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Aristotle (10/17/2002) "Let's step through the looking glass now, shall we?"

miner49er (05/06/03) "The fate of overseas dollars -- will they or won't they 'come home to roost'?"

Black Blade (9/23/03) "World Gold Council sponsored ETF (Securitized gold shares?)"


BACKGROUND: (necessary context for the "looking glass" post that follows)

WGC Press release Page Oct 16
STANDARD BANK OFFERS GOLD PLAN
Standard Bank Offshore has introduced a capital-guaranteed product linked
to the price of gold with a 12-month lock-in period. The Gold-Linked Deposit
Account is a fixed-term deposit offering a minimum return of two percent.
Investors can earn a 10 per cent return if the price of gold reaches or
exceeds $400 per ounce on the London 3pm fixing of the world bullion
market on any business day during the period of the deposit. Interest will
be paid when the product matures.

The deposit has a minimum investment of £10,000 and is available to
sterling investors only. The offer is available to investors for a limited period
on a first come first served basis.

Aristotle (10/16/02; 13:11:46MT - usagold.com msg#: 87548)
Standard Bank offer...
It's just pile of paper Gold manifested in one of its many possible forms. Not only does the investor receive no Gold to show for his £10,000 minimum investment, his cash returns are laughable. He's effectively feeding cash into the bank as fuel for its derivative machinations.

Just look at what's being promised!

As stated, its a *product* that is *linked* to the "price of Gold" which is locked in for 12 months.

HA ha! Where's the Gold? And what's the liquidity on that *product* thing, mate?

Are we to be drawn in by a 2% "minimum return" on the deposit (paid at maturity) as our compensation for letting the bank use our cash while we walk about empty handed? I'd rather use the cash and eat sandwiches all year. With dijon.

Here's the biggest farce of all -- it says investors can earn a 10 percent return on this *product* if the price of Gold reaches $400 per ounce or higher.

Oh really? Well, isn't that generous of the bank!!!

Simple math shows us that if bought plain vanilla physical Gold, bought it outright today (say, at $315) when Gold hit $400 we would be sitting on capital gains of $85 on a 315 investment. Our plain vanilla Gold purchase would give us a 27% pecent return -- almost TRIPLE what the bank is promising with its razzle-dazzle paper and promises. And what if Gold continues higher than $400? Sheeeeeeeesh!!

At this juncture in the currency wars, only a fool would be SO EASILY suckered into this paper distraction.

Gold. It's what the smart money is getting. Believe it. --- Aristotle

Aristotle (10/17/02; 02:29:28MT - usagold.com msg#: 87615)
Stepping through the looking glass...
...I'm a proponent of many real things (Gold, sandwiches and patio furniture to name a few) and I heartily endorse entrepreneurial efforts and any other eyes-wide-open stock or bond investments. My lasting frustration, however, is with the widespread failure of the many promoters and participants in the wide Gold market to reach FULL DISCLOSURE on what's actually "good as Gold" (uhhhh... that would be GOLD, sir, and NOTHING else) and what's merely "Goldish... sorta... and only during good times."

But hey, let's drive my point home to bed. I've got no problem if Standard Bank wants to offer, and you or anyone else wants to invest in, a £10,000 financial product that pays 2% per annum with a 10% kicker if the price of tea in Shanghai (or pint of ale in London) goes up by 27%. I see nothing terribly objectionable with that.

= = = = Moving right along to the main point = = = =

Let's step through the looking glass now, shall we?

Hold on to your hats and maybe take a Valium or two. If you're willing to follow along this is gonna be a helluva thing.....

You know..... it occurs to me, seeing how EASILY some Gold-minded investors may be drawn in by leverage and by less than the Real Thing, I, too, stand ready to accept £10,000 ($15,500) investments for over-the-counter 12-month maturity structured financial products offering a Goldish hue. Let's call them Ari-Instruments.

On those Ari-Instruments I'll pay 2% per annum for use of the money, and throwing caution to the wind (but mostly to make my point) just like Standard Bank I'll promise a (maximum measly) 10% interest payment kicker to the bearer upon the event of Gold's price increasing by at least 27% to $400.

Primarily to ensure the ever skeptical R Powell that everything is right in the world, I imagine I'll hedge my cash exposure to that price-rise event in the following manner: For every FIVE Ari-Instruments I've sold (for which I'll have received $77,500) I'll take up a SINGLE long position through the COMEX Gold futures market.

Are you following me so far? That means I'll deposit $1,350 in margin and if Gold's price increases by $85 during the year I'll cash it out for the leveraged payoff at 100-to-1 ($8,500) from which I can easily pay off the 10 percent interest "Gold-price kicker" on the five Ari-Instruments -- that is, $1,550 each totaling just $7,750 for all five.

In the meanwhile, God only knows what StanBank [
Standard Bank] in my place would do with the balance of the $77,500 (minus the $1,350 margin deposit) received for the five Ari-Instruments for the course of the year, but they sure wouldn't have to do anything else with it even remotely connected with Gold.

But this is what "I'd" do with the cash.

Come follow along. It might prove to be an eye-opener on the nature of the world, especially for folks like Kasperjack who've said I'm full of hot air without any relevance to the real world.

Following that single long, I'd take out TWO additional gold futures positions through COMEX, but unlike the first one, these would both be SHORT. The margin would be $2,700. Then, I'd use about $65,000 of the remaining cash to buy 200 ounces of Gold for delivery to my doorstep.

Are you still with me? As more and more chumps (I mean investors) sign up for my Ari-Instruments and flood me with their cash, I'll always be taking TWO SHORT positions on COMEX for every ONE LONG (plus 200 ounces of Gold delivered to my door) all financed with their money. I assure you, all of my sharpest friends will join in this routine, and thus the price discovery mechanism provided by COMEX will be more inclined to fall than to rise.

As this continues for year after year, I never have to pay the 10% kicker to my investors, needing instead only to pay the paltry 2% which is peanuts when drawn from the broader spectrum of my other banking, finance, and derivative operations. Or how about this? I'll make interest payements with the leftover Ari-Instrument cash that didn't get used for purchases of the fixed ratio of three contract margins (one long, two short) and the 200 ounces of Gold per each five Ari-Instruments which were sold to these poor chumps.

Now get this... here's a beautiful thing. With the downward price pressure, as my long futures contracts suffer losses, it's easy to close them out painlessly using (only) half of my outstanding short contracts as offsets!

Furthermore, as opportunities in the falling market might allow, some of the remaining short positions can be further liquidated (cashed out) through COMEX as a form of compensation -- thus effectively ensuring that the net out-of-pocket expense for the physical Gold I bought and held is always cheaper than the market rate I paid at the time of the order. Think hard on that one and join me in a well-earned smile!

And you wanna know what the REALLY beautiful thing is? For this I want everyone to wake up who's been for years predicating their own leveraged paper Gold longs on predictions about **eventually** there being a massive squeeze on the shorts like me. It ain't gonna happen dudes! If you've been carefully keeping score, you'd see that through this process I've got a physical position that is ounce-for-ounce at least double my net short position.

IF (and that's a big if) there's an unlikely event in which me and my bullion banking buddies can't contain the COMEX price with our two-for-one selling, then we simply announce delivery intentions for a token amount -- that's just a *TOKEN AMOUNT* mind you -- of our physical Gold through the exchange to stand against our short positions.

Wanna know what happens next?

You guessed it! We just sit back laughing at the poor stoppers as these same over-leveraged longs fall all over themselves in their scramble to resell it -- right back to us!! Here's the thing... the thing being that their contracts represented more Gold than they ever had any rightful business or financial ability trying to "control" (and I'm NOT sorry if I'm so bold as to use the one key word always present in the honey-dripping sales pitches of their own commodities brokers.)

These poor clowns are knocked off their feet by their own successful leverage. As we say,
the victory was theirs, but their hands were too small to hold it. Quickly they find it's one thing to pay a $1,350 margin to hold a "right" to buy 100 ounces, and it's quite another thing to pony up the full purchase price ($32,000+) for each contract when the chips are down and the grown men at the table aren't blinking. So you see, as fast as they're selling what they can't afford, we're one step behind them with very strong hands. Once again our token bit of Gold brought about the desired turnaround and business continues as before. Again, if you wish to a Gold accumulator at the best prices, think about this process and join me in a well-earned smile.

The Moonshot, the Worst-Case Scenario for my crew would be in the end game where the currency world comes undone and the flood of hyperinflated dollar spending washes over everything with sprees of buying anything and everything tangible in the flight from dollars.

In that case business as usual ceases to be, and conceivably we'd need to deliver up to nearly HALF of our physical Gold holdings to protect ourselves from nominal (bookkeeping) cash losses through the Exchange on our remaining open positions of short contracts.

The prospect of that being very traumatic to us is much diminished, however, given the nature of the product. In times of volatility there are trading/price limits that kick in, and the COMEX Gold exchange stands better than a good chance of its contracts being locked in "fantasy land pricing" while the prices on the physical market run away in round-the-world Gold rush trading. At least a few frustrated COMEX longs will be looking to liquidate the paper junk ASAP and take their cash where the Real action is.

Whether the exchange in Gold derivatives survives or not, the upside is we keep at least half the Gold to ourselves -- my partners and me -- all of which was purchased for ourselves with other people's money through the Goldish-colored Ari-Instruments. The final small bite for me out of the worst-case-scenario is that we (my crew) would have to sell a wee bit of these Gold holdings on the soaring physical market if, in fact, our previously mentioned long contracts fail to pay out via the Exchange (due to COMEX lockdown) in order for us to cover our measly 10% interest rate kicker due to the $400-Gold-price knock-in as promised in the original terms of the Ari-Instruments. And yes, perhaps we've gotta liquidate just a little more of our remaining Gold at these glorious moonshot prices -- on an as needed basis -- as frustrated owners of the Ari-Instruments reach their 12-month cycle maturity and want to cash out their original [paper] principle (£10,000 or $15,500) on these Goldish yet quite impotent paper posers that we designed for them.

Are you a physical Gold Advocate through and through? Then smile with me a well-earned knowing smile as you continue to buy your physical Gold at prices that others have worked so carefully for so long to bring so low for massive acquisition before the Free Gold moonshot.

If, having joined me in my office for the day, you still insist there is metallic virility in Goldish paper investments, then Heaven help you because my crew, my partners and me, we'll take you up on it. We'll work you up and roll you over, maybe make you wiser but none the richer. So please... feel free to pull up a chair and have a cigar, your head filled with promises even as we rape you.

"Golly, Ari, you've changed!"

No, I don't feel that I have. I'm still trying to help you, to wake you up. (It's the falling piano thing -- "Get the hell outta the way!") That, plus I don't want you to be a welfare case while I'm trying to live large after the dollar goes Bolivian. (The quickest road to revolution and communism is a penniless population. I WANT you to have Gold so you won't take mine. There, see? Turns out I'm not so noble after all. I'm just as selfish as the next guy.)

I just figured where attempts at friendship and various flower-filled analogies have continued to FAIL to impress upon some of you the stakes of the game, I thought perhaps a little swim, up close and personal-like, with the sharks might convince you that the blood in the water will be your own unless you heed my words.

It's just tough love, my friend, tough love. And self interest.

Here endeth the "insider view," thus endeth the lesson.

Real Gold. Right now. (What time do you think you have???) Get you some. --- Aristotle


miner49er (05/06/03; 10:06:12MT - usagold.com msg#: 102429)
Homeless Dollars...
Good post, John the Jute (msg#102381)! Very nice way of explaining the relativeness of scale.

Regarding your musings re: dollar repatriation, it can be a tough one to answer. The obvious take is of course as you express, that without use for dollars, they would simply find their way back to US shores, and help drive (hyper-)inflationary pressure. Yet, if you will permit me also to think out loud for a moment ;->, perhaps we can take a look at this currency as the derivative instrument it effectively is, and then try to figure out its ultimate fate. Let's view it specifically as a kind of call option; one that commands a premium as a price paid for its exercise-ability at any time for any of the goods or investment media that exchange in the currency's universe (or the settlement of debts). This amounts effectively to a liquidity premium.

This premium gives it a trade value in its own right, and as such, as long as there is a market that believes in the currency's stability, the currency itself trades on its own merits. Not unlike futures and options. And just as many of these contract instruments get exercised for whatever underlying asset they represent, most are simply exchanged among speculators and hedgers trying to benefit from movements in the contract price, never actually intending to exercise or take delivery. The paper remains viable so long as the holder is confident that the next guy believes the contract is generally good.

While many holders of a currency intend to "exercise" the currency for real things, especially those in the currency's principal use domain, most of these currency units are likewise exchanged among speculators and hedgers (including all those private individuals, who own dollar denominated savings and investment accounts overseas), who are only trying to profit (speculate) from the currency's movement, or preserve (hedge) their own currency's seemingly endless trek of depreciation vis-a-vis this US dollar. Most of these have no intention whatsoever of "taking delivery" of things with these currency instruments.

So, what happens to the dollars they sell? For these average citizen types, the banks that held their accounts buy them. They then either sell them to another institution or may enter the foreign exchange markets themselves (depending on how they are regulated). They also may hold some back, depending on how they wish to balance their own portfolio. So, now these dollars that have not ended up remaining in reserves at these banks have entered the foreign exchange markets putting upward pressure on the currency of the seller, and downward pressure on the dollar.

Historically, the paradigm was to do as little of this as was necessary in order to keep the seller's currency "competitively" weak (among other reasons). As the influence of export to the US wanes (tapped out US consumer + growing size and sophistication of other markets), the need to keep one's currency weak vs. the USD, so as to compete for this market also wanes. Instead the stabilizing and strengthening of one's currency becomes more important (thereby encouraging borrowing in the local capital markets), and allowing local workers to enjoy a bit more the fruit of their labors, instead of always helplessly watching the value of their labors get sucked into the vortex of a dollar-dominant currency paradigm.

So, do these orphaned dollars eventually come home to roost in the US domestic markets? We will be told that. The media will wring their hands over anecdotal wake-up stories like Arabs buying up vast tracts of property, and how "they" will soon "own" the country... (This has been going on for ages in the U.K., as you're aware... every other lovely English manor is seemingly owned by some Saudi mogul...) We experienced the same with the Japanese in the 80's (Rockefeller Center...). Hence part of the political response will be to enact capital flow restrictions. But anecdote amounts to chump change, in a purely financial evaluation.

The really big holders of dollars are the central banks. What they do with their reserves will make or break. Their influence over other banks and financial institutions will also largely dictate the destiny of these dollars. In the gold standard, the currency acted as something of a title deed for a specific good at a specific price. Central Banks could and did take these "receipts" and claim gold from each other. In this day, there is nothing for CBs to "claim," as these dollars are no longer "title deeds." Rather, they are like non-expiring calls for things on demand, at the variable and going price. CBs are likely to neither a) dump them on the forex markets, as this would simply devastate the currency, and risk dreaded instability globally -- something banks are NOT prone to do; or b) race to our markets to try and buy things (like gold), as this would also be fruitless, since a market revaluation for this action would instantly make gold unpriceable, and it would not even be offered. Again, why engender the instability?

Without a certain weapon in the arsenal of the euro's design, the foreign CBs would indeed be over a barrel. Previously they were forced to evermore be on a dollar standard, since they would realistically only opt for this as the lesser of two evils. The alternative of saying no to the dollar at that time, would only have meant a return to a gold standard, and the politically unacceptable bone-crushing depression that would follow (as well as instability). In 1979, the European CBs began marking their gold reserves to market. This one act demonstrated immense foresight, and would provide the escape valve from the rock-and-hard-place no-win choices between eternal dollar support, or global depression.

Quietly, the euro-system banks have been divesting themselves of dollars. Collectively they retain something like 211 bn. currently. (This is not a large amount relatively speaking, but consider fractional reserve lending, and quickly we perceive the immesity of euro-dollar infestation.) This decline in dollar holdings is desired to take place concurrently with a rise in the price of gold to offset this. Spoonfeeding dollars into the system won't crash it, as well a slow commensurate rise in gold. The discipline that they have thus far maintained is indicative of the tectonic movement of the geopolitical strata. Ideally there will be no rash or even discernible activity. The perfect result is to simply keep shifting these plates until we wake up one day and the world has been remapped. Reality of course is that there are points of friction that cause tremors of unpredictable frequency and proportion all along the way. At some point critical mass will be reached, and the dollar contract markets for gold will no longer be able to contain its price as market perception on a large enough scale discounts paper parity with the real metal accordingly. It is at this juncture that the gold reserves of the CBs will provide immense expansionary leeway, as they are for a season revalued constantly upward. This bona fide liabilityless reserve base will make the ECB member banks the premier lending institutions to fuel the economic growth of the euro zone, and those align themselves with it.

In this respect it is important to curry the cooperation of the more maverick dollar holders, like China and Russia, as their track record of unpredictablility, may lead them to use their dollars as weapons... (And don't think that their dollar debt is of much concern to them, as they know all too well that those totals can be reduced in real terms to pocket change, if such a hyper-inflation were to manifest.) Indeed as far as the books are concerned, this one use for these dollars overseas -- the repayment of dollar debts -- would actually provide a contractionary effect as these receivables are cleared from the balance sheet... One reason why Goldendome's sought after interest rate hikes can't happen... (gotta keep expanding..., and making it more expensive to borrow, isn't gonna help matters...) [Goldendome, there is much to this discussion, and I would like to provide my opinion in response to you -- as I used to think exactly the same... I likely won't have time, but the Trail provides some excellent discussion along these lines...]

The strategy of the level-headed is to slowly remap the globe financially. This involves as much as possible a SLOW transformation from one currency paradigm to Another. These dollars en masse will not return home. They were born in exile and will die in exile. We will hyperinflate ourselves, and won't need help from overseas...

Take care John the Jute,
miner


Black Blade (9/23/03; 21:55:16MT - usagold.com msg#: 109259)
World Gold Council sponsored ETF (Securitized gold shares?)

Good or bad? It depends on what you expect from it I guess. Personally I rather have physical gold in my possession because to me physical gold (and silver) is insurance. We have seen how the markets can just close up shop for several days at a pop. Remember what happened on September 11, 2001? No one had access to their investment portfolios as the markets closed for several days. Yet even though my stocks were locked up and inaccessible I could grab a fist full of my gold and silver. I think most here view physical precious metals as portfolio insurance and having it in their possession is better than not having it in an emergency. The "lock up" in the markets was a wake up call much like during the Great Depression people lost their savings when banks closed up or were inaccessible due to a "Bank Holiday".

Now the flip side of the coin so to speak. Many large Funds are restricted from owning anything but stocks and bonds. Therefore they are not allowed to hold precious metals as a form of insurance even if they wanted to. Besides, it is almost impossible to buy such large quantities of physical gold on a timely basis as demonstrated by Goldcorp's attempt to make a large (actually a moderate) size purchase of physical gold even after being assured that a quantity ten times the size that they bought could be readily acquired. Actually it took a couple of weeks if I remember correctly. The story is located in the "Gilded Opinion" here at USAGOLD I believe. The point I am making is if the ETF is actually shares based on actual physical gold located in a vault then this would be a way for large funds to put gold in the mix of their securities. I understand that the price will be based on the spot price of gold and shares will be issued only on the amount of physical gold in the vault and new shares can only be issued as more gold is acquired and placed in the vault. The gold supposedly can't be loaned nor can any derivative structures be made using the gold as collateral. So in this regard it may be good as it will create another source of demand. I am not sure if the Aussie fund will be combined with the UK fund and the proposed US fund either.

But for the individual investor looking for portfolio insurance and I mean true physical gold as insurance come what may that can't be isolated away from him/her then I would stick with the "real deal". If I want to speculate then I will buy gold mining shares of gold producers based on the qualities that I determine to fit my needs and what I look for in a speculative instrument like stocks. OK, for disclosure purposes, I do own shares in three debt free unhedged gold producers. But that is not "portfolio insurance", that is a speculative and hopefully profitable investment. The physical "real deal" is insurance in my possession where I can get to it no matter what world event takes place and no matter what may occur in the financial markets. So is the WGC securitized gold shares good or bad? It is a matter of perspective but they are two different things entirely and it's comparing apples and oranges from my point of view.

- Black Blade


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