near tripling. The crossover beyond coverage of the US trade deficit came in 1998 as the carry trades began unraveling.
The noises about
the end of the Japanese 0 interest policy threaten the whole of
the global equity markets, which are priced according to that
figure. It also impacts
the gold market, as the suspected POG derivative at its center
reacts to interest rates of particular G-7 central banks so as
to proportion the POG to the lowest interest rate available from
central bank participants in the supposed agreement according
to an apparent application of a Black Scholes pricing model (more
on the modelís economic meaning in an upcoming post I have
been holding back for a few weeks). The model actually prices
the currency in terms of gold in the form of what usually seems
to be a 5 year futures contract. The currency bearing the lowest
interest rate dictates the rest of the currency values according
to supply and demand from actual investment, debt payment, and
trade flows. The lowest interest rate makes the country providing
it the main source of capital for the global banking network.
The outcome is that during active fund flows, POG is roughly proportional
to (1+Imin) ^ n, where Imin is the lowest G-7 interest rate, and
n is the common maturity for the particular nationís common
bond maturity, usually 5 years. The result is a POG that rises
with interest rates during the period covered by the alleged agreement.
The effect is to have a country that has low interest rates, and
therefore infuses capital to the world to be rewarded with a low
POG in general, and in its currency in particular.
08:53:16MT - usagold.com msg#: 35986)
GOLD ECONOMICS- ABBREVIATED VERSION
CURRENT EVENTS- We may as well have some fun while patiently awaiting more fireworks!
GATA's GDBC says POG is manip. by US & UK via OTC derivatives backed by ESF w\o OK of AG & FED. SOS came from LTCM fiasco & stress to CBs, BBs, IMF, & AU lingers. WA is a jolt to mkts., but GS, JPM, etc. douse the flames. 1\2 of PGMs run anyway as TS hits TF re Pd. on TOCOM & NYMEX, CFTC is MIA re COMEX. OPEC amps the POO in order to buy more yell. met. yet no inflation. The pols get involved as govt. honesty is AWOL. The FIG is no fraud, but the CPI is. They contam the XAU yet the obscure HUI remains pure. The DOW, S&P, NAZ, & US$ soar as planned, while the ECBs & Euro languish. LBMA, under H2O w 2 many IOUs, gets dissed by BIS. BuBa vs. Bubba debuts, UBS, DB, & SNB scramble for physical. POG plummets & the PUDCs w HIV\AIDS are SOL. The GBs are PIAs to USG, claim FAZ articles are WA 2, await >POG ASAP.
Recs for Au HOF IMHO- Midas, Chris, Frank, Reg, Ted B., & TG\FOA.
Recs for Au HOS- FDR, RMN, wjc, BoE, GS, & GFMS.
Hope this clears up any confusion!
AUSPEC [no FOB]
P.S. Ag also.
8:34:28MT - usagold.com msg#: 39058)
Mr. G. [a response to the following post]
Mr Gresham (10/15/2000; 0:24:46MT - usagold.com msg#: 39048)
Steve H -- #39045
"The Washington agreement was the shot across the bow."
The more I think back on the past year, the more amazing the immediate price spike of 30+% was in the context of behavior in normal markets.
It meant several things:
SOMEBODY(S) was/were watching the European central banks. They did not need to study gold for months and years more to know the connection between CB behavior and gold supply availability. They are still out there, with bucks to commit.
The only question for them had to be WHEN the Euro CBs would make the move. The Somebody(s) in September '99 thought they might be too late to get on board a runaway gold price, and bought the upswing. Who were they? Hibernating gold bugs? I don't th-e-e-e-nk so...
They were those near the center of financial power and information. WHO ELSE would be watching such an announcement as closely? Until I started reading this forum, I had no thoughts of connecting Europe and gold -- like nearly all other ordinary investors.
A reasonable surmisal: A price surge IS possible, likely, even inevitable, and only some downward pressure from more powerful sources keeps it postponed. Only the who and how remains hidden from us, to be read in history books or memoirs later. The only hints we get in the meantime are from market eruptions like the WA one.
The who has been well documented by GATA. We know who. It is Britain and the US (ESF) and, for some unknown reason, Deutsche Bank and the likes of GS, JP, etc. It is the countries using these civilian banks, who are in the know, that irks the likes of us. I suppose one could argue that the CB's can't intervene in the gold market directly and must use the best tools at their disposal: the bb's or bullion banks. It is this dotted line from CB's to bullion banks that gives the bb's the advantage and insider knowledge. That Mr. RR happened to have been chairperson of GS and then later Sec. Treas. and now head of Citibank and friend of Al G. shows clearly the dotted line relationship that GATA speaks of. Nothing official, just a bunch of conflict of interests in power who also have an on/off switch to investigator bodies to expose all.
The why has been sufficiently documented. The US dollar has defaulted twice on its debt in gold. It is about to do it again. Nations have a right to protect their currency. Noone can argue with that. It is the manner of intervention that has us all up in arms because as commodity investors we have been duped by an underhanded attempt to show gold as only a commodity but yet has the full force and power of nations behind its manipulation in order to extend the life of the dollar. It is this relationship that has the press only focusing on gold as commodity and that completely ignores its role as monetary asset that were it left on its own accord would show inflation to be extra-ordinarily high, that has us all up in arms.
It is NOW a no brainer to see that the charts of RossL and the other two (Kondratieff and Dow v Gold) show that the backing of currency with gold but not allowing it to float at market price of gold has caused governments to conspire to hide the true relationship of currency to gold. These chart show that nations can only hold inflation and gold back for so long and than vrooom something causes the clock to start over again, just as though a winding spring has broken loose. Because so much gold is stored in Central Bank vaults, they have the ability to extend the lifeline of currency but when that gold is no longer held or controlled by CB's in sufficient quantities that they loose control of it (as now appears to be the case), then the clock is reset. We are witnessing such a collosal resetting of a clock that has three lives, with the third one seemingly on its last few days or months. Who can blame the Nations for colluding in gold? Can we as Americans (some of us) really blame our country for trying to extend the life of the dollar? I say go for it.
What irritates me, though, is that instead of doing it in the open, we have chosen to manipulate through hidden deals in a way that has directly cost me easily $100K, either in lost opportunity or reduced gold-share prices. It is this hidden tax that you and I bear directly through underhanded dealings with a few special banks in the know, because of their unique market position, that makes me support the efforts of GATA. I want the dollar to win, let there be no doubt. But I believe that goldbugs, mines and gold-mining countries are truly hurting because of these efforts.
If the finincial powers believe that they are in a currency war, then they will take extraordinary measures to save the dollar. I believe that is what we are witnessing -- extraordinary measures of CB's to save the dollar. If that means stepping on a few goldbugs, so be it, eh? Is this right? No. Perhaps in their minds it is and that is what GATA is all about. It is a foul that has a maximum 20-yard penalty and forfeiture of the ball to the other team.
Yet, the Euro was born by some pundits to replace the dollar as the eventual world reserve currency. It is the oil-gold-Euro-Dollar relationship that would appear to be the trump card in this relationship. If the dollar were to fail, and let's hope it does not, then would it be better to have another currency that could step in without much harm to world economies or would it be better to move soley to a gold standard? We have thoroughly discussed this topic here and elsewhere on the web. I believe the conclusion was that it would be better for another currency to step in that had the potential to handle the volume, as it were.
In the meantime, we are forced to watch this all unfold, while we call "foul." And now we must wait while the referees determine whose ball it is and what to do about it. Negotiations will take a while, they are reviewing the tapes now. "Please, I'll take a bear and some peanuts." It is going to take a while while they figure this out.
I forgot to mention that we watch this game behind an opaque screen and only occasionaly get glimpses of players being carried off the field. We hear grunts and clashing pads, but see no direct action. What is most clear: gold is at the center of a tremendous world-wide game of dollars, gold, euros, and oil. The nation players don't talk about their game, they just do their thing and we watch what we can.
Finally, it is gold as the ultimate inflation indicator that keeps it suppressed. We have heard that Greenspan watches gold for signs of inflation. If he knows, and we know he knows, that gold is being held back, then he knows what true inflation there is out there. It is gold as the ultimate thermometer of inflation that throws it into center field. When gold resets the clock of values as has been shown in 1929-33 and in 1979-80, it bought time. Because the US didn't mark the dollar to gold's market value (a very unpopular move in 1971-73) the dollar only bought more time. Had it been allowed to float with the value of gold and gold allowed to act as a thermometer of spending beyond US means, then all may have been good longer term for the dollar, but instead, one chose to eschew the role of gold has on currencies -- a disciplinary role that keeps excess spending in check beyond 2500 tons of mined gold per year.
So, the game appears to be about how Nations reassert the role of gold without shocking the world with that reality. Since the dollar has twice defaulted and appears close to doing so again on gold-debt (paper gold), it may have been decided by the refs that the other team (euro?) gets the ball now. We shall see.
WHEN is also the question. When will gold rise? When it is time to let currencies reset the clock to gold's market value. When will it be proper to let currencies reset to gold? When no more moves can be made to hold gold back or a key player who can turn the ball over decides its time. Is oil the key to turning the ball over? It seems so. Why?
Oil going higher and gold staying low has skewed the historic relationship of gold to oil. (RossL, it would interesting to see a chart of oil v Dow, as this would likely show the reset is in progress but through oil this time [as a leading indicator]. It is oil that appears to be the leverage that will cause a turnover. The reason is the record trade deficit, the rise in US dollar inflation, and the subsequent inability of the US to control inflation as reflected into the economy by higher oil prices. We saw this in the PPI on last Friday. It showed a nearly 12% per annum inflation rate. As more oil dollars chase less physical gold, physical gold will dry up and reset the gold clock. The turnover will be complete. For now, though, the dollar is still in play and stashes of OPG (other peoples' gold) are being put in play to extend the game.
So, the WHEN, now becomes when the physical gold is all called for and oil has no more to buy, then currencies will reset. Oil will drive gold higher through an ever increasing appetite for physical gold. The game can only be extended as long as players accept more and more dollars for paper gold. Once this insatiable appetite for paper has been been stopped, physical gold will rise. The ME (Middle East) may then be an attempt (in this game) to leverage the leverage or turn the timetable up. Any quick turnover, would cause more harm to the US. The ME may be such an attempt. It has the effect of ratcheting oil prices higher, forcing the hand in the trade deficit quicker, and making inflation that much more apparent. Gold is now starting to react to such pressures (but was quickly contained). The ME would seem to be another horseman then. Oil has gone ahead of gold in its traditional behavior from a lagging to a leading indicator and now oil supplies are being threatened that further compounds this traditional break in gold v oil. If oil ratchets higher quickly, then this will force hands much sooner. All eyes turn to the Middle East. (The currency battle has turned violent in the ME).
I am fairly certain that all the Euro gold (Swiss 2000, British 400 or so and whatever else was allowed through the Washington agreement) is all called for already. It is supplies of new or OPG that are being tapped and when that run dries, the changeover may occur. Oil and tensions over oil appear to be the play that could force the Euro into reserve currency status much sooner than hoped for or thought possible. Higher oil prices will allow more dollars to buy more physical exerting more pressure. Physical gold will dry up much more quickly with higher oil prices. More profit, more gold. More gold, less available. Less available, higher prices for gold, once the paper can't or won't satisfy.
So, the question
now becomes: how long can the Commodity exchanges for gold support
a lower gold price? Answer: as long as those buying the paper
are satisfied to not convert paper into gold. Or, as long as those
buying physical can still buy it at the artificially lower price
of gold as set by COMEX and LBMA.
When physical gold becomes scarce it will require more and more
of it to be directed to COMEX. Or, COMEX will have to set up to
demand less and less physical gold. When COMEX no longer needs
physical gold or can't provide it, or provides an alternative
(dollars?) for settlement, then physical gold will rise. Only
those who follow COMEX much closer than I could tell us when this
might be. Are the gold lease rates the barometer for this? Some
of you know.
16:06:24MT - usagold.com msg#: 40331)
Rockgrabber's questions, No. 40323 11:18 MT
"What happens to countries' currencies that are backed with a percentage of gold holdings, if the dollar continues to strengthen and gold continues to fall? Does their currency fall as well?"
Rockgrabber, there are probably as many answers to these questions, as there are people to give an opinion. I'll give you my opinion, to which I finally arrived largely on the basis of thinking for myself and not on the basis of what others were saying, typically in the popular press and T.V.
"What happens?" ---Nobody
has a clue! Anything can happen!
The problem with modern currencies is that they have no quality, they are simply numbers (quantity) devoid of quality. (I am here harking back to classical philosophy) What are they worth relatively to each other - in "purchasing power"? They are worth whatever the speculators think they are worth at the moment. The speculating community is watching itself (watching each speculator) to see what each is doing. These speculators know absolutely nothing about the currencies: there is nothing to know about them, since they have no quality. All the speculators have to go on, is what the others are doing. And they all, each and every one, are trying, 24 hrs. a day, to outwit the others by running to where they think the others will sooner or later run (that may be in 5 minutes time, or in 5 weeks time).
So this is a casino, or an insane asylum, take your choice of epithet. There is no rationality to it. It is sheer madness. (It would be interesting to know what percentage of currency traders are on coke during working hours and after.)
The gold reserves serve no useful function, unless they are going to be used to redeem paper money at a certain rate.
Relative values of currencies are all subjective; some have "prestige", a good image; others don't. Generally a fallen currency is like a fallen woman: reputations cannot be mended. We are told the "productivity" of a nation determines the strength of a currency. This is total rot!
The only way productivity affects the value of a currency, is because THE SPECULATORS THINK SO. And they all watch each other.
In currency valuations, there is nothing tangible to go on, only on correctly answering the question: what are the other speculators going to do, and when? And doing it first.
I don't think any school will tell you this, and very few individuals. The idea of "reserves" seduces people into thinking that with "backing", the currency is more trustworthy. This is nonsense, because the reserves are only decorative unless used to REDEEM paper at an absolutely fixed and permanent rate. [Ed. note: Reserves can also be employed for Forex interventions of questionable long-term merit.] In that case, reserves are certainly useful and highly important: they show the public how much gold there is, to redeem paper in circulation. Too much paper (too little reserves) engenders gold flight as people begin to worry, correctly so, that the gold will not suffice to redeem paper, in a crisis. This redemption is not done any more (last vestige was abandoned on August 15 1971) and so as I say, gold reserves without redemption are simply decorative and may add an aura of solidity but nothing truly objective.
Your other question:
2. "Since the dollar is the reserve currency, what happens to other currencies that are backed by the dollar, with little or no holdings of gold, if the dollar should fall? Does their currency fall as well if they sit there and do nothing?"
Again, anything can happen. It all depends on politics, for one, and on many other factors such as structure of internal and external debt. There are no inevitable consequences: it all depends on what governments and/or speculators want or feel or fear. There is no objective standard against which to measure. (All this means lots of stupid articles in stupid publications by stupid "economists", for stupid readers.) A stupid situation.
Indeed, part of the problem of the dollar, is: How do you devalue it? There has to be an agreement among the significant parties. The U.S. cannot devalue on its own, because to do so, requires a third, superior medium, recognized by all, against which to devalue. That used to be gold. Devaluation was done by reducing the content of the gold in the dollar, pound, franc, mark, etc as stipulated in the definitions of each of these currencies.
Since all currencies, in early 20th Century, were simply quantities of gold with different names, a devaluation was achieved simply by diminishing the quantity of gold required by the definition of the currency. But currencies are no longer quantities of gold with different names. How then, to devalue? In the case of the dollar, only by agreement and manipulation! "Up" and "Down" in value, can mean something, only in relation to something relatively immobile. That something was gold, and all link between currecies and gold has been specifically forbidden - by the IMF!
Specifically, what does dollar devaluation mean for Mexico, for instance? Very little, immediately. Most people would not even take notice. The peso would continue to be worth so many dollars. Politically, what is important is that pesos be redeemable for a quantity of dollars which, everyone hopes, will not change much in the near future. If the dollar goes down, the peso goes down with it. No visible change directly perceptible.
And that will prove a problem in a downturn in the U.S. economy; aside from the problems such a downturn would cause in Mexico itself, I can see a surging protest in the U.S., against imports from Mexico, which "steal jobs" from U.S. workers. So since the dollar cannot be devalued against the peso, the answer will be, raise tariffs: Taxes on imports.
The whole situation is madness. To explain it is maddening.
Just GET THE GOLD!
(11/10/2000; 13:46:37MT - usagold.com msg#: 41075)
DaveC - All - the Electoral college and the Republic
Democracy legitimizes government in the popular view. The elected government can claim that it has the backing of the people, even if the choices put in front of the people are not at all different from each other.
The Democratic party does not believe in human rights as an absolute that rises above the whole of the legal structure and government, as stated outright to be the purpose and sole legitimate source of authority for government as stated in the founding documents of the country.
From Day One of its founding, the purpose of the Democratic Party has been the overthrow of the constitution and of the Federal structure of the United States of America. It is the party of treason against the constitution through placement of its people in control of its institutions and the constitution's de-facto abrogation and the nullification of the government's purpose of protecting individual life, liberty, and property as stated in the Preamble. Its purpose is, and always has been to institute "popular" rule rather than rule of Law. Rule of law is NOT rule of legislated statute. Rule of law is the rule of common law and its institutions of principle: the assumption of the reasonable person freely interacting with others of a similar nature in pursuit of their individual goals, and the supremacy of the rights of man over the wishes of his neighbors, be they single thieves, a mob, or the electors of the rulers of his government.
The founders of this nation had not created one single primary sovereignty, but created a Federation of Sovereign States. The Republic is a treaty between the several States, all of which elect representatives of the States to the Federal Government. The States elect their Senators and their Representatives to the House of Representatives, and elect the Electors of the Electoral College who elect the President of the Federation of States.
Hillary Clinton is calling for the final demise of the Federal structure by allowing the central government to claim direct authority derived from the people rather than the States. This would destroy forever what little is left of the sovereignty of the States that make up this Union of States. She is well within the tradition of her party and is a standard bearer of the attempt to undo this country. Hillary Clinton and Al Gore are simply the vanguard of the mobs they have mobilized in Florida and elsewhere. They are alpha wolves seeking to hunt the sheep huddled together in groups we call States for their protection, they are calling on the sheep to disarm and disband so that they can be hunted individually by the mob of wolves.
The Republicans have given up on protection of the Constitution and of the sovereignty of States long ago both because of their desire as politicians to enlarge their practice of patronage, and because of the deep unpopularity of their original position among most of the people who fancy themselves wolves. Many of their own are self-proclaimed holy wolves and holy sheep that are by divine and mystical power somehow endowed with superior capacity to determine the "right" relationships between wolves, sheep, and anyone else.
It has only been 10 years since the collapse of the Soviet Empire provided the final proof of the fact that a society of wolves can only starve and the small wolves be eaten by the bigger wolves, and the Democrats are calling on us all to become wolves, to affiliate ourselves with particular wolf packs by race, by profession and occupation, or by sexual orientation, and form coalitions to fight the sheep. The reward is a juicy meal and a thick fleece. But that meal is only available once. The sheep will have no motive left to produce a fleece or to eat. They will either join the wolf pack or keep themselves scrawny and bare so as not to attract the wolves. The wolves would starve and the leaders of the pack will start calling different groups of wolves to set upon others, calling loudly "sheep, sheep sheep in wolves clothingattack themthey are your next meal".
Republicans have attempted to limit the encroachment of wolves upon the huddled sheep, but have had to sacrifice much of their traditional agenda in the interest of staying in power. They had to respond to the wolf thoughts of the deluded sheep who have joined the wolves despite the evidence of their own eyes. And they had to keep in line with the small holy wolf crowd that has been part of their support since the middle of the 19th century.
It is time now to decide clearly whether you believe as the founders of this nation had, that the individual has rights derived of his nature that come NOT from the state or his neighbor's decisions, or that the decisions of the people as they are made by their representatives are the source of rights. You must now clearly decide between a society of free association, or a society of imposed relationships formulated according to your choice to belong to one group or another.
I say it is time to start acting for the end of democratic mob rule and return to the basic principles of individual rights and the rule of law through the common law.
Defend the rights of the States
to elect the President through the Electoral College. Defend the
States against the force of the institutions formed by their Federation.
(01/04/01; 10:28:08MT - usagold.com msg#: 45018)
Central banks ARE mines
Something of an epiphany recently hit me and, as in most of these sorts of things, I found myself wondering why I hadn't thought of it in this way before.
Like Copernicus realising that the math became so much easier once he put the sun at the centre rather than the earth, it occurred to me that the workings of the gold market became substantially easier to comprehend once I started thinking of central banks as if they were nationalised gold mines.
The United States nationalised gold mine in Fort Knox, for example, has proven reserves of approximately 8000 tonnes, and the cost to mine these tonnes is NEGLIGIBLE. For political purposes, the United States chooses not to mine its nationalised gold. But of course it could do so at a moment's notice.
By contrast, the United Kingdom nationalised gold mine in the Bank of England did choose, again for political purposes, to begin mining its negligible-cost gold in earnest.
How can a 'first-time' gold mine such as Harmony possibly compete? It survives only while a sufficient number of central banks choose not to mine the cost-free gold out of their vaults.
Perhaps gold is Not eternal?
Someone recently suggested that perhaps Platinum and Palladium had taken the place of gold as the safe haven for big money in the modern world. That raises two very intriguing concepts: 1) perhaps gold is not eternal, and 2) perhaps platinum/palladium can be a safe haven. While I can envision a day where 1 becomes true, I do have some reservations about 2.
As to the first, we at this forum so often blithely AssUme that gold will forever remain the purest form of natural money, simply because it has always been so regarded. But as the mantra of the stock brokers warns, past performance is no guarantee of future performance. Carl Sagan chose gold as the source material for his recorded messages on space probes because of gold's reputation for remaining eternally in the form in which it was manufactured. However, Coca Cola is nowadays bottled in aluminium for precisely the same reason. The element gold does not have a monopoly on eternity anymore.
We have only to look at our most optimistic literature to see what may lie ahead. The fictional future of Star Trek has, on several occasions, portrayed characters who do not value gemstones or gold. Oh, they're pretty to look at, but with transporter technology they can be manufactured by the ton effectively cost-free. Gold in the Star Trek era has thus had its scarcity value stripped from it. Residents of United Earth, upon observing a London Good Delivery bar lying at the roadside, would pass it by as you would pass by a discarded concrete block. To those readers whom that notion disturbs, perhaps you haven't grasped what Gene Roddenberry was trying to tell you: someday, humans may yet build a society in which citizens are so well satisfied that they have no cause to fear one another... and so have no need to stockpile defences against such threats.
But of course, the world of to-day is far from that idealistic Star Trek future. The humans alive to-day are descendants of creatures who were sufficiently cunning and lucky enough to avoid being killed just long enough to bear children. As a result, we have within us three thousand million years' reinforcement of proven survival habits, one of which is hoarding.
Of course, that urge to hoard can sometimes produce unhelpful results. Obesity is the classic biological example of hoarding: citizens of the civilised world seldom if ever encounter starvation, yet our inherited bodies seem to go out of the way to stock up on lipids 'just in case' famine should ever return (in years past, this was viewed as mainly an American phenomenon, but in recent years the waistlines have begun to spread in other nations as well). Further examples of nonsense hoarding figure prominently in the tabloids: mostly variations along the lines of 'old man's house found to contain uncounted thousands of meticulously cleaned and categorised three-inch lengths of string'.
Sometimes, however, hoarding is beneficial. Travellers on the Null Arbour Plain can seldom be said to be carrying too much spare water and petrol. The Scots managed to rebuke English invasions through the centuries by stashing weaponry everywhere (speaking of which, I'm told the most popular movie in Chechnya these past few years has been Braveheart). And there are countless instances where refugees have negotiated their way past soldiers because they'd planned ahead and had in hand a sufficient stash of gold, silver, jewellery, or some other portable and anonymous form of wealth.
Historically, gold and silver have had top bragging rights as the materials to which the frightened masses would turn in times of trouble. In contrast, platinum and palladium (like aluminium) are comparatively recent arrivals on the stage of man's emotions.
It is true that a lot of big money players are involved in both platinum and palladium, but I should stop short of describing their activities as safe haven investing. In order for something to provide a safe haven, it must be something which is about to be wanted by the masses, but which has yet to soar in price. And palladium has problems with both of those issues.
Practically every adult alive today, whether he owns gold himself or not, realises that gold delivers significant value in a small package. In sharp contrast, however, we few here at this forum probably account for 20% of the adults alive today who 1) recognise the word 'palladium' at all, and 2) know that it has recently soared in price.
As a result, the emotions of the masses have no more hold upon palladium than upon tungsten. There is no practical way in which the masses can hoard palladium, nor I suspect would they care to do so if they could. It's not even a filament of their imaginations.
Look back at any chart of any precious metal's prices. You'll find lots of rolling valleys punctuated by the occasional Matterhorn: from an otherwise calm trading range, the line will abruptly rocket to the heavens, only to plummet back to the valley floor almost as quickly as it arose. If one gradually accumulates while the price is in the valley, he'll have acquired a very safe haven indeed. However, if one begins buying in the stratosphere, he's going to hate himself later. And worse, if he's left being the owner of something which no one wishes to purchase at any price, he finds himself in the same condition as the shareholder of a defunct dot com. Or the hoarder of fiat banknotes from a now-defunct government.
The present day spike in palladium came about due to an incredible lack of foresight among consumers of palladium, primarily the automobile industry. It speaks volumes on human naivete to realise that it was the Japanese especially who allowed themselves to believe that a material 70% supplied by Russia would always be accessible to them.
The present day spike in platinum is being caused by anticipation that automobile manufacturers will retool so as to use the predominantly South African supplied metal in place of palladium. The amusing aspect of this is that, by the time the retooling is complete, the odds are phenomenally good that the South African economy will have collapsed into anarchy.
In both instances, the arrival of a recession in the largest automobile consuming nation (the U.S.) will dramatically lessen the demand for both platinum and palladium. Indeed, the anticipation of same will hammer down their prices in a descent approximately as sheer as their earlier ascent. From now until then we may see their prices double or even triple, but they could just as easily halve this afternoon. I for one have no desire to play catch with a cannonball.
Global Conspiracy and The New World Order
I continue to be disturbed by the trend towards conspiracy theories at forums such as ours.
Let us for a moment consider the mother of all conspiracy theories: one world government. The mere mention of that phrase seems to send shivers up some people's backs, but honestly now why should it? I find the best way to appraise a situation is to look back into history for situations which at least somewhat resembled it, then examine what became of those situations.
For example, prior to 1066, England was composed primarily of six earldoms. Heredity did count in leadership positions, of course, but it was by no means guaranteed that the eldest son of the present king would be accepted as his successor. Merit and the respect of the nobles counted considerably, and it was perfectly possible that the six earls might decide to place one of their own number on the throne if they deemed he would be the better man for the job. Of course, the opinion of the commoners was unimportant.
If this sounds vaguely familiar right now, it is perhaps because you just witnessed much the same transfer of power in the United States, where the votes of the earldoms (states) and the nobles (election officials and judges) held sway rather than the votes of the commoners.
Do any of you care how the Secretary General of the United Nations is elected? We've had a President of Earth for nigh on half a century now and most Earthlings haven't even noticed. The high king of England seldom if ever came into a commoner's house, either to benefit him or to endanger him. How many Americans have had Bill Clinton personally invade their homes? For every televised home invasion by federal stormtroopers, there are tens of thousands of interventions by local constabularies.
But that's the key: almost all invading officials are local to the invaded. The bobby banging on your door sleeps not twenty miles from your house, so he'd best bear that in mind when dealing with you. As rare as a federal intervention is, realise how rare a planetary one is. Kosovo needed a planetary intervention. Florida only needed a federal one, and that happened only because the gridlock in that one state was hindering the needs of the other states. I daresay that if a similar fiasco were to occur in one state's governor's race, the federal level would feel no compulsion to intervene.
It is an unfortunate side-effect of human nature that many if not most people allow themselves to fall into overblown we-they mindsets, world views wherein dark forces are massing on the horizon, bent on doing harm specifically to us. The creeping terror which naturally results from such self-fulfilling world views is perhaps the prime motivator behind individual adults' acquisition of physical gold and silver (and individual children's acquisition of stuffed animals).
Being aware of that tendency among the masses, and steeling yourself to avoid falling into the same panic, is the key to knowing when to buy gold, when to hold gold, and when to sell gold.
Getting ALL the gold
There's a recurring theme among aficionados of conspiracy theories that 'They' are out to get all the gold away from 'Us' and, once 'They' have it all, 'We' will be at their mercy.
But think that scenario through for a moment. Let's say that NWO, Inc., somehow manages to buy, beg, borrow, or steal every ounce of aboveground gold in the world, down to the very last flake. Let us further say that NWO also takes control of (or at least has the power to destroy) every gold mine on the planet. I gather that's what's anticipated by the conspiracy fans.
In the aftermath of such a complete acquisition, I find myself asking the rather simple question, 'So what?'
Were someone to corner the world's supply of industrially crucial palladium, for example, then yes that would send distortions and convulsions through the world economy. The fact that such a cornering has occurred through post-Soviet ineptitude rather than through brilliant cunning is rather beside the point. The material in question has a very real value because it is a key component in core parts of the world economy... at least, until the major users of palladium have time to retool their systems to instead partake of an alternate material not quite so unreliably supplied. By the time the Russians have their act together, the world will have largely abandoned palladium as an industrial metal.
By contrast, if someone were to stand up to-day and announce, 'I've completely cornered the world's supply of francium and you lot can't have any', I truly doubt there'd be much outcry apart from the odd researcher.
Now let's try that with gold. 'Whilst you lot weren't paying any attention, we at NWO, Inc., have rounded up all the gold in the world and it's ours and you can't have any. Because it's ours.'
Okay, I'll grant there might be a general sense of 'wait a minute' from the world at large. And there would be the more immediately justifiable outcry from electronics makers who had only recently set to wondering why their supplies of electroplate were dwindling. There'd be an even greater outcry from all of the past purchasers of electronic equipment who, now they come to examine the sockets more closely, find that the NWO has successfully infiltrated their homes and offices and scraped all the highly conductive gold electroplate off every contact.
But again, apart from comparatively minor industrial inconveniences, 'So what?'
At this imagined and increasingly ridiculous stage, no-one would still be in possession of even a half sovereign or 5 gram wafer from Credit Suisse, so no-one except NWO, Inc., would have any further stake in any future price of gold. Indeed, by having completely removed the elemental substance from any active market, this nonsensical NWO, Inc., would have caused there to be no such thing as a price of gold, any more than there is a price of francium. Now I ask you: what possible benefit could there be for NWO, Inc., having found themselves the proud owners of a 60-foot cubed block of a substance which they themselves have just rendered valueless?
And that's the nub of it. If you're very very lucky, there may be as many as 4 atoms of francium within a kilometre of your present location, but your complete inability to lay hands upon them has hardly harmed you. Francium plays no biological part in your life, nor does it play any technological part, let alone any monetary part. Gold, come to think of it, plays no biological part in your life, and very little technological part. Nor, for billions of people, does gold play any monetary part.
Indeed, there's already been a far less effective NWO, Inc., rounding up gold for nearly a century now... the various central banks. A third of all the gold ever mined is cloistered in perhaps a dozen government vaults around the world. Additionally, perhaps another third of aboveground gold is cloistered in the vaults of petty governments and of wealthy individuals. And whilst all of that gold has been disappearing from pockets and arriving in vaults, the world economy has experienced the greatest explosion in living standards that humanity has ever experienced.
What makes gold valuable is not its elemental utility. A lump of gold is no more useful than is a still-valid slip of paper with a queen's or president's face on it. What makes gold valuable is that humans have historically regarded it as something other humans will accept in return for food, clothing, petrol, and other things directly necessary for life. What makes paper valuable is that a still-valid government imbues the paper with that same (legal tender) status. The big difference between paper and gold, of course, is that gold minted by a defunct government has the same value as gold minted by a still-extant government, whereas paper printed by a defunct government lost almost all of its value the moment said government fell.
But this notion that, by rounding up All the gold, some conspirators can gain power, is quite honestly wrong-footed. DeBeers, for example, would only be harming itself by attempting to round up all the diamonds not currently owned by them. DeBeers actively wishes for there to be many prominently visible diamonds in the world. The catch is that there should be just few enough of them that there shall always be persons who have no diamonds, and so who are willing to overpay to acquire them.
To maintain that dearth of accessible supply, DeBeers maintains vast holdings of diamonds, many years worth evidently. Just like a central bank's gold hoard. Now why should it be that this vast overhang should be ignored by the market pricing mechanism? Well, for one thing, because DeBeers is the only central bank for diamonds, and it's unlikely to do anything to cause prices to plunge. DeBeers manages the flow of diamonds in the same way that the Aswan Dam Authority manages the flow of the Nile.
By contrast, there are many central banks holding significant quantities of gold, some of whom wouldn't mind seeing a rise in POG, whilst others wouldn't mind seeing a fall in POG. Imagine competing dams, some of whom wouldn't mind seeing the lowlands become a desert, while others wouldn't mind seeing the lowlands become a lake. The result is that no single cabal exists which can control gold in the way in which DeBeers controls diamonds. Despite fears to the contrary, the price of gold is set in a far freer fashion than are many luxury goods.
More importantly, each of these competing central banks hold sufficient amounts of other wealth so that their gold component is, to the bankers themselves, not significantly large. That's why the Bank of England can sell its gold at a 20 year low and can afford to look stupid for having done so. It harms them no more than it harms you to occasionally pay Federal Express charges to post a letter. Is it foolish to pay £26 when it absolutely, positively has to get there overnight? Of course not. It's only foolish if you pay £26 for no good reason.
Likewise, the Bank of England is incurring only a very minor loss on its gold sales, yet is obviously doing so in pursuit of some greater gain elsewhere. There has been a concerted attempt since 1999 to stop sterling from tracking with the U.S. dollar, instead trying to steer it towards favourable alignment with the euro, primarily to stave off capital flight from the UK into Ireland and the rest of Euroland. As often happens with such interventions, the effect is only just now beginning to kick in, too late to retain several important manufacturers such as Sony. Hmmm, now there's a new catch phrase... 'Sony capitalism'.
Well met, Sir HBM
To Hill Billy Mitchell regarding (12/31/00; 13:49:07MT - usagold.com msg#: 44762 through 44771), I say EXCELLENT! You've taken me gloriously at my word when I suggested a month or so ago that we should all thoroughly challenge suppositions until their truth or falsehood was made plain. I was afraid for a time that no one was going to challenge my own suppositions, and I thank you for it.
I especially like your passage, '...to some, gold is physical. To some, gold is political. To some, gold is philosophical. To some, gold is safety. To some, gold is religious. To some, Gold is God. To most gold is a mixture of several of these.' Frankly, I think that statement would be an ideal motto at the entrance to this roundtable.
With barely two lines of text, you have wonderfully captured the point I was attempting to make in (12/01/00; 10:17:12MT - usagold.com msg#: 42604): if one would wish to know whether to buy, sell, or hold gold at any particular time, the first thing one should do is find out how his fellow market participants feel about gold at that time.
The second thing one should do, and by far the more difficult, is to then act contrary to the masses. When everyone wants to own something, that's the time to sell it to them. When everyone wants to sell something, that's the time to buy it from them. In order to successfully do this, however, one must realise that most market participants think like sheep, and one must consciously lift oneself out of the sheep mindset.
Please do accept that I mean no harm by describing my world view here. Quite the reverse: it is only by becoming aware of other people's world views that we improve our own chances of living happily to a ripe old age. As Peter Asher rightly pointed out in (12/31/00; 21:46:12MT - usagold.com msg#: 44797), 'the western bible viewpoint is a rather small percentage' of humanity. And for that matter, the mainly-U.S. fundamentalist viewpoint is an even smaller percentage of Christendom. As a result, although your own world view gives you a pretty clear idea of how U.S. fundamentalists currently regard gold, it will not help you to successfully anticipate how the other 95%+ of the gold market's participants will arrive at their buy/hold/sell decisions, simply because they are reading from different playbooks.
Note that I approach religious issues in the same way I approach political and investment ones: they are all things which, rather much by definition, cannot be perfectly known. That's why I see no incongruity in occasionally touching on religious issues at this gold-centric forum. It doesn't help us much to debate the precise number of angels which might or might not fit on the head of a pin, but every person who buys, holds, or sells gold does so for reasons which include his or her opinion as to whether angels exist in heaven or only on 20 franc coins. By observing how others around us arrive at the conclusions they draw, we can use those other conclusions to refine our own. This makes it more likely we'll survive and thrive as the world shifts and churns around us.
How clean can I make that slate?
You and I both genuinely attempt to start our contemplations with clean slates. But here we diverge: whilst you expect that you can perfectly clean your slate, I do not expect that either of us can ever completely clean either slate. No matter how hard we scrub, there will always be a few molecules of chalk clinging tenaciously to the surface. So, sitting here as I am with a slate which I feel I cannot perfectly clean, how can I have any hope of drawing reasonable conclusions?
Hope lies in realising that it's not necessary to achieve perfection. As most leaders of men will readily affirm, it's almost always unwise to try to acquire 100% information before making a decision. The final 5% will take longer to acquire than the first 95% did. But more often than not, being 95% certain of something is sufficient. Those who wait in hopes of 100% generally have their lunches eaten by their competitors.
For example, no president of a gold mining concern knows precisely how many ounces of gold are under his feet. But he does have a rough notion, and that's usually sufficient for him to keep things rolling. He simply doesn't care to know to the seventh significant digit how much might be down there. It's not only not possible to know, it isn't necessary to know.
Conversely, the recent political debacle in the U.S. state of Florida shows what goes wrong when people expect math to perfectly model an imperfect world. It is now literally impossible to accurately count every vote in that election, because voting forms and equipment which were sufficiently accurate to call a 60/40 election were simply not up to the task of calling a 50.0000001/49.9999999 election. Before nightfall on the day of the election, the system had already irrecoverably failed to capture the information it needed to ascertain the intention of every voter. Everything after that moment was tilting at windmills.
Nurses seldom take a patient's blood pressure more than once per visit for precisely the same reason: they could take it a hundred times and it would be different every single time. One might as well accept the first measure, because it is no less valid than would be a second or fifth or fiftieth 'recount'.
Close enough for government work
For me, there are no absolute truths. Not even in mathematics: two plus two sometimes rounds up to five for large values of two. But there are lots of 'close enough' truths, and most of the time they are quite sufficient. Religion provides perhaps the most contentious demonstration of this problem, particularly in regards to the notion of infallibility. When I describe myself as an apathist, what I'm trying to convey is that it does not disturb me to think that the particular edition of the Bible sitting on my bookshelf might be riddled with errors. Indeed, it reassures me.
While I'm quite confident that you, HBM, rarely if ever fall into this trap, I do observe that many people who believe without question every printed word in one book have a hard time questioning the printed word in other locations. Take the ubiquitous tabloid headlines declaring that the Bermuda Triangle is somehow supernatural. There it is in print, after all. And I'll admit to having had in my youth a deep hope that the myths of the Triangle might turn out to be true. But as an adult I learned an interesting thing: the run from Bermuda to the Bahamas is one of the most popular among amateur boaters... combine too much money, not enough common sense, and large amounts of alcohol, and it's suddenly not so very surprising that lots of boats disappear there. Nowadays I regard the Triangle as nature's way of weeding out rich idiots.
Each of us either fosters a habit of questioning everything we observe, or of accepting everything without question. And therein lies all the difference between people to whom history happens, and people who cause history to happen.
Always demand a second opinion
The point on which I'm sad to say I expect we shall never see eye to eye is that I do not regard any single text as a reliable document, religious or otherwise. The human authors of any text, and the innumerable human editors and translators who subsequently lay hands upon that text, each have their own world views and resulting temptations to omit and/or rephrase that which they do not like. I cannot in any way accept, for example, that the long-forgotten monk who translated the parable of the talents into Jacobean English was any more objective than is, say, the copy writer for the Gold Council.
When Dr. Greenspan speaks, is he saying what he honestly believes, or merely saying things which will cause the reactions he desires? And, as Black Blade points out almost daily, journalists who crank out economic reports are highly likely to either 1) have a personal bias even if a subconscious one or 2) lack expertise but face a deadline and so type what sounds good.
As a general rule, one rendition of a purportedly historical event should never be accepted as accurate until a second independently recorded report can corroborate it. And if the two reports disagree? Seek for a third. Even though the printer has carefully applied the letters HOLY BIBLE to the front cover in gold leaf, I still want to read an Egyptian account of Exodus before I'll be willing to accept that the story is historically factual. That the story is religiously inspirational I do not question, but that's an issue independent of determining what really happened.
So yes, whilst I would regard the original lightning-graven tablets of the Ten Commandments as infallible were they still available to-day, you are quite accurate when you suggest that I cannot regard any subsequent reprint as infallible. Not even the 'original Hebrew and Greek manuscripts', you might ask? Well, so far as I am aware, Joshua ben Joseph spoke Aramaic, so every one of the Greek phrased quotes ascribed to him was already at least once translated, and that left the door wide open for errors of interpretation. And if he had learned Greek in school? Well, recall that U.S. president Kennedy stood in downtown Berlin and sincerely attempted to show solidarity with the assembled crowd by declaring 'Ich bin EIN Berliner'. Unfortunately for him, this was received by the audience as 'I am a donut'.
HBM, I hesitate to 'directly' quote Machiavelli for precisely the same reason. I do not speak modern Italian, much less 1500s Italian. I have read three English translations of The Prince, and to my complete lack of surprise I find that the resulting English phrases used vary a great deal within the same passage. But I look for the general sense of it, rather than try to tease out precisely what Nicolo might, or might not, have been subtly trying to imply. Indeed, it is the man's lack of subtlety, his preference for candour, which recommends the work to me. But even so, when he makes casual reference to minor events instantly familiar to his own generation, the references are lost on a modern audience without translator intervention. And that presumes that the translator himself understood the reference, an often unwise presumption.
One of my favourite modern examples of translation problems was the catastrophic failure of an American refrigerator company to advertise in Thailand. They hired a local fellow to render their slogan, 'Out of sight, out of mind', into Siamese. Not grasping that this was an idiom, the chap took it literally. On about ten thousand billboards all over Thailand were displayed smart photographs of these attractive little refrigerators with the slogan 'Invisible things are insane' emblazoned over them. Whilst I daresay the translators of religious documents are more careful, by being human they simply cannot be perfectly careful. Thus, the results of their endeavours cannot be infallible.
Interesting thought: the U.S. is roughly comparable in size to Europe, but the majority of Americans know only one language. Where we over here have daily reminders of the fallibility of language translation, many of you live long lives without such reminders. That may go quite a ways in explaining why Biblical infallibility is mainly an American notion.
Safety is where you find it
Throughout time, there have been a minority of humans who were of a mind to 'step out of the box' and look back at the world from afar. You've met people of my mindset before, though most of us have had the sense not to admit it to you. I am much more candid at this forum than I am with those who know my real name, because honesty without anonymity often invites peril. Because we are willing to see the big picture, the vast majority of us are able to avoid the limelight and present the appearance of leading the most boring, uninteresting lives. Which explains why the Chinese consider it a curse to wish for someone to live in interesting times.
Most of us use our world view for survival, not self-aggrandisement. And if that world view can assist others in seeing an approaching fist, so much the better. It's by no means necessary that others abandon their own cherished world view: by simply becoming aware that your world view is not the only one, you dramatically improve your chances. But there are things to recommend our world view, obviously, else we wouldn't live long enough to talk about it.
We're the ones who shook our heads when we saw footage of people scrambling for the last helicopter to leave Saigon. We'd already long since left the place, just as Einstein had long since left Nazi Germany before the trap sprang shut on those less observant. The phrase 'How did they not see that coming?' is, sadly, a frequent visitor in our thoughts.
But not all of us are seekers of quiet. Many of the names you find in history books, for both good and ill, number among those who position ourselves outside looking in. There's a line from the movie, The Hunt for Red October, where the head of the U.S. Security Council says to the CIA researcher, 'I'm a politician, which means that while I'm kissing babies I'm trying to figure out how to steal their candy. But it also means I keep my options open.' A small few of us keep our options open with intentions of becoming infamous, but most of us do it with intentions of staying out of harm's way.
You, HBM, place great confidence in the faith in which you were raised, and you likewise place confidence in gold over other investments. By contrast, I have no such confidence in any one thing. As the last two decades have demonstrated, gold is not always a safe haven. However, with each grindingly lower year, gold becomes more and more a safe haven. But how much lower can it go? Quite a bit. Will it? There's no way to know.
I suppose that's the crux of it right there: I do not believe in eternal safe havens of any sort. Nothing is forever safe because everything is always in motion.
The devoted faith of English Catholics served them quite well right up until 1535 when Henry VIII decided he wanted a divorce. Within the year, many who continued to look to their religion for safety found instead that it had become their doom. Four hundred years later, hardworking and patriotic German citizens who worshipped in synagogues discovered to their horror that their faith had marked them for death. Heaven only knows how many prayers from concentration camp victims went unanswered. Just a couple of years ago, peaceful citizens of the former Yugoslavia were assaulted and driven from their homes because they were Muslim (well, more generally, because they were not Serbian).
Those of you who saw the movie Braveheart witnessed a great example of the divide between HBM's world view and my own. I daresay HBM finds a lot to admire in William Wallace's willingness to stand unflinching against the enemy. For myself, whilst I do greatly admire the man's courage, I cannot help but bow to the sense of Robert Bruce's decrepit yet wise father who knew when to get out of the way of the hammer. No, I didn't like it, any more than the young Robert Bruce liked it, and I would have tried to handle it in some other way had I been that decisionmaker, but the father's act did preserve the Bruce family and give it the chance to fight again another day.
To quote another Mel Gibson movie, Chicken Run, when Ginger says 'We'll either die free chickens, or die trying', recall that one of her fellow captives then wonders, 'Are there any other options?' Whilst I myself found Mac to be my closest kindred spirit in that movie, I couldn't argue with the ever-knitting chicken's sensibilities on that question. Actually, come to think on it, there was another line she said that was very much in keeping with my mindset: 'My life flashed in front of my eyes ... it was really boring.'
People who live long enough to pass in old age into the hands of their chosen maker are almost always those who knew not to raise their hands during a hijacking and ask for the kosher meal. Most such observant people had also secreted their savings in places untouched by time or by tyrants. Sometimes those safe places included gold. Sometimes not.
As it happens, I tend to think that the present day is a reasonably safe time to gradually acquire gold, regardless of one's personal motivations. We've been descending into the valley of POG for years now, so the odds of gold's present price being unsupportably high are quite a bit less than they were in years past. But because there's no way to know for certain, I own a little of many different things, and I really don't care which one if any suddenly leaps for heaven.
PS: To USAGOLD regarding (12/31/00; 21:12:58MT - usagold.com msg#: 44796), I got a great laugh from your wife's interpretation that 'he was obviously a twelve year old child trying to stay out of trouble with his mother.'
PPS: To Pandagold, who wrote in (12/3/2000; 6:54:02MT - usagold.com msg#: 42780), 'It has now become a well known cliché in Britain that Hollywood gives the "baddies" British accents.'
Well, I suppose it's to be expected. For half a century 'til just recently, Hollywood's standard way of identifying baddies was to give them either German or Russian accents. But as American movie-goers began to have difficulty pointing out Germany and Russia on a world map, Hollywood realised it had to find other ways of putting a 'not one of us' label on the baddies. You can even see where the transition occurred: the lead baddie in Die Hard was a German terrorist, so naturally they cast London-born Alan Rickman (who couldn't utter a proper German R even if he leaned his head back).
Weird casting decisions do seem to be pretty equal-opportunity, however. Scottish actor Sean Connery was cast as a Lithuanian submarine captain. Mexican actor Ricardo Montalban was cast as Sikh warrior Khan Noonian Singh, whilst Yorkshire-born Ben Kingsley was cast as Ghandi. That they each managed to pull it off brilliantly is rather more a testament to their acting skills than to the casting skills of their employers. I'm just waiting for someone to cast Priyanka Chopra as Hillary Clinton. And don't even get me started about Robin Hood.
Sometimes, though, they get it right. One of my favourite movies is the 1981 film Arthur. Most people remember it simply as a comedy about a chap laughing whilst being drunk, but it's really a story of the depths to which loneliness can drive one. The casting of Dudley Moore as a New York financier's son was panned by several film critics who argued that the son's accent ought to have been like the father's. But watch that film again and ask yourself something. Decades before the events portrayed in the film, who do you think took the time to teach the child how to speak? Arthur's biological father? No, too busy at work. Who else would have cared enough but Hobson the butler (played by John Gielgud)? Those casting decisions were spot on.
1:00:31MT - usagold.com msg#: 45146)
AG and Payments System: Squeeze is On
I guess I should put it up top: This is the way I see the FOA gold rocket-price scenario happening. Combination of Fed "printing", public "flocking" and "fleeing", and ECB "re-balancing" reserves. It's hard to see $30,000, no matter how much of the above occurs; hard to see that something else wouldn't siphon off those $ somewhere on the way to that, but none of us really NEED that number just now except as an attention-getter, right? Somewhere around $1000 or $2000 (very explainable) we'd be getting "the rest of the story" from FOA & ANOTHER, and making our judgments from there.
AG and Payments System: Squeeze is On
In the interviews with Greider and others for their books on the Fed, Greenspan and Volcker have emphasized that their concern has been with preventing a breakdown in the payments system between financial institutions (US & worldwide). They couldn't guarantee which way markets would go, but they wanted to be sure that the winners and losers could settle their deals quickly and finally in USD, and move on to more commerce.
The Fed acts to stand behind institutions with the required capital levels so that they are not driven over the brink by interruption of payments from less-solvent counterparties. In one instance during Volcker's reign, the breakdown ("Herstatt Risk" from an early-70s European crisis) was somewhat threatened by the different clearing times between US and European banks. I think one system had three-day, the other five-day clearance, and that difference would have left some banks gasping for liquidity for a fatal 48 hours. The Fed and other CBs had to tide over that difference during a cash flow crunch.
Many of AG's speeches have been about technical improvements in the payments system, so that a glitch seemingly far-removed from the basic business solvency of the transacting institutions (which are playing brinkmanship enough as it is) does not bring down the system. "Cascading cross-defaults" I think was his phrase.
We get a whiff of that anytime a major bank or other institution is threatened with capital insolvency. The memory of Continental Bank, which was cleaned out by foreign overnight wired withdrawals nearly 20 years ago, must still be in the minds of some today.
Picture the money supply as somewhat concentric rings of asset types, perhaps akin to Dante's rings of Hades(?), or the electron rings of a highly agitated atomic particle. At the outermost levels are the "flakiest" of funny moneys, but they exist because people can play with them in certain ways they can't with the more stable moneys toward the center. (Can you Goldhearts guess what these might be?) The players are willing to accept higher risk to attain their ends of greed and excitement, though their risk/reward calculations have been actually been lousy if done at all and their information inputs inadequate.
They analyze their transactions on a two-dimensional map of risk/reward considering only market directions and maybe the psychology of counterplayers. They do not question the third dimension which, from an elevated perspective, says that the chessboard they are now winning upon can at any moment be swept clear by the hand of market breakdown and payments system collapse.
The US money supply today might be, for example, $7 trillion of all types (honest, I haven't looked this up, and don't care to research harder toward some useless specificity.) But this money supply represents debt of all types that people and institutions have committed themselves to work toward repaying, circumstances permitting. (Subject to many ways of discounting in future.) It represents paper currency that people commonly accept as money. And it represents real assets that can be used as money, or act as direct backing for a currency money.
Suppose that those categories boil down, in an economic "hard landing" scenario, to only $2 trillion of "hard" money. Money that really will be trusted in use, debt that will be worked down to sustain homes, businesses, and credit ratings. Right now, the public is looking toward the $7 trillion "mountain" of money that they've always known (and still remember from its smaller and less-flaky days). Right now, they believe that by working harder and smarter, a piece of that big mountain is to be theirs. A shift in psychology later, they turn around and see instead the smaller "hill" of $2 trillion. And, voila!, THAT becomes the real money supply, either very immediately, or eventually, after a longer and still-painful workout.
If that is what people believe is out there, then that is what they are willing to supply their labor and capital to work toward. That is THE Money Supply.
Alan Greenspan's problem with the Bubble is that its puncture immediately puts the smaller amount on peoples' credulity screen. All the funny money in various way-out orbits -- whether created by flicks of the fickle Fed fingers, or by a lifetime of self-denying savings -- flees toward the stable center when it is threatened, but like the crowded theatre on fire, the doorways are not wide enough. The available niches for more stable money in closer levels are fewer and cannot readily accommodate the flood of scared money. Much money, both borrowed and saved, departs for Money Heaven (where streets are paved with fiat.) Of course, back on Money Earth, prices rise for items representing the more stable money items.
In market Technical Analysis terminology, there is not much "Support" between $7 trillion and $2 trillion. Most "buyers" of money ("suppliers" of labor) will sit out the market slide as able, once their expectations shift, and they will thereby produce a bottoming out of the supply/demand equilibrium at a new low, but supportable, level. They will not bid their hard labors for the outer, flaky (mostly departed or soon to) moneys anymore but for the nearer to hand, harder, trusted moneys. Newly risk-averse, the cycle will funnel more of the remaining $2 trillion toward gold and assets near its central orbit of stability.
Of course, economic activity, statistically-measured, slows to a crawl as people re-jigger their ideas of what is worthwhile spending their now poorly-paid labor and dwindling cash upon. The Depression scenario, scary as it may be, may cause many people to repeat what was said in an earlier time: "We had everything in those days, except money." Learning about values never ceases; money is just the warm-up.
The payments system is the artery through which trillions of dollars flow daily or weekly, and upon the constriction of those vessels, the economic "lifeblood" flowing will reduce to the lowest practical and supportable amount. Institutions will simply not hang out their entire corporate capital on a transaction or two, when a new "Creditanstalt" or "Herstatt" has occurred and more are waiting to happen, unknown which ones among all their routine transactions. This is how the payments system dies, regardless of Fed and CB backing. Even the Lone Ranger can fit only six Silver Bullets in his pistol.
Greenspan simply does not want the statistical implosion of the money supply to happen on his watch. He does not consider it inevitable, and believes that the Art of Fed Chairmanship, aided by public psychology, has a spitting chance of turning it back, or landing it "softly". If he fails, his consolation prize would be history granting that he "did his best, in an impossible situation," quite a re-write in itself. (If the camera is focused only upon the post-Crash period, though, he may get away with it. Awww, let him.)
But, as he has pushed back each harbinger or lesser trigger of that implosion, he has aligned all of the disparate elements in a grand conjunction, a parting of the economic Red Sea (in which his own chariots must perish), and the almost meticulously calculated as-if-planned Perfect Storm that will fall upon the economy with full fury and spare no frivolous item of economic waste from dissolution.
06:27:44MT - usagold.com msg#: 45600)
Trail Guide, Randy, auspec and DavidG Black Gold
Mining today is quite different from past practices in that only refractory methods were used, and the mining of gold sediment by panning. The low hanging fruit the gold nuggets on the surface, and in the cores of underground mines everywhere but in South Africa were reached long before modern mining began. Any look at a modern mine's reserve structure shows that most of the gold is not recoverable at anything like current "real" prices (relative to other goods). Most of that portion was not recoverable at all in the past, as even high temperature refractory methods of the type used to obtain iron were not sufficient to recover most of it. But at higher "real" prices, the metal is recoverable at rather higher proportions.
It should be considered that the purchasing power of gold was substantially beyond current levels or even levels seen at the 1980 peak. Prior to the Spanish conquests of America, and before banking took off, gold was not leveraged to any extent, excepting the three centuries of decline of the Roman Empire of the West, where the leverage was not effective because the coins were discounted to their gold content as one went further out from Rome. The monetary value of the metal at 40% reserve in Europe of the early 19th century was far below its value in times preceding it at near 100% reserve prior to the 15th century. To gain an appreciation, one has at least the 2.5 factor of leverage to undo, and then whatever purchasing power extension due to the non-linearity of the relationship as a 2.5 fold decrease in supply is not going to produce a 2.5 fold increase in price, but a 6 and even 10 fold increase, if not more. Recent experience with natural gas should suffice to show the principle.
At that kind of purchasing power, one should expect that gold mining, then seen in the form of panning and underground mining by pick in a near 0 capital investment, as occurring over all of the history of man from one million years back to the advent of agriculture 40-50,000 years ago. Just as each European village had a blacksmith going back to the original inhabitants before the Germanic tribes came in, gold mining dates back to that same time and compares in intensity to iron production and working where gold could be had, in the Greek isles, in Spain, in Turkey, in Egypt, and Cush (Ethiopia), in Persia, in China, in the pre-Columbian Americas.
The patterns of trade belie the flow of money gold and silver along the silk road and on ships, whereby imports from India, South East Asia, and China were coming into the Mediterranean cultures and their empires with a one way flow of gold and silver to the east, wherefrom came silks, fine porcelains, spices, rare woods, and precious stones for thousands of years, perhaps ten thousand years. Recent Egyptian findings have shown Thai opiates and coca plants from America, as well as spice plants from the pacific were grown in Egyptian temple gardens. Doubtless the people who could build gigantic monuments were more numerous and trading more intensively then the English and French historians were willing to admit at the time when ancient history carried importance.
If the value of gold was 5-10 times greater, and it had flowed for thousands of years in one direction, how much could have flowed? Say 5000 years at one tenth current production, what would the value be? 500 times current production of 2500 tonnes? 1.25 million tonnes? Even at 1/100 of the production volume over a period of 50,000 years one has that same level without considering gold's higher purchasing power.
Jewish law dating back to before 500 BC in written form (in practical and spoken form it dates back much further) deals with trade, agriculture, and religious mores. Indicating that the bulk of people's time was not in raising and processing food for sustenance, but in making their physical and spiritual lives better. On average, it seems that people stop working purely for sustenance somewhere along the prior lines of hunter-gatherers in the jungle at 2 3 hours a day. Housing maintenance and improvement, decoration, and comforts, take up most of the time. Prior to the industrial revolution, industry was wholly within each household and village. Trade was limited to traveling merchants (peddlers) prior to the middle ages, and roving bands of thieves and stationary bandits known as nobility - knights.
Population density and population numbers.
Throughout history, and pre-history, people have settled from nomadic lives as hunters-gatherers to deal in agriculture. Studies of the few remaining nomadic societies in the jungles show that they put in about 2 hours per day in working for sustenance, and the rest of the time is spent in ritual and social activity, as well as decoration and other actions not related to subsistence. The people migrating out of the jungles and onto the plains would only have done so because it was necessary to do so for survival as competition with other bands would have raised the level of effort needed for bare survival (including fighting for territory). As one leaves the jungles for the plains, one sees the transition to long range hunting of herd animals and then fishing, and later to animal husbandry. Each of these requires progressively higher initial investments of time to form capital in order to gain sustenance one needs food for the hunting expedition before the hunt (one also needs to feed the tool maker), and the animal husband needs to refrain from eating the lambs and the calves before they have matured.
Cultivation and fishing give rise to fixed settlements and a higher investment of time during particular seasons, and investment of time in building irrigation systems. These would not be built if there was no prospect of investing less time per person (on average) for sheer survival. If the time investment is greater, then people simply move elsewhere. In short, unless prevented by geography or force from immigrating, people will organize so that the average person puts in 2-3 hours of work per day for sustenance alone. Limitations on migration, or the simple end to the availability of arable land would be the only cause for subsistence taking up a greater part of the day.
Where this happens, and no migration is possible, the people react according to circumstances by (1) fighting over land and its produce, (2) lower effective fertility (formerly by lower infant survival, later by having fewer babies), (3) investment in capital and invention by necessity. Thus industrial technology for agriculture did not develop till new arable land became unavailable to anyone contemplating migration, as it lowered the cost of migration before migration was halted by the lack of somewhere to go. This only happened during the end of the 19th century.
It should also be remembered that the last ice age was still unwinding as the civilizations of antiquity developed. Much wetter conditions prevailed in the middle east and on the Southern coast of the Mediterranean. Some estimates have the population of the Jordan valley and its associated desert areas (they were not always desert) at 5 to 10 million.
Though reliable numbers are not available, it is well known that the Roman realm saw a depopulation as taxation to support the "bread and circuses" at home, made it impossible for the taxed plantation owners and their slaves to maintain the 2-3 hours per day of working for sustenance and prompted them to move migrate out of reach of Rome's tax men. They left behind the whole estate, crops and all. Soon Rome fell to a relatively small band of "barbarians" from the North. The remaining population of the cities fled once free food was no longer flowing in, and service to the military was no longer profitable.
My point here, is that people have had the time to dig for gold, and have done so. They have traded over great expanses since time immemorial. Their trade had different levels of money: from salt, food (cattle) at the working class level; to silver and copper for the tradesmen; to gold for the merchants and professionals; gold, art, rarities, and gems for the rich and the rulers.
Rhodes and DeBeers
The same people who set up DeBeers to control diamonds, and have released them slowly over a century, also controlled the gold industry of South Africa. Today's mines in South Africa go down up to 4 miles, digging up their best ores. The better material and the easier digging was most probably evacuated by WWI, AFTER tens of thousands of years of non-industrial mining. Doubtless, Rhodes and Milner set up a depository for gold that was not put into the market, just as they did with diamonds.
The size of their hoard is unknown, but must have been substantial, on the order of a major central bank. Perhaps Quigley's successors will pry the information out of the inheritors of the Rhodes-Milner cartel at another moment of recklessness when they feel that they are on top of the world, or have given up getting there.
The gold they dug up surreptitiously, was never moved to Europe. Rumor has it that it went to Hong Kong, Shanghai, and other locations at the periphery of Colonial Empire. I don't expect to know with certainty the quantities or the whereabouts of this gold, but to say that ten or tens of thousands of tonnes are rumored to be involved.
In his research of oil company data, Hubbert found that they hide their reserves carefully, admitting their existence as replacement of reported reserves becomes necessary in order to maintain commercial or financial credibility. As he reports, it was not till the mid 1970s that the last unreported reserves were disclosed as new discoveries/reserves, though those were discovered in the 30s. This follows the well tested method of gaining credibility by putting away "reserves" of cash, gold, oil, completed and tested designs and research, etc.. The exploration for reserves, the sales plan, the design or research project are then sold and funded. With much pride and bravado, the completed project is presented on the date due. The funds are used for an entirely new and different project, which will be used to obtain new funding. One then obtains a reputation for good management and reliability, which provide a premium price on the market.
To expect less from the long lived former gold cartel of South Africa, 100 years old at its death some years back, is foolish. The Anglogold cartel of the past was given up only when the important discoveries dating back to the 1890s were depleted, and only official quantities could be produced just enough to cover expenses. South Africa was then released from Apartheid when its resource was depleted. That is the pattern, and as Mr Guyatt was told, official production from South Africa was only 17% of actual output as recently as the 50s. Most likely, the difference between official and actual production was much greater in the early days, at well under 10%. That alone would raise the 20th century gold output to at least double and probably triple its reported levels; accounting for some 150,000 to 200,000 tonnes.
Prices of gold in London are relevant if you can get it there. If there is war and you can no more get to London than to heaven, then whatever amounts of gold leave London will be at a lower "real" price than they would be in areas where commerce is closer to normal conditions, e.g. Qatar during WWII (or WWI for that matter). The prices of gold were very well higher in the markets than officialdom would have one believe.
Indeed, in order to retain the gold-dollar parity, an elaborate system of quietly supplying gold was needed. Furthermore, there has never been a complete accounting of the gold supplied to market at the time, nor the source of that gold.
Needless to say, the source of gold pricing is supply and demand. If prices are falling in dollars, it is because the amounts of gold paper and bullion reaching the market are going in at a higher rate than dollars. That can only continue so long as the market believes that gold paper will be convertible at par with the real thing. The only way this parity would break is through the inability of the issuer of paper gold to provide bullion at par or an acceptable substitute (say Chrysler, or Banker's Trust, or Universal, real estate, etc.).
The approach to that condition would be preceded by a period where more real assets are traded for release from paper gold obligations as traded volumes of the suspect fiduciary gold securities decline concurrently. Next, one sees occasional periods of liquidity, where "call money", or spot gold (bullion in a known location), is in short supply and the scramble permeates the system to get hold of it. Hidden black gold would be used first, because it is hidden from popular view.
The markets would respond by taking a skeptical view of the paper gold contract's components, namely an over the counter futures contract, and a treasury or dollar bank account balance. These would see a rising interest rate, and a rush to exchange them into real assets (companies and real estate).
Finally, reaching to official gold hoards, the system would make a show of the puny supply in trying to demonstrate its availability while gold interest rates behave as they did in 1928 and again in 1929 spike then crash demand for borrowing fell as none expected to be able to repay, and none wanted to lend because they did not expect to be repaid for the outstanding debt, not to speak of any new debt. The interest rates were fictional, as no one borrowed and no one lent. Furthermore, gold bullion traded at a premium to paper gold one step away from the paper-physical exchange window. The premium was finally accepted by changing the official price to the market price, terminating the gold debt cycle. During the FDR revaluation of gold, a number of different values were proposed then shot down. Considering that the cycle was completed, the seeking was for a price acceptable to a hidden market.
Today, this would be seen in high premiums for coin and new fabricated gold (as in the use of 10kt gold instead of 14kt for low end American gold jewelry re FOA's single atom per coin).
Knowing first hand how a black market operates (somewhat out of date, but I am sure my experience is still relevant), and understanding that little or nothing in this market is different from the official market but for there being little recourse for the "little guy" if a contract is broken, but no problem for major players as they extract payment for breach of contract in a most total and effective manner. Furthermore, in this market, reputation is all. If a private bank and is illiquid, a simple delay in payment even one accepted by the client - will cause a rush out of your bank and destroy its reputation. In this world, governments are just one more organization, with little or no superiority, as its executive members in open politics and the powers within the parties as well as in bureaucracy, are exposed as much to the rules of the unsupervised market as is anyone else.
Mr Guyatt tells us the parallel world trades more slowly but in greater sums, it is also the only manner of substance by which one can "take it off the table" to perform the conversion of profit into real and permanent wealth, which I pointed out in a posting long ago is a precondition for a wealthy market player's participation in the official market. Without it, he/she would not ever make an investment because the official markets allow no assured avenue for exit, which requires government and other potential looters to know what you have and where you have it. The market in $20-50,000 art and antiques is cash and carry. Brokering is much more common as a business, and relationships are worth a goodly fee, often 10% per layer, with two layers being standard. "My people will meet your people" is routine, with no contact, or even knowledge of identity between the principals of the trade.
Mr Guyatt says that governments play a direct role in the black gold markets as fiduciaries and on their own behalf.
Considering that government is an organization, and that as such it is composed of people, and that these people are as susceptible to corruption as anyone else and are as self interested and determined as others are to do themselves favor, the likelihood of government officials actually being the honest custodians of public good many imagine they should be (and think they could be), is as absurd as can be. Where government officials are paid off, they are paid for services they provide; moving law and regulation in favor of their sponsor and against competitors, providing immunity to legal actions, acting to enforce cartels to force members to abide by the cartel rules, acting as an arbiter between various interests of size, and to act as a fiduciary. In some European governments, the national institutions act as custodians for anything from land to art, shifting the burden and costs onto the public, and still allowing the unofficial owners to make use of them. Mr Guyatt posits that central banks act as fiduciaries with the banks, who in turn are fiduciaries to the black market gold players.
The government, however, also has an interest in obtaining control over those that would control its members. As little public accountability as there is in government, so there is a strong incentive on the part of government members to move against their black market sponsors and to grab the means for their power. The pro governmental agenda of declaring independence from most private interests is part of the loudly proclaimed socialist agenda, and is promoted by the few private interests who are (at least to their own thinking) beyond reach of government. It, like all currencies and government efforts of the past, will be disastrous. Some actually want the disaster to occur because that provides further public support to government usurpation of people's rights, and to the expansion of government control and power, and ultimately to expansion of their own power. In fact, after the civil war, government power expansion and extortion of private interests were the cause for private interests taking the more active role in shaping government decisions and to cooperate with the socialists.
Here it should be noted that the most obvious incorporation of private interests into government was in the Spanish war, WWI, WWII, and cold war expansion of the secret "intelligence" agencies and the foreign ministries. They were staffed by the private intelligence operations of the large banking and industrial interests and their socialist associates in every country of size. The system thus constructed was intended for furthering government power on the one hand and forming a government within a government by providing intelligence agencies with arbitrary powers that they could use against the rest of the government. The more public portion of government that had been staffed by socialists then developed into a dangerous self-interested group that saw complete alignment between their official decisions, ideology, and their interests as practitioners of patronage. I believe that the current electoral, monetary, international, and legal debacles are related to an internal fight on the part of members of the private/government partnership in favor of cooperation with Europe's crackpot socialist/environmentalist nihilists and the opposing forces that want to push away from them and compete, knowing with certainty that Europe is demographically and politically deformed and can't keep up.
As in all fiduciary media entrusted to government in the past, the gold backing the certificates entrusted to government would fail as government would forever repeat its practice of trading fiduciary responsibility for quick political gains. The gold certificates, if the one from Germany is to be believed, have been lent out leaving about 20% reserves. I would tend to believe that all Western governments have abused their fiduciary duty and it is just a question of scale as to how much of it each government and banking system have remaining unencumbered. I would tend to believe that the US had done more to abuse its duty than anyone but perhaps Italy.
As to circulation of black gold, it seems that it circulates as it has always done, by proxy in the form of depository receipts. Though these may be thought to be fully allocated, they probably are not.
A couple of economic notes:
Though the days of the American monetary empire are numbered, I don't believe that Europe is on an actual ascendant towards domination. Its economic isolation and socialist leaning public and governments will prevent it from achieving substantial importance without foregoing the whole of the current political trends. The use of the Euro as an international trade settlement medium may never occur, as without its wealth preserving component intact, a currency will be destroyed, furthermore, a skyrocketing gold legal tender which is what I saw as precedent in the action forced on the IMF by the US and Europe (presumably BIS) would prevent the need for holding any currency balances at all. As the markets show a proclivity towards lending in the strongest currency available, gold denomination of debt contracts would soon follow a crumbling dollar so long as the Euro falls too (even if not so far). The Euro's gold backing will not matter at all as long as it is irredeemable to anyone. If it is made redeemable for anyone of size, then it will suffer the fate of all gold backed debt money of the past. The wild swings in expansion of international Euro lending last year are but harbingers of things to come.
Unlike the US dollar at the beginning of its present incarnation in 1934 and again in 1946, the Euro already has behind it an accumulation of debt, particularly government debt, that will hamper it badly and shorten its potential life.
Coming to the point of gold taking on the cumulative wealth value created during the gold credit expansion period, I want to add that it would not be quite the case today because there is a change in the composition of the economy on a global scale, whereby the cumulative portion of the economy that of durable goods has fallen. The growth in accumulated wealth around the globe, is manifest also in incomes that allow more expenditure on non-cumulative elements, namely prepared food, entertainment, subscriptions to information services, telephone, and other such economic activities which gold does not normally price proportionately. That will limit gold appreciation in real terms to a lower ultimate value of perhaps 70-80% of its potential relative to other such revaluations in history.
As to silver, it should be noted, as Von Mises pointed out, that silver was not demonetized by the market's free choice, but by intentional government policy coordinated around the globe. That government policy was part of a recurring mercantilist approach that bankers occasionally supported (and got their way more than once). The reason for moving towards gold alone was exactly the desire to slam shut the debt trap on South America in particular and on debtors in general. It never quite succeeded.
Silver will probably behave as before if it is allowed to. If the Euro reserve structure is going to form as you suggested it will, then there is going to be a politically motivated gunning up of the gold price. As gold surpasses prior historical ratios to silver, the intentional Euro-gold bubble will feed silver as gold will surely become over priced. It will also feed into the PGMs, as it has already.
Some more comments later this weekend or early next week.
14:43:09MT - usagold.com msg#: 46961)
Currency is the cause, not trade
In your post [Stocks, Lies, and Ticker Tape] there is discussion of displacement of local manufacture by imports due to "free trade".
This is not true!
The actual cause is "Triffin's dilemma", which was actually discovered at least 3 centuries ago, and possibly first formulated by Sir Gresham, the Exchequer to Elisabeth some 450 years ago.
The idea is simple, industry is destroyed at the source of money creation.
If you are in a country that has a wide variety of industries in the days of the gold standard, and there is a huge strike of gold, with more reserves found every year, then money (gold) will be spent by the local owners, spent by the happy miners, taxed and spent by the local government, and would cause an increase in money supply. Local prices would rise well above those in other countries, as a result, the country's exporters will find local labor hired from under them and moving to work the mines or cater to the spending of miners, the mine owners, and the government. The exporters, facing high costs and an attractive local market would stop exporting. Next, import prices, being lower than local prices, would cause imports to flow in, displacing local production.
While artists, shop owners, and service providers might be getting very well paid by the mine owners and their laborers for local services, lavish shows, and construction of megalo-houses, the industrial production of the country would decline and the mechanically inclined local labor once employed in industry would have to convert to one of the booming industries of housing, retailing, broking intermediaries, entertainment, scientific research, spiritual and psychological advice, medical service and medications, and government service.
This will continue until the prices of goods abroad rise to be closer to the prices of goods in the gold producing country. When this happens, the expansion of imports will stop, some imports will no longer be cheaper abroad than when locally produced, and then local entertainers, salesmen, government workers, home builders, brokers etc. will have to find new employment in some of the old mainstay industries that now have to be rebuilt from the ground up.
Now, instead of a mine being the source of money, lets look at the source for today's official international money, the dollar. How and where is a dollar created? Dollars are created by issuing debt which is done by borrowing for the purpose of spending, investment in capital and technology development, or speculation or it is done by "printing" of it by the monetary authority, the Fed. Dollars abroad are not borrowed into existence directly, but leveraged in what is a "free banking" system which is prone to liquidity problems when it expands more quickly than the supply of dollars from exports to the US (the creator of our "gold" in this case), because there is no monetary authority to print dollars outside the US.
Money is thus destined to flow out of the reserve currency issuing country, America. Aside from giving it away, the only other ways of supplying money abroad is by lending it and spending it on foreign investments and imports (produced by the investments abroad).
Imports are destined to flow the other way and to destroy the industrial economy by competition from imports, so long as dollars are used to settle the most necessary trade (oil) by political fiat (an agreement between our creditors, us dollar producers, and oil producers that have our troops sitting around their oil), and there is a need for more dollars abroad. The need for more dollars abroad is a result of dollar debt incurred in the past by developing economies; both in their attempts to buy oil in the 70s, and in their borrowing for capital investment in local and exporting industries in the later 70s and through 1994.
When dollar exports overcome debt service costs to dollar debtors, the dollar will collapse as prices of imports grow to match US prices, while import volumes drop and will start being replaced by local production.
A demonstrative look at recent dollar history:
This is exactly what happened in the course of the development of the dollar reserve system coming out of WWII. This lasted till 1971, when the then exporters to the US, namely Europe, finally reached the point where their loan repayments in dollars were completely supplied by income from their accumulation of American income producing financial assets, and the US suddenly found itself devoid of new oil, which had to be imported in growing quantities thus suddenly supplying more dollars to the global markets. From that point on, there was no further need for dollars in Europe, and they just dumped into the markets for real goods those dollars they and oil producers got from exports destined to the US. Import prices rose to the sky in the US, and "free trade" became the mantra in order to lower import costs to Americans. Europe and oil lent the money to emerging markets, and China suddenly started opening its doors to trade.
The oil crisis also brought many of the emerging markets to borrow dollars in order to supply their upper crust and local industry with oil. Enjoying the rise in dollar prices of their mainly commodity exports to America, these countries thought that the future would be just roses and daffodils. Then Volcker (and the markets responding to price inflation) raised interest rates to the sky and the emerging markets could not refinance their debts at the old interest rates and could not afford the current rates. The dollar prices of their products no longer rose, and many prices fell. Faced with lower dollar revenues and higher debt loads, they wasted no time in lowering their currency values (by printing up tons of it) till enough real assets were sold to cover debt and export revenues resumed growth through investment by dollar holders from abroad and tremendous growth in export volumes to the US.
Japan, seriously damaged its trade balanced by the sudden rise in dollar costs of oil imports, and made a conscious decision to gain not only enough dollars to cover existing dollar debt service by interest alone, but to be able to buy a year's worth of oil from interest income on US treasuries and real assets, which they quickly accumulated.
Beginning in the 80s, highly efficient cars and installations were put in for oil use around the world, and oil based electricity was replaced by nuclear gas and coal generation.
During the 70s (Japan was still "emerging") and then through the 80s (Japan was now a "mature" economy), exports from dollar indebted emerging markets grew by leaps and bounds to 20 times the volumes of 1971, while dollar prices were stable. Through the 90s, while volumes grew at a similar rate (increasingly dominated by Chinese products) Greenspan's mid-late 90s policy of high "real" interest rates, caused the prices of imports to the US to drop just after Greenspan's low "real" interest rate policy of the 90-93 period had induced massive borrowing by the Asian "tigers", who could not pay the dollars off with the exports they sold the US.
They will only be able to resume high speed growth when China (and later India) can no longer offer cheaper skilled labor or the costs of American distribution and retailing and export transportation (oil to run the ships and energy costs to build new ships) rises to the point of choking further export growth by eating the price margin with the US. Alternatively, they can make a coordinated and concerted effort to lower outstanding debts and raise reserves in dollars till they no longer have to price their exports off of the need for dollars for debt and oil. When this point is reached, they will not need any surplus dollars from the US. The collapse of US energy infrastructure is displacing production of US basic materials to these same emerging markets, which will increase their dollar income more than it will increase their production volumes. The 7% drop in their net debt position is going to be a 10%-12% drop in the next period (assuming stable oil prices under $40) just because of the replacement of production from US basic industries.
When non-oil US import prices stop dropping, the signal will have been given that the colossal debt trap of the past 20 years has been breached and the captured economies are escaping. Oil prices will then rise in tandem with other import prices going up, till the US is producing enough of its energy to cap oil prices.
During the 70s and early 80s, the "median American" lost 25% of his "real income". This round will be worse. With luck, it may fall by 35%-40%, as production of import replacement capital and energy capital will hopefully grow by the time the process hits bottom.
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