This post is my replies to two reader emails. The first one was to "Victory", one day after my Gold as a FOREX Currency post went up. And the second one was to "Burningfiat" on Friday.

Hello Victory,

"... My thinking is this, won't the end of $ support be clearly visible in the currency exchange rate? Isn't that where the rubber meets the road, there really should be no guesswork needed. The US is a perpetual net exporter of dollars and has long ago hyper-inflated…"

There is definitely a glut of dollars right now. In September the Fed announced its new "reverse-repo" operations. There is, of course, a lot of debate about what those are really about, but I think it is obvious that they are to mop up the glut of dollars and raise short term interest rates in money markets and t-bills. The Fed even said so. They said that these operations will raise overnight rates in the money markets so that lenders can actually earn some interest.

When there's a glut of dollars, it's hard for banks (who create dollars) or money markets (who auction existing dollars) to make money on interest because there's so much competition for the limited pool of borrowers. Too many dollars drives interest rates to zero and even negative in some cases. So the Fed is actually competing against real organic borrowers for its own liabilities. The Fed will pay you to lend your extra dollars back to the Fed, even though what the Fed is "borrowing" are its own liabilities. So the Fed is creating synthetic demand for its own product to drive overnight and short term interest rates higher.

You're looking for a crash in the USDX to indicate the imminent end, but I have always expected a spike in the dollar, and I think Another expected that as well. I have written in the past that we could even see the USDX spike (very quickly mind you, not a slow rise) to something like 150.

What we see right now is big money piling into short duration, even overnight, assets. To escape, that money will have to pass though dollars once again. Where the rubber meets the road, in my opinion, is not anywhere inside the monetary plane. Instead, it is where the monetary plane intersects the physical plane, and that is in prices, the prices of real physical things, the price of physical gold and the price of (primarily imported) necessities. That's where I expect to see the break, in one of those two places: the LBMA or a real price jump in necessities. Whichever one comes first, I think it will quickly cause the second one to follow.

What that means, practically, is that either physical gold goes into hiding first, or there's a sudden devaluation of the dollar against the physical plane, meaning necessities, especially those necessities needed by the USG which must be imported. When that happens, the USG will print whatever is needed to keep its imported necessities flowing in under the aegis of national defense. Actual hyperinflation will follow.

When this happens, or a top level disruption within the LBMA, all that money piled into short duration assets will panic out and bid for dollars which it needs in order to pile into anything else. This will briefly drive the dollar way up on the USDX. It may even happen before you know what's happening, because big money tends to panic before small money even knows there's something to panic about. Remember this story from Unambiguous Wealth 2?

"Compare these big money folks to the average guy who rides the bus. You miss a bus, so what? It's inconvenient but another bus will come. It takes a long time to sink in that another bus isn't coming. It's not until there is such a big crowd waiting at the bus stop for the next bus that people start thinking "even if a bus comes there are too many people to fit on one bus." In that mindset the surest way to cause a riot is to send one bus i.e., not enough buses. You have to fight to get to the front of the queue. This is a bank run mentality.

And this is a key difference between the average guy and the big money. Big money isn't used to being kept waiting. Big money owns the "bus company". They know the buses aren't going to run before the little guy. They panic early. There was an electronic bank run around the time of the Lehman collapse. That was one of the reasons why governments around the world stepped in with fresh deposit guarantees. But there were no lines outside the banks to alert the average guy to what the Giants were up to.

Right now gold is $1,712 per ounce. If you have $200,000 in ambiguous claims floating through system-space, your account is right now worth 116 one-ounce gold coins of unambiguous wealth. But here's the thing. You are never going to beat the big money to that panic button. There are enough gold coins on the market right now that you could get your 116 of them without affecting the price. But if you're waiting for the first signs of panic, you're not going to get anywhere near 116. You'll be lucky to get six or seven.

There's only one way to beat the Giants to the gold, and that is to run in front of them."

Apply this reasoning to the signals you are watching. Even though you aren't waiting to buy gold coins at the last minute, you are still looking for signs that systemic transition is imminent. So what you want to look for are signs that big money is panicking, not the signs that you think will cause big money to panic. Because chances are that the really big money will see those signs before you do, and panic before you even know they are there. Therefore, signs that you think should be making big money panic, when it's not panicking, are probably the wrong signs. See?

In the comments section, it often seems like the Freegold holy grail is to be able to predict the proximate cause, and therefore get some advance warning, and therefore be the first to make a correct timing call on Freegold, even if it's only by days. But if you follow my reasoning, then it is most likely a waste of time trying to gain some advance warning. The advance warning is in the logic, and in the A/FOA archives. And the holy grail is simply buying physical gold now, before it happens. That alone will make anyone look like a genius in hindsight.

Some people look for rising short term interest rates as a sign of systemic stress, while others look for rates to fall to zero or below. Some look for a falling DX while others look for a spike. That's all monetary plane stuff, and not where the rubber truly meets the road. As I said, the Fed is trying to levitate short term rates right now, so why would rising rates indicate stress? To me they indicate that the Fed has sufficient control over the monetary plane, which I kind of assumed it did. What it has no control over is where the monetary plane intersects the physical plane.

"So my question is really this, until we see the $ drop rapidly on the FX market don't we know that official support from someone besides the USG is still in full effect. And the corollary that FG will not be imminent until this support is withdrawn, which we would see immediately in the FX market as a $ devaluation?"

We could see a sudden drop in the USD versus other currencies in the FX market, or we could see a spike. But I think we will eventually see some sudden, unexpected and highly unusual volatility. That's what I would watch for if you're one who likes to watch the pot, waiting for the water to boil. Watch for unusual and extreme volatility, because that should be what we see when the monetary plane comes unhinged from the physical plane. And don't forget the concept that there can be a head-fake right before a phase transition, a sudden and major move in an unexpected direction.

For me, I already have the advance warning in the logic and the A/FOA archives. I try not to watch the pot, but instead to explain the logic to others, because I think that's better than trying to predict how the monetary plane markets will behave at that moment when the physical plane lets go.

Sincerely,
FOFOA

Hi FOFOA,

Hope all is well!

Do you have an opinion of the latest strange GLD inventory update behaviour?

Could it be a sign of rumblings further down in the machine room? Or do you really think it's all just meaningless pot watching? :)

/BF

Hello BF,

I certainly think it is interesting, but the short-term variations we see don't change my opinion of what is happening behind the scenes. I think the consistent drain this year is a sign of rumblings further down in the machine room, but I find it hard to believe that the reporting anomalies are reverberations from the same thing that is causing the drain. More likely, I think, there is probably some explanation for the reporting anomalies that we just don't know about, something that we haven't even considered.

The indisputable story is that GLD has lost 36% of its inventory, 487 tonnes in 10 ½ months. Title to that gold was transferred to someone. The only question that matters is whether it was transferred into BB reserves (the plenitude view) or into private ownership (my view, and obviously the correct view ;). That's more than 46 tonnes per month.

The BBs probably have at least twice that much coming in through mining and scrap (just a guess), so let's imagine they have 100 tonnes coming in each month. The outflow is obviously higher than the inflow, but the pressure is widely distributed across the LBMA. So the rumblings in the machine room are widely distributed and therefore isolated from what we see in the reservoir drain reporting. GLD is where the buck stops, where they obtain that shortfall of incoming gold, but it is not likely going to a specific buyer. More likely, it is simply restocking the subterranean stream.

The point is, I wouldn't expect the underlying cause of the drain to transfer "short term vibrations" into the daily reporting of the drain, I only expect it to show up in the greater trend. Therefore I think it is more likely that there must be a more mundane explanation for the reporting anomalies that we see, something we simply don't know about and therefore haven't even considered. That's the way I apply Occam's razor to a situation like this.

I expect the short-term machinations of the system to appear outwardly normal right up until the moment the pistons seize up and the whole machine comes to a grinding halt. That's the way these things usually seem to end. So I expect that could happen at any moment, without visible warning signs. In hindsight, I think we'll realize that OBA was right, it was just a hair's breadth away. But watching the pot can make even a hair's breadth feel like an eternity from the watcher's perspective.

So yes, it's interesting, but Occam's razor tells me that we are most likely watching the effects of some mundane cause we are not aware of while "superstitiously" trying to attribute those effects to the greater cause which is clearly obvious in the long-term trend. That's fine, and it is human nature to do so, but at what cost? The cost is that a hair's breadth starts feeling like an eternity, and some people can't handle that feeling and end up throwing in the towel.

Have you noticed how many people that have only been following my blog for a year or so eventually start making emotion-based predictions that Freegold must be 5, 10, or 20 years away? I have been at this for more than five years, and I still have the same view I had in 2008, that it could happen at any moment and each moment that passes brings us one moment closer. In fact, I think it must be almost here right now! And I think the reason I am able to maintain that view is that I have never been a pot watcher. I have always paid more attention to FOA's logic and the long-term trend than to the short-term vibrations.

The long-term trend is that the commodity bull/dollar bear market ended more than a year ago, even though dollar inflation *policy* is firmly in place. Shortly after that, the GLD drain began. And shortly after that, support for "foreign dollar settlement with CB storage" reversed and began declining. This is very close to what FOA said in one of his last posts: "The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollar's timeline as we are already stretched to the leverage limit. They know that [the Fed] has but one policy to use and that will be super printing."

Anyway, keep up the great work with your auto-pot-watching app! I do enjoy the short-term show, even if I don't put much stock in it. ;D

Sincerely,
FOFOA

Real Things



The super wealthy pay way too much for some stuff, don't they? I mean, $490,000 for a used old card table? I can get a brand new card table for $40, but here's a much nicer one for $280.

I caught a few minutes of the Antiques Roadshow the other day. Mrs. FOFOA had it on and I was passing through the room, but somehow that show grabs you and you have to stay to find out what the item they're examining is worth. This one was an old, wooden card table, originally made in Pennsylvania, and long ago refinished. Some lady had brought it in to have it appraised on TV. It was pretty nice, mahogany wood, claw and ball feet, and it had a swing-out leg that supports a hinged extension of the table's surface. The appraiser told her it was worth $250,000 to $350,000, and if it hadn't unfortunately been refinished years ago, it could have been worth up to $500,000 today.

I tried to find that episode online while writing this, but I only found a similar one. It's another card table they appraised for $200,000 to $300,000 and, when it actually went to auction at Sotheby's, it sold for $490,000! You can see the original appraisal here and the actual auction here.


What makes a second-hand card table worth $490,000? It's certainly not the need for a surface on which to play cards. That need can be met for much less money. You know what it is? It's that the wealthy fill their lives with otherwise-common items that perpetually rise in value, while we do the same with similar items that lose half their value, never to be regained, the minute we take them out of the store.

Two tables. One is $280 and the other is $490,000. The difference between the two is that the price of the former comes from demand related only to the service it renders in its specific form, as a table, and the latter comes from demand related to two different services it renders, that of a table and also that of a store of value.

I have explored this concept in many posts. It's not a new concept in any way, shape or form. In fact, man was using real things as stores of value, often in preference over their other uses, long before any labels were applied to this specific utility or function.

Take the $490,000 card table for example. We could say that the buyer paid $280 for a table, a well-crafted and nice-looking flat surface with four legs, and another $489,720 for a store of value. When you look at it this way, it starts to make sense why the wealthy often buy such remarkable "real things" and then hide them away for decades, packed in unassuming wooden crates, in places like this—Über-warehouses for the ultra-rich—rather than "using" them in their homes.

Which would you say is a $490,000 table's primary function or utility? As a table, or as a store of value? Obviously it can function both ways, but if someone pays 1,750 times more for one function than for the other, I think it would be fair to say that is its primary function.

The high price of these items which function primarily as stores of value comes from the demand for that specific function. Such demand creates a market and, thereby, the high marketability of such items. This is the network effect. And the long history and past success of such markets engenders the confidence in those who possess (and seek) such unique items that, when needed, they will be able to find a buyer ready to pay the highest price which can possibly be attained. This is what I like to call the regression effect. And while past performance is certainly no guarantee of future performance, especially in unique, one-of-a-kind collectibles, our natural tendency to believe that what worked yesterday and still works today will work again tomorrow does create a very real effect with very real results.

I hear that Christie's is booming these days. Here are just a few of the auction-related articles I've collected over the past two months:

How many more $100 million 'pictures' can the art market absorb?
PBS

Digging Into Deep Pockets at Auction
The New York Times

The Man Who Sold the Art World
The New Yorker

Warhol paintings up for sale in New York could fetch $120 mn
France 24

Grisly Warhol Painting Fetches $104.5 Million, Auction High for Artist
The New York Times


On Equal Footing with Giants


Here are a few snips from the article in The Economist which I mentioned above, titled Über-warehouses for the ultra-rich:

"The world’s rich are increasingly investing in expensive stuff, and “freeports” such as Luxembourg’s are becoming their repositories of choice…

Because of the confidentiality, the value of goods stashed in freeports is unknowable…

Collectibles have outperformed stocks over the past decade…

The goods they stash in the freeports range from paintings, fine wine and precious metals to tapestries and even classic cars…

These giant treasure chests were pioneered by the Swiss, who have half a dozen freeports, among them sites in Chiasso, Geneva and Zurich…

The wealthy are increasingly using freeports as a place where they can rub shoulders and trade fine objects with each other. It is not uncommon for a painting to be swapped for, say, a sculpture and some cases of wine, with all the goods remaining in the freeport after the deal and merely being shifted between the storage rooms of the buyer’s and seller’s handling agents…

Gold storage is part of Singapore’s strategy to become the Switzerland of the East… To spur this growth, it has removed a 7% sales tax on precious metals…

Switzerland remains the world’s leading gold repository. Its imports of the yellow metal have exceeded exports by some 13,000 tonnes…

Did you notice anything about the stuff the "ultra-rich" are stashing at those freeports? For one thing, most of that stuff is out of reach for the average saver. Most individual items that make their way to these storage facilities cost more than the average person makes in a year, and some cost more than he'll make in a lifetime.

Gold is the only "real thing" used by the wealthy, for this specific store-of-value function, that is also available to anyone. What's more, the gold of the everyman is the exact same quality gold that is held by the Giants. The same cannot be said about the paintings, sculptures, tapestries, cases of wine, classic cars or even the card tables held, and used, by people of average means.

I have everything on that list, except a classic car (although my car is 12 years old now, so I'm getting close). The difference is, I hold each of those items for the service it renders in its specific form only. My wine is for drinking and my art livens up my home. I have bought and sold an entire home-worth of expensive furniture, and I can tell you that, no matter how much I paid for each wonderful piece, in order to sell it when I needed to, I had to cut the price considerably.

Storage and moving expenses can greatly increase your cost basis in items that are only depreciating over time. This was why I decided to sell everything the second time I moved cross-country. It was a good decision, but what I learned was that, for the common man, household items, no matter how nice they are, are generally poor stores of value at our level.

That's not to say you can't do well with certain types of items, especially if you take your time selling them. I had a Dr. Who pinball machine which I sold for quite a bit more than I paid for it. But I took my time selling that item, and if I add the maintenance and expense of moving it cross-country to my cost basis, it was probably a wash, although I did get hours of enjoyment out of it. Then again, I didn't buy it as a store of value.

I do know a few people who buy fine wine by the case, numismatic coins, expensive paintings, pottery and even sculptures with the idea that these items will render the dual services of practical use and store-of-value. In some cases, a portion of their high price does indeed come from demand for the store-of-value function, but in most cases, at our level, the majority of the price comes simply from the demand for an exclusive level of quality. Exclusive items are sometimes called Veblen goods.

There's nothing wrong with enjoying an exclusive level of quality if you can afford it, but I want you to think about how these exclusive-quality items that may be within our reach actually compare to the ones used by the uber-wealthy. The difference really comes down to the magnitude of the proportion of their high price which was derived specifically from demand for the store-of-value function, as opposed to the item's practical use as a high-quality exclusive showpiece.

This store-of-value demand is the demand which creates a deep and liquid second-hand market for these "overpriced" items. Did you buy your collectibles from a store, or at an auction? If you bought at auction, how many others in the room also bid on your item? Is the maker of your precious item still alive? If you decided to sell your showpiece, how would you sell it? To a store? On consignment? On Craigslist or eBay? Is there a good auction house in your city? Do you have any idea how much commission auction houses charge? How long do you think it would take for you to find a buyer who would pay the highest price which can possibly be attained at any time? If you had to sell in a hurry, do you have confidence that you could attain the highest price?

These are all unique items we're talking about, so there is no standard that applies across the board. But over long stretches of time, some unique items climb a certain "store-of-value pyramid" while others don't. I like to call this the focal point effect. Take Andy Warhol for example. With one of his paintings selling for more than $100M, he has risen to become a kind of focal point among the various pop art painters of the 60s.


Does this mean that Warhols are in a bubble and a Rauschenberg at $10M would be a better investment? Perhaps, but I don't think so. And I'm sure that this view misses the point I'm trying to make. Since we're talking about unique, one-of-a-kind items, one can certainly pay too much for any single item. But in a proper auction setting, there will either be many bidders, or else you won't be bid up higher than you planned on paying. It is the focal point effect which adds the depth and liquidity to the highest-of-high-end auctions that gives the owners and seekers of such items the confidence that, if and when it comes time so sell their particular item, they will be able to attain the highest possible price at that time.

That focal-point-marketability is precisely what makes the very best-of-the-best stores of value. It is what drives some things to many multiples of the "intrinsic value" of their component parts, i.e., frame, canvas, paint and an aesthetically-pleasing image, while leaving others in their dust. So, in this case, a Warhol might be a marginally better store of value than a Rauschenberg, although you could have paid more for the latter in the 60s. In fact, you can still buy 60s pop art originals on eBay today for a few hundred bucks. Note that it's not the death of the artist that drives the focal point effect. There are plenty of dead artists. It's just that it takes time for the focal point effect to emerge and mature to this top level, usually longer than the normal human life span.


Surprisingly, however, that's not always the case. You might think that the anonymous telephone bidder who paid $58.4M for "Balloon Dog (Orange)" last month paid way too much, especially considering that, not only are there four more balloon dogs just like it, in arguably better colors than orange, but more importantly, the artist is still alive. And he's only 58 and still producing! But considering that there was a competing bidder willing to pay $57.3M ($51M + commission), how can anyone say he paid too much?

The seller of "Orange Dog" was Peter Brant, the 500-millionaire who is married to supermodel Stephanie Seymour. "Blue Dog" is owned by billionaire Eli Broad and is currently on display at the Los Angeles County Museum of Art.


"Magenta Dog" is owned by French billionaire François Pinault (but that's the artist Jeff Koons, not Pinault, in the photo):


"Red Dog" is owned by Greek billionaire Dakis Joannou:


And "Yellow Dog" (my favorite, although I would have called it "Gold Dog") belongs to billionaire hedge fund manager Steven A. Cohen:


Call it "Focal Point-Balloon Dog"! It doesn't have to make sense to you, it just "is". But does that mean that all of those balloon dogs are each worth $58.4M now? Of course not. With these kinds of items, we don't know their price until after they are sold at auction.

Here are some interesting statistics. According to Investopedia, experts estimate that only 0.5% of paintings bought are ever resold, and public auctions account for only a small portion of those resales, with private transactions accounting for the rest. At the high end, fine art auction houses are the best way to attain the highest possible price at any time, but they can cost you anywhere from 3% to 50% of the sale price in some cases. The commission on "Balloon Dog (Orange)" worked out to about 12.3%.

Tracking or indexing markets for unique, one-of-a-kind items, like art, is different from tracking stocks, bonds and commodities. It's more like residential real estate due to the infrequency of trades and the uniqueness of each item. To create a useful index comparable to stocks, bonds and commodities, you can't just track the average price of sales over a period of time, since each item sold is unique. Instead, you would want to create a database consisting only of repeat sales of the same exact objects.

Two New York University professors, Jianping Mei and Michael Moses, did just that. They created the Mei Moses Fine Art Index based on a database they built which now contains over 30,000 repeat sale pairs for approximately 20,000 individual works of art. They are constantly adding to the database using mainly the public results of auctions conducted by Sotheby's and Christie's from around the world.

What they found was that the compound annual return on fine art exceeded stock market returns on 5- and 10-year timelines, but that the stock market outperformed art over the last 25 years. However, for the last 50 years, the returns were very close, with fine art achieving a compound annual return of 9.23% compared with 9.73% for equities.

Now I should point out that the purpose of this index is to compare stores of value with investments to encourage investors to incorporate them into their investment portfolios. Such is the Western investor mindset. Like paper gold, there's even a kind of "paper art". According to Investopedia, fine art funds typically use leverage to buy art, have a minimum entry investment of $250,000, and for that you will receive a diversified portfolio of art, annual statements and appraisals for the artwork.

Everyone knows that western minds don't like or want gold, but if they think you like it they will trade it up in price for the sake of "sticking it to you." Enter the world of "paper gold." –Another

If you buy into one of these art funds, you won't actually have pieces of art. You will, instead, have a securitized fractional interest in a stash of real art, kind of like owning a fractional interest in a real Giant's store of value. Only it won't be managed like a Giant would manage his stash, buying focal point winners and selling the losers until all he has left are the winners. Instead, a fund manager will decide which pieces of art will be purchased and sold, and his only concern will be the short term gains made from selling the best pieces so that he can make his 2+20. Another called this "a western way," to "cut the winners and let the losers run."

The thing about this focal point effect I'm trying to explain is that the winners rise to the top and just keep on rising, well out of reach for all but the Giants. What makes something one of the "best-of-the-best" is not its superior quality or age, but simply the focal point effect, which essentially means that Giants have already voted for it in the only way that matters, with their pocketbooks.

True Giants are extremely strong hands when it comes to stores of value. They generally have no financial need to sell anything, so when they do, it is often because they are "trading up". In this way, the very best-of-the-best items tend to make their way into the strongest hands where they just "lie still" for generations. And, of course, we cannot know the price of such best-of-the-best items except on the very rare occasions when they are put up for auction.

If we could, somehow, hypothetically, come up with an objective way to identify the best-of-the-best as a class, and also track their progressive appreciation, I think we'd probably find a lower but much more dependable (less risky and more homogeneous or uniform, especially over the long run) rate of appreciation than the Mei Moses index would otherwise lead us to believe. Of course, this is impossible to know, because the best-of-the-best focal point winners I'm talking about are the ones that never go up for sale, kind of like the Mona Lisa, so we will never know their price. All we can do is guess.

Here's where it might get a little bit difficult to follow because you'll need to think like a Giant. While these "best-of-the-best" items are perpetually appreciating, hypothetically at a remarkably dependable rate, and while that seems very appealing to us shrimps, it has nothing to do with the reason the Giants buy these things. Giants buy these things simply because of the regression, network and focal point effects that engender the confidence that, when needed, they will be able to find a buyer ready to pay the highest price which can possibly be attained at that time, whenever it may be.

It is, quite simply, the inherently-strong hands of the Giants that instill such remarkable dependability in the "best-of-the-best" focal point stores of value. If Giants suddenly had weak hands, and all such items were to hit the market at once, this would obviously no longer be the case. But that clearly doesn't happen, precisely because such items are only within reach of true Giants, who, by definition, have inherently strong hands.

We know this is true by the simple fact that these items I'm calling "the best of the best" so rarely come to market. Once they make their way into the strongest hands, they just sit there, lying still for generations. And this is why, on the very rare occasion that one hits the market, we see other Giants falling all over themselves to get it, bidding that item up to well above all "rational" expectations and, without fail, setting a new record. It's quite literally something that's only available to Giants, and you almost have to be one to even understand it. And because these items I'm talking about always sell for more than can "rationally" be expected or explained, they will never end up in one of those art funds. Only a true Giant can understand the "rationale" behind "paying way too much" for something.

And then there's gold. But I'm not talking about today's (quote-unquote) "Gold". I'm talking about physical gold, the singular item in that Economist article above which is not only hoarded by Giants, but is also available to anyone and everyone. If you can wrap your head around the concepts—the effects—that instill such remarkable store-of-value functionality in the best-of-the-best real things as I have explained them, then I am here to tell you that physical gold is even better!

ANOTHER: The gold market is made up of a very broad spectrum of investors. At the very farthest ends of this spectrum lie the persons with the largest influence on the physical bullion. The super wealthy at one end and the "third world no ones" at the other. The middle is occupied, mostly, by the "investors with western thought". The far ends buy bullion. And they don't buy it as a gamble or a game! It is a way of life that has worked, through thick and thin, even before the West was "The West".

Now, on the other hand, this "modern day middle of the spectrum"! Well, they have read why we need gold, but they have never "Experienced" the need for gold! Until that day, when they gain "Experience", most of them will make "A Gamble That They Never Intended To Take". Yes, they do invest in all forms of paper and or leveraged gold and all the while, expounding from the roof tops the coming currency crashes and stock market declines. Even looking for bank closures and bank runs, as they cling dearly to comex options and gold stocks!

Anyone, from the outside looking in can clearly see that "westerners" do lack "experience".

There is a "flaw" in this modern market that many do not quite grasp. In time, they will! There have always been people and companies that make a living dealing in gold. It is an ages old business. Today, we see a phenomenon that is "as none before". It is mostly done by the investors at the middle of the spectrum. The "trading of gold" has grown to a level never seen in history! You read every day, that no one wants or needs gold! In a way those statements are very correct! No investor wants to hold gold, but everyone and his brother ( and sister ) wants to trade it! The volume of paper trading, worldwide, on and off market is beyond belief! It has created a type of "Parallel Paper Gold Universe", existing side by side with the physical. The major "flaw" in this system is found in the makeup of the "traders" of this "paper gold universe". Without fail, the majority is made up by those in the "middle of the spectrum", those without "loss of currency "Experience" ". Mostly, they are of "western thought".

I have tried to offer these thoughts as a way for many to understand why this modern gold market is not as before. Most of these letters apply to investors at the far two ends of the market ( see my last post ) . Many, from other places, do understand these "expressions" as given. For many here, I resist the replies to questions that offer results for "gold traders". The intents and reasons are for persons to "consider" and "see" this market in a true light for today. Not for paper trades that will lead to certain loss for the future. I now believe, that by way of other posters, these thoughts are "in grasp" by many traders of "western thought". One may not "accept" the conclusions, but they can, "mentally experience the outcome" of the future. For this end I will now offer real direction. That of Why, When and How Much! I do this for those of "Family and Country", and persons of Honor. Those that live to help, not take, in times of change! Some say this knowledge should not be in a "public way", but I say secrets are for fools.

We must grasp that all commerce is done, at least, in the US dollar concept of "valuations of real things". In this way, " the true value of the purchase of real money" is hidden from view! Persons will say in the future, "how could gold be $500 one day and $5,000 the next"? I tell you now, it is already past that level, as in "present reserve currency dealings" it is not seen! Consider, that in all that you do and think, your "western values" are of paper concepts. From your birth, real things are not used to cross value themselves! When the battle to keep gold from devaluing oil ( in direct gold for oil terms ) is lost, the dollar will find "no problem" with $30,000 gold, as it will be seen as a "benefit for all" and "why did noone see this sooner"?

Now when I say that physical gold is even better, I'm not talking about carrying it through the revaluation. I'm talking about after the revaluation. But to understand what I'm trying to say, I think you need to put your mind there, into the future, to "mentally experience the outcome" of the future, which is why I included that bit from Another. He lays it out quite clearly. Today's gold market consists of a "Parallel Paper Gold Universe" used by "investors with western thought," and real physical gold used by Giants and "third world no ones" for generations.

"Street Gold" and "Paper Gold" are going to part ways! –FOA

Physical gold is the one real thing that puts Giants and "third world no ones" on equal footing. Third world no ones certainly don't buy $100M paintings, $50M balloon dogs, or spend half a million on small tables with their surplus income. But they do buy gold as a tradable wealth asset, that singular real thing (focal point effect) in which its perceived value comes from a very long history (regression effect) of broad demand (network effect) for its store-of-value function above and beyond any other services it renders as a shiny and malleable metal.

But what about those "investors with western thought"? If "Street Gold" and "Paper Gold" are going to part ways, does that mean gold will play no future role in the West? Of course not. The fact of the matter is that a large slice of today's "investors with western thought" are not true investors at all. They are conservative savers, which means they are inherently more like the Giants and "third world no ones" in terms of how they prefer to deploy their surplus income. Investor money is called "hot money" because it's always on the move, looking for the next great yield, which requires a certain amount of expertise and focus on the specific activity of investing. Saver money, on the other hand, is "cold money" as it lies very still, which requires a focal point store of value. Gold is for savers:

"[Another's] message and proposition was never for a trader's mindset or time frame. Indeed, his direction was for simple savers, like you and me… As I hold my gold for the money it is, traders will work all these markets as they must… most "physical gold" savers will find themselves "many steps" ahead of the "Western trading community" as this plays out… gold money was/is but a representation of the real tradable wealth you saved over a lifetime of work… This "long term gold accumulation" proposition was given some time ago, to induce conservative people to begin saving gold "now"… You see, there is a world of difference between saving real money as a "wealth of ages" and trying to trade this world's "paper derivatives"… These years be right for ones who save gold." –FOA

The bullish explosion seen with the NZDUSD last week was triggered after price dipped further at the completion of a triangular cycle. This doesn't come as a surprise since price was yet to hit the 50ema in the last rally and also didn't break out of the descending trend-line at the completion of its triangular cycle. A clear rejection off the new Support zone at the close of trading on Friday signals for more bullishness to follow in the new week. 0.8790 looks a possible target.



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Six years ago today, I started this blog as a tribute to something I'd only discovered three months earlier. The fact that I'm still at it six years later speaks to the depth of the material I had only glimpsed when I started. I once started another blog on a different subject and lost interest after only a couple of months. I do tend to lose interest easily. In college, I changed majors and colleges several times, and after college I changed careers twice. Six years on one subject, for me, is remarkable.

I have no formal education or background in the subjects I explore on this blog. Everything here I learned since 2008, through reading, thinking and writing this blog. Once you understand the basics, it's mostly common sense. But the real strength behind my subject matter is the foundation I chose as my muse, the five years of Freegold archives left behind by someone calling himself "Another" and his friend, "Friend of Another" or FOA.

Many people write blogs related to their profession or area of expertise and influence. This is not one of those blogs. If I have any level of expertise or influence in the subject of my blog (which is not my judgment to make), then it comes from writing this blog, not the other way around. So I am deeply moved whenever real professionals make comments praising what is essentially my hobby.

As this is an anniversary post, here are comments from a couple such professionals over the past six years. Krassimir Petrov is an economics professor from Bulgaria who has been blogging and writing articles since well before the global financial crisis. He received his PhD in economics from Ohio State University and now teaches in the Middle East and Southeast Asia. In 2010 on his blog, he sent his readers to one of my posts with this recommendation:

"This is one of the very best contributions in the inflation-deflation debate. It is long and detailed, but the topic is extraordinarily complex."

Two weeks later, after reading some of my earlier posts, he added this:

"FOFOA is probably one of the very best analyst in the whole world. The more I read from him, the more I am convinced of his vast superiority over most experts and analysts…"

In 2011, I wrote a post directed at Rick Ackerman. Rick is a professional trader, financial advisor and blogger with a large following, well known as a hard-core deflationist. My post was an attempt at addressing his 30-year aversion toward dollar hyperinflation as the final outcome, using FOA's reasoning. Within days of my post going up, he left the following comment on my blog which made the hairs on my arms stand at attention when I first read it:

"Sheesh! Where to begin? It's difficult to give up a belief system that took root 30 years ago, but I find your arguments irresistible. I took notes as I read the essay, thinking to rebut you point-by-point; instead, halfway through it, I found myself overwhelmed by the clarity of your thoughts. The real power of this essay is that each step of the hyperinflationary endgame it foresees is entirely consistent with human nature, particularly where self-interest and self-preservation are fated to play out.

I will have to find a way to break this gently to my readers, perhaps starting with the joke about not having to outrun the bear. It goes a long way toward explaining how the Masters of the Universe will actually benefit from hyperinflation. You've also helped me understand how I could have been so bullish on gold over the years even though I considered myself a hard-core deflationist. It was a conflict between head and heart, really, but you’ve resolved it with the most persuasive argument I’ve seen in favor of gold. Even better, you’ve provided a sound basis for arguing that at $1500 per oz., gold has barely begun to discount the dollar’s final fall.

I especially appreciate the patience and humility you showed in walking readers through your argument one gentle step at a time. By not trying to overpower your opponents, you have produced a treatise that is certain to engage many minds. Thanks for engaging mine -- at a depth that had eluded me for three decades."

Such comments are wonderful confirmation for my efforts and my presentation, but again, I have no real experience or background in the subject matter. My secret is my deference toward the view presented by Another and FOA. I work to hone the lens they left behind in order to share the view with others, but all credit for the view itself goes to them.

In my last two posts, I have been progressing toward the simple concept that Freegold is all about clean floating exchange rates. Not just a clean float in the price of gold, but in currency exchange rates as well. It's a little more complicated than that, but not really. To "float" simply means that the private sector (also known as the market) determines the exchange rate.

It's not a proposed change of rules or anything like that. Instead, it is the recognition that this is where things are heading on their own, without any further rule changes. It's not a system that will require a clean float or punish a dirty float. Instead, it is the observation that a clean float is what everyone who matters now wants. It is the direction they are all heading today, including the US, Europe and China, and that once a fresh starting point is reached, the rationale behind it will be obvious to everyone and exchange rate manipulation will, for the most part, become a thing of the past.

It's not even that floating exchange rates are the most fundamental principle involved. After all, the euro took many countries which used to have their own currencies and combined them into a single currency zone. There's no floating exchange rate between France and Spain. The more fundamental principle than floating exchange rates is functioning automatic adjustment mechanisms. This principle applies across all borders, whether they share the same currency or not.

The difference is, for adjustment mechanisms to function automatically, wherever an exchange rate exists, it must float, i.e., it must be determined by the private sector. Whenever the public sector intervenes in exchange rates, it prevents the automatic adjustment of imbalances and therefore causes imbalances to accumulate. It's a pretty simple concept.

Public sector intervention in exchange rates covers everything except a common currency and a clean float. Hard fixed, pegged, adjustable peg, dirty float, they all prevent imbalances from correcting gradually and therefore cause them to accumulate, which leads to an unstable and vulnerable situation. Using a common currency or having a clean floating exchange rate leads to balance, stability and invulnerability.

Covering this point properly would require an entire post, and it's one I may write in the future because it is somewhat controversial. But in brief, the reason it is controversial is because one famous economist in particular thinks that hard fixed exchange rates are essentially the same thing as sharing a common currency. They aren't, because what can potentially work in theory has been shown time and again to not work in practice. As FOA said, "This is the way fiats work, whether gold backed or not, they always break from strict printing discipline."

For hard fixed exchange rates to work like a common currency requires "strict printing discipline" in response to international imbalances, while a common currency and a clean float do not. And it's not just discipline that's required, because the complexity of getting the adjustments just right would challenge even a supercomputer. Yet it seems to follow that if a hard fix can work, then looser fixes or adjustable pegs are fine too. But the complexity and difficulty multiplies as you ease away from the hard fix, then it disappears suddenly when you finally give control over to the marketplace.

In any case, such academic exercises are irrelevant at this point as the trend away from fixed exchange rates toward either a common currency or a clean float has been established by those who matter for the last 40 years and then some. It is now "baked into the cake" as they say, so none of this is meant to be a discussion of possibilities. It is simply part of the lens and the view.

What a clean float from a fresh starting point (which I should stress that we do not have yet) will do is to balance trade automatically through the exchange rate. There will be no need for the systemic settlement of trade imbalances. Economy-wide trade imbalances will be corrected gradually, almost imperceptibly, over time through changes in exchange rates.

Different economies obviously produce different things, and different things have different (and constantly changing) relative values. Some economies produce more valuable products with less effort, while others produce less valuable products with more effort. Nor is consumption or the enjoyment of the fruits of one's production equal across different economies. The United States, for example, produces a lot of stuff, more than any other country in the world. We are, in fact, the largest economy in the world (unless you count Europe as a single economy) based on gross domestic product.

Yet even as the largest producer in the world, we still consume more than we produce. FOA said it well. "Collectively, [we use] our own attributes and require the use of other nation's as well… We cannot place [our attributes—our enormous resources and high productivity] up as example of our worth to other nations unless we crash our lifestyle to a level that will allow their export! Something our currency management policy will confront with dollar printing to avert."

Running a trade imbalance is a choice that is most easily made by the net-producer. The choice is to consume less than you produce, which is what makes one a net-producer by definition, and nearly anyone can make that choice. The choice to consume more than one produces, on the other hand, generally requires support from an external source.

Profits are income in excess of costs. They can be invested, saved or consumed, so profits alone don't define a net-producer. It is what you do with your profits that determines whether or not you are running a trade imbalance. Here's a rather confusing comment from Another in 1998:

"As you ponder these thoughts, consider that; all economies today are truly equal in production as the exchange rates are the manufactures of profit!"

As you think about this comment, recall that in my last post I quoted an article about Airbus calling for the ECB to intervene in the foreign exchange market to weaken the euro. The article explained:

"Airbus, which sells its aircraft in dollars but incurs costs in euros, is one of the most exposed groups in Europe to a strong single currency. Other groups such as Unilever, SAP and BMW have also faced currency headwinds."

The list price of an Airbus A380 is $400M (€298M at the exchange rate at the time of writing), but a tough market has forced them to discount the price significantly in order to sell airplanes. Having spent $25B developing the A380, plus the cost of producing each unit, it is estimated that the break-even point will be once they sell 420 planes. So far they have delivered 138 planes and have orders for 180 more.

The bottom line is that their costs of production are still higher than their income for this plane. They need to cut costs or sell more planes at higher prices in order to turn a profit. In a competitive market, you need to be competitive in order to profit. But there is a potential shortcut.

Just as a simplistic exercise, let's say A380 sales are happening at $300M per unit (€224M at the current exchange rate), and production costs are €230M per unit, for a net loss per unit of €6M. If the euro exchange rate was to decline 5% from $1.34 to $1.27, the $300M price would suddenly convert to €236M and the €6M loss per unit would magically become a €6M profit per unit. Without any cost cutting, competitive improvements or increase in price, a profit would have been magically manufactured by simply manipulating the currency exchange rate.

Now read Another's comment again and see if it makes any more sense the second time around:

"As you ponder these thoughts, consider that; all economies today are truly equal in production as the exchange rates are the manufactures of profit!"

Manual labor, like factory work, has the same basic output anywhere in the world. A screw turn is a screw turn whether you're Chinese, French or American. By moving the production facilities for certain parts to China, Airbus could cut costs because, even though the output is the same, the manual labor is cheaper. Part of the reason for that is China's support of the dollar. By weakening the yuan, China lowers the living standard of manual laborers which increases the nominal profits of the company owners, wherever they may reside. This is how exchange rates manufacture profits.

You may think that Chinese laborers work cheaper than, say, United Auto Workers in Detroit, because they are accustomed to a lower standard of living. While it may be true, it will be irrelevant with a clean float. I think we'll all be stunned by how quickly the purchasing power of comparable work on comparable products will equalize across borders between comparable economies with clean floating exchange rates.

Getting the ECB to lower the euro exchange rate through FX intervention would have a similar effect to moving production to another country that already manipulates its currency. It would lower costs at the expense of a lower standard of living for all workers in the local economy while elevating the nominal profits of the company owners, the bonuses of its executives, and the standard of living in America where we can buy overseas using an overvalued dollar. As FOA said, "the world does not hate America; rather they hate the free lifestyle our dollar's illusion value brought us yesterday and today."

There is another way, other than currency exchange rate manipulation, to manufacture profits. That other way is through real cost cutting and real improvement in output, in other words by becoming competitive. From the articles quoted in my last post:

"Currency manipulation is not a route to competitiveness, it is a soft alternative to hard explanations to the electorate."

"We have to concentrate on whether the European economy is competitive and then we will have an appropriate exchange rate."

With this latest honing of the lens, I think that the view of not only what is unfolding in real time is becoming clearer, but also some of Another and FOA's posts from 16 years ago are also making more sense. Here's another one that should be familiar to most of you. Please let me know if you think it makes any more sense with an improved lens:

ANOTHER 5/26/98: "The Western mind does focus on "what I buy today for the lowest price". Yet, in this modern world economy, the lowest price is always the function of "the currency exchange rate"? The Yen, it is compared to the dollar today, and used to purchase goods. One year later and the Japan offers these goods for much less, as the Yen has fallen to the US$. The currency value of this purchase, was it "true" today or a year ago? Understand, all value judgments today are as subject to "exchange rate competition"! It is in "this exchange rate valuations" that the private citizen does denominate all net worth! A safe way to hold the wealth for your future, yes? You should ask a Korean or the Indonesian?"

Here are a few more:

FOA 9/22/98: "The currency confidence factor comes from a strong positive exchange rate, much like that enjoyed by the dollar today. The average European will buy from the USA in the same way that Americans buy bargain goods from other countries. Using an overvalued dollar makes one feel as there is no inflation, even though there has been massive dollar currency inflation over the last twenty years (the real cause of price increases is when the exchange rate is allowed to balance a negative trade deficit)."

FOA 9/26/98: "The possibility of FXC (Foreign Exchange Controls) is very real. This topic has been discussed in several well written books spanning 25 years. In a way, the closing of the gold window in the early 70s was a form of FXC. Anyone outside the country could no longer get their gold because too many dollars had been printed to cover the gold in the US treasury.

Today, too many derivatives have been printed (paper gold is one of them) than can be covered by the outstanding dollars! The US Federal Reserve either prints a load of dollars to cover this contingent or the system falls apart. If the Fed prints, the Americans get inflation. If the Fed doesn't print, the world financial system, based on a dollar reserve currency, starts to implode and foreign holders of dollar assets try to exchange these for their local currency. To do this they must take the dollar home to the USA for exchange! During this exchange, if the dollar loses too much value in the exchange rate, these foreign holders just SPEND THEM in America!

Again, the US experiences price inflation, only this time it's during a global deflation in dollar assets. To stop this chain of events, this time the US Treasury closes the dollar window. It's usually a last effort to hold the banking system together. The gold window was closed by holding gold at a low price valuation and not selling any of it. The dollar window will be closed by buying dollar currency at a rate so low as to stop most major holders from exchanging. This usually brings a two tier market, dollars inside the country worth more than outside the country. For some time, all dollars outside the US were called Eurodollars! Will we see these Eurodollars exchanged for Gold????"

Very briefly, I want to draw your attention to these curious charts of Foreign Direct Investment or FDI in the US:


They come from here, and the data comes from the US Dept. of Commerce Bureau of Economic Analysis, or BEA. You can download the latest BEA Excel spreadsheet for FDI Financial Transactions here. I noticed a curious coincidence when I decided to compare the mysterious FDI outflow to the puzzling "Belgian" Treasury buying from the same quarter.

The net decline in FDI for the first quarter was $117B, but the decline from Europe alone was $124.6B w

The Brazilian Real, which posted the best quarterly performance since it was introduced 15 years ago, is set to prolong its rally, as former central banker bets on the South American economy ability to rebound quickly, spurring demand for the national currency.

Among the 16 most traded currencies on markets, the Brazilian real was the second best performing, gaining 19 percent against the U.S. dollar, losing only to the South African rand, which has gained 23 percent in the first quarter. Luiz Fernando Figueiredo, a former Brazilian central bank President, affirmed that the Brazilian currency is set to continue its rally against currencies like the dollar and the euro, as multiple factors are likely to push the attractiveness of the real, like the commodities price rebound, and the Brazilian economy, which has been stimulated by a number of interest rate cuts since the first semester of the current year.

Economists are not so optimistic as Figueiredo towards the current real’s situation, even if there are several reasons to believe that the real will not lose against the main currencies during the following months, its hard to determine whether the rally will continue to perform as significantly as it has been in the first quarter, since the Brazilian economy has also been struggling with the effects of the global slump.

USD/BRL rose slightly to 1.9525 as of 12:32 GMT from a previous rate of 1.9578.

If you want to comment on the Brazilian real’s recent action or have any questions regarding this currency, please, feel free to reply below.

The pound entered its fourth day of losses against the dollar and the euro, after British financial sector calls Bank of England to expand its asset purchasing program to revive the faltering economy in the United Kingdom.

The British Chambers of Commerce stated yesterday that the already expected economic recovery in Great Britain is not guaranteed and further measures should be taken immediately by the Bank of England, reflecting on the national stock exchange market and currency, the latter losing against virtually all major pairs, mainly to the U.S. dollar, the yen, and the Swiss Franc. According to the group’s call for the asset-purchasing program expansion, the Bank of England should extend the current program to 150 billion pounds and eventually ask permission to go further, considering the U.K.’s contracting economy needs. Factory production unexpectedly fell in May, adding to the already negative outlook for the pound sterling.

The quantitative easing measures asked by the British Chambers of Commerce may revive Great Britain’s economy, but on the currency point of view, the speculations regarding this fact already weigh on the pound, and if the measures continue further, it’s considerably possible that the pound will bottom against the euro and the U.S. dollar, yet, negative news in these markets make it hard to predict what direction the pairs will follow.

GBP/USD traded at 1.6225 as of 10:36 GMT rising from 1.6125 in the intraday, but still in a very low level considering last week’s rate around 1.6400. GBP/JPY remained stable at 154.53 after several days operating negatively.

If you want to comment on the Great Britain pound’s recent action or have any questions regarding this currency, please, feel free to reply below.