(Artwork by Warren James, Screwtape Files 2012)
"It is a story about how gold was officially removed from the financial system in the early 1970s, but in fact never was. About how the US$ was kept strong by selling gold to the oil states for cheap. About how the Europeans were pissed off about oil being priced in US$ and how they positioned themselves for the case that the US$ would lose its reserve function. And, of course, about the US$ and how it will eventually end." -VictorTheCleaner
The story is the story that FO/FO/A have explored, and many have visited. Essentially the EURO structure was implemented as the master stroke in the currency wars - which took advantage of the flawed dollar/gold structure, with an outcome guaranteed for the europeans. This strategy is well described by ANOTHER who expected events to quickly cascade. The bullion banks were caught with their pants down - the gold market for new mine output is/was already cornered and a even a small loss of confidence in the dollar similar to the 70's would trigger a run on the bank (physical gold withdrawing) and immediately expose all the gold contracts which were created during the 80's and 90's. The move was pretty clever - after all the ECB could essentially print as much money as it likes to raise the price of gold and hence the value of their central bank reserves. It was a great plan - all they had to do was sit tight and cash in as things took its course.
The Americans were never going to be beaten that easily though, and perhaps ANOTHER (whoever he was, and regardless of his motives for writing) had wished he hadn't given away the gameplan. the outcome of this freegold threat is more or less what we have observed over the last decade, namely:
1. That the banks have wriggled out of their gold obligations by leeching more gold out of the marketplace. A steady price rise of gold in USD has effectively guaranteed the flow of 'just enough' physical. If you want evidence of a steady vaccuum cleaner hoovering up available gold - you don't have to go much further than your local 'cash for gold' shop to see this in action.
2. A series of wars has ensured that demand for USD currency is constant (because oil is priced in USD, kept in place via military force), which allows them to further perpetuate the ponzi. The wars also keep pricing pressure on oil - Victor's reasoning is that a high oil price is in America's interest because it forces other nations to find more USD.
The Europeans at the minute appear to be bluffing - they can print as much money whenever they like to cover the bad debts inside the eurozone, and it only serves to strengthen their position. This is demonstrated by the FACT that Greece has NOT YET imploded, despite all indications that it SHOULD and that it will (evidence, it's already defaulted officially and nothing came of it).
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| Why do guys with beards have so much fame? It's uncanny. |
Overall, it's a curious standoff, with a mutant global monetary system slowly lumbering to its death and the little guy ultimately paying the price. Martin Armstrong believes that no one is at the helm - that the central bankers have neither a clue nor control over what is taking place. Some others (at FOFOA) like RJPadavona believe there is teamwork going on between the two superpowers to ensure a safe landing for this crippled financial system.
I personally believe the teamwork option is at play, and that some players (aka The Bernak) know exactly what is going down (after all we're in a new age of science and data modelling). But there will be other myriad factors involved as well - for example the Americans can also extend the game duration by preventing a run on the banks (physical gold withdrawal) - e.g. create massive gold contracts which lower the price of gold, forcing many to give up in disgust (aka GATA thesis), or use social media campaigns and psychological tricks to pursuade people to dishoard their physical gold (aka anything that Jon Nadler writes). NOTE: If you haven't read about how credit denominated in gold changes the pricing of gold, Victor's latest is a great read. It's clear that more gold contracts exist than there is gold to cover it (probably at a lower ratio like 10:1 like Bron Suchecki suggests), but definitely not the 100:1 which is regularly pumped (check About.ag for a great rebuttal of that meme). If I have been following events correctly, then the big bullion banks have used the last decade to cover roughly half of their obligations, which is why I think we're in for another decade of slow-and-steady gold price rise. At the end of that time (say around about 2020) the bullion banks will probably have had enough mine supply, and at game end they can do a final smash on the gold price as the last problematic gold contracts get sold in a frenzy, and quietly buy back massive amounts of physical just before the price skyrockets (aka SPROTT/TURK playbook).
That's my brief summary of Freegold as I've been following it. I like Victor's modern interpretations because it contains an explanation for both the freegold thesis as well as observations from the market over the last few years. The full detailed story is well described by FOFOA, which may indeed take two weeks or so to digest:
It's the Flow, Stupid
Flow Addendum
The View: A Classic Bank Run
Once Upon a Time
Return to honest money
15 comments:
Warren,
thanks for writing this, but I insist that you do not claim it were my story. I learnt most of this at FOFOA's, and many others (Aristotle, Ender, Mike Kosares, etc.) helped interpret and understand the Another/FOA leak even before FOFOA arrived. It is just that I like to present the story with more political spin than others, and this does seem to attract a certain type of audience.
There are about 50 details I'd like to comment on, but not too much time right now, and so perhaps later.
Victor
Hi Victor - absolutely. I have made some edits to make the text .. uh .. less Victor-specific. Let me know by email if you would prefer it tuned any further.
I like your write-ups because you provide some good suggestions for current market conditions (e.g. good reasons why Freegold hasn't come about yet). That is hugely relevant to decision-making in the short and medium term.
The implications (of the story) are huge for anyone wondering whether to buy gold or how to preserve their purchasing power through the transition.
For the record to everyone else I've been a fan of FOFOA for many years, and a supporter throughout. My post above is not intended to detract from anyone's message - it's purely a summary of how I understand things at this point in my learning.
Above all, the highlight for me is the understanding of how gold contracts relate to the claims on physical - it's fascinating and everyone needs to realise it's a bit more complex than just saying that the ETF's have no gold or silver.
Warren,
alright, here we go, first instalment.
1) I never wrote that article myself because I have never been entirely happy with the story, and it sill involves too much guesswork. But now that you have written it, you somehow force people to comment on it. Never mind. Perhaps FOFOA is going to show up, too. If not, please take a look at FOFOA's comment section where a lot of the action is these days.
2) 2 weeks of full-time work spent (i.e. >= 8hrs per day) may not be enough.
3) I don't think it is FOFOA's position that the CBs are clueless. I guess he believes they all know what is being played, but you should not forget that Europe and the U.S. are allies, and so the Europeans would never attack. They just set up the Euro firstly in order to have a working system should the dollar fail and secondly perhaps also as a threat signalling that the U.S. cannot just bully them around as they keep doing with the UK, for instance.
4) I think it does not take any rocket science to see that the situation from 1922 until today (see 'Once Upon A Time'), the dominant role of the dollar as the currency of international trade settlement, is a historical anomaly. It would be natural to use gold as payment in full rather than any particular country's currency or debt as a promise to pay later. So if you conclude that the dollar is an anomaly, it makes a lot of sense to prepare for the time after the dollar - all politics aside.
5) I don't think Another was defeated by the U.S. and I am not sure he would regret coming forward with the inside information. I do not fully understand why he started posting - I certainly do not buy FOA's excuse later on. Another's comments may have been a warning to the U.S. that they need to join mutual negotiations, using an inofficial channel.
I agree that the Europeans used a substantial amount of elbows around 1999-2001 (but the U.S. had done that before), but I do not think they would act openly hostile such as the ECB openly selling euros for gold just in order to destroy the dollar.
A collapse of the dollar (even if you agree that it is eventually inevitable) is too big a disruption to world trade to be risked lightly. But I can imagine that they forced the U.S. to the negotiating table about the future international monetary system around 2001. Some pressure, yes. Perhaps a lot of pressure. But not an open attack.
Then, right after 1999, the Europeans sold about 2000 tons of their own gold (a lot of the physical gold had left the FRBNY vault before 1999, probably in the form of gold leasing, and now it was not requested back, relieving pressure from the bullion banks). So they were willing to help the U.S. in averting the instant meltdown of the financial system. They must have extracted some concessions for this. Which ones?
to be continued.
Victor
re #3 - you're right I tried to find the email from FOFOA which gave his views on the 'clued-up-nature' of the FED, but could not find it. I'm reasonably sure he alluded to their clueless nature when I suggested they must surely have some kind of strategy in place.
Martin Armstrong is the one who believes 100% the system is a driverless out-of-control car headed over the nearest waterfall.
Thank you for your notes. Apologies if I've jumped the gun.
6) More politics. I think if I was the UK or Canada, for example, and had been persuaded by the U.S. to sell my gold reserve in the late 1990s, I would be rather concerned now because I have no good defence left.
If I cease to support the US$ and the US$ collapsed (some say hyperinflation, but it need not be that bad to be relevant), they would basically threaten the same to my own currency.
What would the UK do with a collapsing US$ reserve? How would Canada export into the U.S? They would be forced to devalue together with the US$. I guess the U.S. will always have access to Canadian oil at a reasonable price in US$ (not only C$). They don't even have to spell out this threat. The Canadians will understand it and avoid the confrontation automatically. This is how you wage wars without firing a shot. The enemy understands that he cannot win and appeases you in order to avoid the confrontation.
But the architecture of the Euro means the U.S. cannot force Europe to devalue by a "threat of mutual destruction". The ECB can always print Euros to buy gold. This option of currency defence was built in right from the beginning. This move would instantly destroy the US$ because gold is the only major international reserve that competes with the US$, and it would cause the rest of the world to switch from US$ to gold. An obscenely high gold price in Euros is much less disruptive to the European economy in contrast. You might view this as
Threat: If you don't support my currency, I force you to devalue, too.
Counter-Threat: If you do this, I hike the gold price so much that you will regret it instantly.
The point is that when the ECB sends the price of gold obscenely high, there is no economic arbitrage that could bring the price down easily. They could bid for 1000 tons of gold at € 10000 per ounce by printing just € 320bn. That's not that big a sum on the scale of the present debt problems. It would cause some inflation, but, hey, nobody is going to deliver that gold and then some more in order to get the price down. This is a one way bet and has a huge margin of safety.
View it as a global game of chess if you like. The position is still very 'closed' although the first pieces will be taken soon.
...
7) Do the U.S. want a high oil price as of today? When I suggested this at FOFOA's place, I was basically beaten up immediately by some of FOFOA's regulars.
I think we agree that the U.S. wanted oil more expensive in 1971 and this was a major reason for terminating gold convertibility by Nixon (see "It's the flow, stupid"). We also agree that the Europeans did not like it because they had to get US$ before they could buy oil. Mortymer at
http://anotherfreegoldblog.blogspot.ca/
found declassified documents from the State Department in which you can read up on the details.
Also, Another wrote explicitly that Germany and France opposed the move and this was one of the reasons the Europeans started the Euro project.
Then after 1980, perhaps already in the late 1980s, but definitely since around 1993, the Europeans used gold in order to make the US$ strong and oil cheap in US$. We agreed that the U.S. knew this, but I think we were divided as to whether they supported it (although they could not sell and lease some of their own gold because that might have triggered a run on the U.S. gold - you need to remember that they were still officially in default because of 1971) or whether it was primarily a European move.
The question is whether the U.S. might want oil high now. It is certainly a destructive move, a choice between two evils. If oil is expensive in US$, this helps North America (I count Canada in) to become less dependent on energy imports, helping the U.S. to balance their trade account. Their trade deficit is their major weakness if the US$ ever drops seriously. Secondly, a big support for the US$ is demand for oil trading. On the other hand, a high oil price damages their own economy. And so at best, it is a trade-off.
I hope this makes sense up to this point.
Victor
You`re on the money with your assessment. Others have pointed to this also, like Putin for example at Davos 2 years ago.
You`ve mentioned the example of Saddam who wanted to sell oil for euros but there`s a more recent example which is Gadafhi. He wanted an African Gold Dinar used in an African Union, backed by gold as name suggest. He wanted to sell oil for this new currency.
Regarding US wanting a high oil price. Not sure about this one. Depends on who`s in charge of US.
Obama wants high oil prices so that he can make the case for alternative energy, although this year(election year) is different because he needs better economic data and oil needs to stay as low as possible.
Green Trivial,
"Obama wants high oil prices so that he can make the case for alternative energy,..."
Think, man, think! Obama doesn't care about alternative energy. What Obama wants is good PR for supporting 'green projects', whether any come to fruition or not. Handing out money to favored cronies in exchange for political donations is a nice incentive as well.
@Victor, not withstanding my comment on my last post regarding how this is not a discussion I'm personally interested in getting into, I know for a fact that our readers would love to hear more from you on this subject.
Given that Screwtape has, perhaps, put words in your mouth, how about you tell us your views on this more precisely - in a guest post? I know it would be very popular...
Go on, you know you want to. Email me at jda1920@gmail.com if you're prepared to step up to the plate ;-)
I heard Kyle Bass saying the COMEX has something in the region of 40 paper claims per ounce. Interestingly if you take US debt at around 15.5x10^12 / ~250x10^6 ounces held by the US and then divide by 40, you get 1550. Does the leverage of the comex represent the leverage of US debt?
" FOFOA Martin Armstrong believes that no one is at the helm - that the central bankers have neither a clue nor control over what is taking place."
The redline did not show up on the copy. Are you saying you think FOFOA is MA? Wasn't he in jail until sometime in 2011?
Thanks for your posts. I enjoy reading them.
@somanyroadsinvesting - no, that is not at all what I am inferring. Apologies if my poor editing skills have suggested this - I've edited that out now.
I'm on Martin Armstrong's email list - he has the strongest opinion that the FED has absolutely no power and control(and we should take note, since he is a respected economist with much knowledge about history and many well-placed connections).
You'll find that FOFOA takes a similar stance, although his argument is that the superorganism is in control.
FOFOA wrote about Martin Armstrong in 2009, and while many of their views are similar (such as a new gold standard will never work), the fundamental (important) difference between them is that Martin Armstrong does not believe/want gold to become a reserve asset.
Hope that helps clarify. As I'm taking in the full implications of the freegold argument my head is spinning (despite having studied it for years). That such things have been hidden from the public is somewhat incredible (conspiratorial) and I'm eternally grateful to FOFOA (and others) for revealing much of it.
OK thx for the response. Why does MA not want gold to be the reserve asset?
I listened to a recent podcast of him on Financial Sense. While I have not followed him for a very long time he came across as very technical and trading oriented in his views.
Somehow he was pulling out exact dates like 2017 for the crisis to hit the US, but with no detail as to why. He also thought stocks are in a new bull mkt because basically you dont earn anything in a bank anymore and eventually everyone will pile into stocks.
After what has happened to him I found it odd he seemed to be cheering for exactly what the Fed wants.
Anyway just my 2 cents. I thought he could have had some more meat behind his comments.
@somanyroadsinvesting - that's a long story. Armstrong's dates are based on his computer modelling which is incredibly complex and there are no real details on it. Smart fella though, I'd love to meet him one day.
My best guess at Armstrong's stance is that he would like to help redesign bits of the next monetary system. i.e. 'be in control of the savings medium which denominates credit'. A Freegold solution is too convenient/honest and confers no particular advantage to anyone trying to pull the levers of the global economy, hence it is shunned by those in charge.
Ok thanks. Hmm seems odd that someone who was jailed by the govt thinks he would have a role to play in the future monetary system.
The problem with any of these analytical forecasting models is I dont understand how they account for the human element. Where would the Dow be if we didnt pass TARP, TALF, QE1,2, twist etc. unless you can predict how the govt will respond seems somewhat like noise to me.
Personally I think we are still in a secular bear mkt. I think there will be massive rallies followed by massive sell offs and while the Index may not be down much in nominal terms come 2020 I think they will be little changed in real terms. I expect further multiple contraction and margin reduction.
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